Semiconductors are the strategic industry of the 21st Century. They are the foundation of economic and military power. Future industries will be based on the ability to use semiconductors and software to create new goods and services. Semiconductors are also one of the most highly advanced technologies, operating at the edge of physics and material sciences, and the product of a complex, distributed supply chain centered on the Pacific Rim.
The leaders on this distributed supply are the US, Taiwan, Japan and South Korea. The US leads in market share (45%), in advanced chip design and, with Japan, in the production of semiconductor manufacturing equipment (SME) with a 75% market share. Taiwan and Korea each have about 20-25% market shares and have the most advanced fabrication plants (“fabs”), with TSMC and Samsung being global leaders. They lead in a widely used business practice called “fabless” production, where a company like Qualcomm specializes in research and design, but then gives the design to TSMC to manufacture. There are a few European companies, such as ASML, that are also global leaders.
Is China lagging behind?
China is not on this list. China is the world largest consumer of chips, largely because it is the world’s largest assembler of technologies that are then exported elsewhere, but it is dependent on foreign sources of supply – chiefly the US, Japan and Taiwan. The Chinese see this as a strategic vulnerability. It also reflects a desire for independence (if not leadership) in technology that dates back to the 19th century. But China, while its chip design and production capabilities have improved, probably lags a decade behind global leaders. China cannot yet make advanced chips (although Chinese propaganda obscures this and the Chinese company SMIC was on track to do this before US sanctions). It has created a multi-faceted program to change this.
China’s leaders plan to spend $60 billion in government semiconductor investments, including a 10-year corporate tax exemption for chipmakers producing advanced chips, accompanied by pledges of another $60 billion from local governments. Other policies aim to strengthen the workforce, expand R&D, and incentivize foreign chip companies to relocate to China. These investments are accompanied by a significant campaign to use espionage and acquisitions of western companies to accelerate China’s indigenous capabilities. China hopes to make advanced chips and uses the illicit acquisition of semiconductor technology, including the theft of intellectual property, to achieve this. The theft of technology by Chinese nationals and conspirators acting at the behest of the Chinese state does immediate harm to US security and to its economy.
A 2020 Survey of Chinese espionage found 152 publicly reported instances of Chinese espionage directed at the United States since 2000. This did not include espionage against US firms or persons located in China, or another 1200 intellectual property theft cases brought by US companies against Chinese entities. American officials have repeatedly stated that China’s espionage efforts exceed in scope and scale what was seen in the Cold War.
China has wanted a strong semiconductor industry since Deng Xiaoping became leader, but has struggled to make progress because of the complexity of the technology. Semiconductors are not easy to make. In addition to investment and espionage, China sought to remedy this by the purchase of western companies. The reaction in the US and EU has been to strengthen reviews to protect strategic industries form predatory acquirers and this avenue has largely been closed off for China. Even intra-western acquisition, such as Nvidia’s effort o to acquire the UK company ARM (a leader in chip design) now face scrutiny because of the recognition of the strategic importance of chips.
Chip leadership remains a strategic goal for China’s leaders. China’s illicit technology acquisitions mix profit-seeking, guanxi (personal networks of influence), and strategic motives. China relies heavily on private actors, especially for technological and commercial espionage, who are guided by government policy and incentives rather than by a case officer. These cases usually involve fraud and conspiracy to evade US laws. China uses a combination of government investment, subsidies, non-tariff barriers to trade, and the illicit acquisition of technology through a variety of means, including espionage to build their industrial base.
The role of Taiwan between Washington and Beijing
Taiwan plays an uncomfortable middle role in this contest. TSMC is the world’s leader in producing advanced chips, using SME bought from the US and Japan. Chinese firms like Huawei learned that although they cannot make chips, they can design them, and high-end Chinese design firm like HiSilicon would develop chip designs and give them to TSMC to produce. In response, the United States and Japan have begun to take steps to restrict the flow of SME to China and forbid TSMC from selling chips to China made on US SME. ASML, the only European producer of advanced SME, has somewhat unwilling cooperated in this.
For semiconductors, the US first took defensive measures. Export controls on semiconductor manufacturing equipment, restricting sales of chips made using US equipment, and blocking Chinese acquisitions of American chipmakers slow China’s growth, but do not build the American semiconductor industry. The Huawei experience is a warning of the cost of not supporting a strategic industry. American companies once led in making telecommunications infrastructure, but no longer. Advances in telecom technology are repairing this, as telecom infrastructure become more reliant on software and semiconductors, areas where the US, Japan and Europe lead and China does not.
The U.S. is now poised to begin its own investment program in technology and in semiconductors. There is strong Congressional support for the chip industry and research as a part of the basked of legislation entitled the “Endless Frontiers Act.” This legislation recognizes the competition with China and also the widespread use of subsidies by many nations to attract semiconductor fabs to their countries, and there is fierce competition among a dozen countries (including the US and China) nations to attract fabs.
Towards a US-China race for technology leadership?
Technological leadership is part of a larger contest between the US and China. Semiconductors are one of the focal points of this contest. China’s leaders learned from the US that technological leadership provides influence, power, and authority in the international environment and is crucial for military strength. The US now recognizes the challenge and is reinvesting in technology and rebuilding partnerships with key allies. Ultimately, this is a contest between two very different systems of governance. In some ways, Xi Jinping was premature in announcing China’s return to global leadership, probably the result of a mistaken analysis of US decline (a hidden cost of the censorship that prevents vigorous debate in China), and his words and actions have prompted an increasingly vigorous response in the US and Japan and concern in Brussels.
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