As the global economy rapidly moves towards digitalization, the demand for chips across various industries has surged. At the same time, due to the impact of the COVID-19 pandemic, the global semiconductor industry supply chain and logistics chain have been disrupted, exacerbating the contradictions between supply and demand for chips in the short term. As the underlying support of the digital age, semiconductor chips have become increasingly strategic in the context of international competition. With the interplay of the digital economy, the COVID-19 pandemic, and geopolitical factors, achieving safety and resilience in the semiconductor industry has become the focus of competition among various parties. The global semiconductor industry is facing a new round of challenges and adjustments; what challenges and opportunities does China face? How can it enhance its strategic autonomy in the semiconductor field? Let’s pay attention to this exclusive article from the “People’s Forum”.
1
Current Situation and Trends
A semiconductor refers to a material whose electrical conductivity is between that of a conductor and an insulator at room temperature, and its products are mainly divided into four categories: integrated circuits, optoelectronic devices, discrete devices, and sensors. Among these four product categories, integrated circuits have an absolute advantage, accounting for over 80% of semiconductor products; thus, the semiconductor industry is often referred to as the integrated circuit industry. An integrated circuit (Integrated Circuit, IC) refers to a circuit or system that performs specific functions, which is “integrated” on a semiconductor chip by interconnecting components such as transistors and diodes through specific processes. Therefore, it is also known as a chip. Without considering technical details, semiconductors, integrated circuits, and chips can essentially be regarded as the same concept. The global semiconductor industry chain mainly consists of semiconductor supporting industries, manufacturing industries, and application industries. Some companies specialize in foundry, such as TSMC. In contrast, companies with complete design and manufacturing capabilities (IDM, Independent Development Manufacturer) include Intel and Texas Instruments. Additionally, there are independent design companies (Fabless), such as Qualcomm, Broadcom, and MediaTek. The semiconductor industry chain is a global supply chain; according to the principle of comparative advantage, different countries and regions have different strengths in many semiconductor subfields, and these strengths are highly concentrated in a few monopolistic enterprises. Under the impact of the COVID-19 pandemic and escalating geopolitical tensions, the existing industrial structure is beginning to loosen. Specifically, the global semiconductor industry structure has the following characteristics:
First, regional specialization is prominent. A report jointly released by Boston Consulting Group and the Semiconductor Industry Association of America shows that the United States, with its strong research and innovation capabilities, leads in semiconductor R&D-intensive fields, particularly in electronic design automation/core intellectual property (EDA/IP, 74%), logic devices (67%), and manufacturing equipment (41%). The comparative advantage of mainland China lies in packaging and testing (38%), wafer manufacturing (16%), and raw materials (13%). The EU’s relative advantages are in EDA/IP (20%) and manufacturing equipment (18%). Meanwhile, South Korea, Japan, and Taiwan hold absolute advantages in raw materials, memory chips, and wafer manufacturing. Currently, the global chip production capacity by region shows that Taiwan accounts for 22%, South Korea 21%, mainland China and Japan each 15%, the United States 12%, and Europe 9%. Notably, the entire East Asian region accounts for 73% of global semiconductor production capacity, corresponding to the fact that the semiconductor equipment market size in East Asia has reached 83.85% of the global market.Second, the market concentration is high. The semiconductor industry has high barriers to entry and is a typical capital- and technology-intensive industry, with key components and production materials monopolized by a few enterprises, resulting in high market concentration. Among the global semiconductor companies, eight out of the top ten are American firms, with comprehensive competitiveness at the industry-leading level. In terms of subfields, key technologies are often controlled by a few large enterprises. For example, in semiconductor wafers and electronic specialty gases, the former is mainly dominated by five companies: Shin-Etsu Chemical (Japan), Sumco (Japan), GlobalWafers (Taiwan), Siltronic (Germany), and SK Hynix (South Korea), while the latter is dominated by four companies: Air Products (USA), Air Liquide (France), Taiyo Nippon Sanso (Japan), and Linde (Germany), making it difficult for other companies to enter. Among semiconductor photoresist suppliers, Japanese companies dominate with a 72% global market share. The global semiconductor equipment market is mainly concentrated in manufacturers from the USA, the Netherlands, and Japan, with ASML, a Dutch lithography machine giant, monopolizing 83.3% of the global high-end lithography machine market.Third, the COVID-19 pandemic has disrupted the global semiconductor supply chain, exacerbating the “chip shortage” dilemma in the short term. The supply chain crisis brought about by the COVID-19 pandemic includes two aspects: first, various countries implemented varying degrees of work stoppages to control the pandemic, causing certain nodes in the global semiconductor supply chain to fail to operate normally, and the short-term production capacity was hindered due to employees contracting the virus, directly leading to a decline in chip supply levels. Second, the COVID-19 pandemic caused a break in the global logistics chain, further disrupting the balance between chip supply and demand. The global chip consumption market is spread across the world, but the main production capacity is concentrated in East Asia. The pandemic has led to a break in the global logistics chain, with some countries closing shipping routes and poor port management causing congestion, further exacerbating the shortage of chip supply in the market. For example, in early 2021, companies such as Ford, Toyota, and Daimler had to reduce or even halt production of certain models due to insufficient chips.Fourth, the acceleration of the digitalization process has led to a continuous increase in chip demand, and the “chip shortage” dilemma is expected to persist, necessitating adjustments in the global semiconductor industry chain. If the pandemic caused a short-term disruption in chip supply, the acceleration of the digitalization process has led to a sustained increase in chip demand. On one hand, new chip demand markets such as autonomous vehicles, artificial intelligence, and industrial internet continue to emerge due to digitalization. On the other hand, work-from-home, smart homes, and virtual reality are becoming increasingly popular ways of working, living, and entertaining in the digital age, resulting in a continuous rise in global chip demand. According to IC Insights, the global chip market was valued at approximately $550 billion in 2021, with predictions that it will exceed $1 trillion by 2030. The significant gap in chip demand also calls for structural adjustments in the global semiconductor supply chain.
2
New Round of Competition Among Various Parties
Given the important position of semiconductor chips in the production structure of the digital age, major economies have shown great interest in the industrial policies of strategically significant sectors related to it. Relevant parties have begun to promote various measures, not only in terms of investment but also including taxation, trade, regulation, and antitrust measures to support the development of their national strategic industries. Due to the special nature of the semiconductor industry, which is capital and technology-intensive, the number of participants in this new round of industrial competition is far fewer than in the industrial age. Currently, only a few participants, including the EU, the USA, South Korea, Japan, mainland China, and Taiwan, occupy 96% of the semiconductor industry’s value chain (2019) and 93% of global chip production capacity (2020). To further consolidate their advantages, major players are engaging in a new round of competition around the semiconductor industry.
Currently, Europe’s share of global semiconductor manufacturing capacity has declined from 24% in 2000 to 8% today. To change this disadvantage, in March 2021, the European Commission released the “2030 Digital Compass: The European Digital Decade”, proposing that the EU’s production of advanced semiconductors should reach 20% of the global total by 2030, while reducing excessive dependence on external supply chains and reshaping the competitiveness of Europe’s high-end manufacturing industry. In February 2022, the European Commission announced the “Chips Act”, requiring the EU to invest 43 billion euros before 2030 to support chip design and manufacturing, strengthening Europe’s technological leadership. In response to this call, in March 2022, semiconductor giant Intel announced plans to invest 80 billion euros over the next decade to build a comprehensive chip industry chain from design to manufacturing in countries like Germany and France. In February 2022, the U.S. House of Representatives passed the nearly 3,000-page “2022 U.S. Competition Act”, which will provide $52 billion in funding and subsidies for U.S. semiconductor research and manufacturing to address issues related to automotive and computer components, while also providing $45 billion to strengthen the supply chain of technology products. Additionally, the U.S. has previously introduced the “Semiconductor 10-Year Plan” (2020), the “U.S. Chips Act” (2020), and the “U.S. Innovation and Competition Act” (2021), aimed at promoting investment in the U.S. semiconductor manufacturing industry and research and production related to semiconductor simulation hardware, industrial electronics, and computers. Under the policy push in the U.S., in May 2020, global semiconductor foundry TSMC announced plans to build five foundries in Arizona, and in early 2022, Intel announced an investment of $20 billion to build two semiconductor factories in Ohio. Meanwhile, the U.S. is actively lobbying South Korea, Japan, and Taiwan to form a semiconductor quadrilateral alliance to control the global semiconductor industry chain. In May 2021, South Korea announced the “K-Semiconductor Strategy”, aiming to build a “K-Semiconductor Industrial Belt” and transform South Korea into a comprehensive semiconductor powerhouse by 2030, leading the global semiconductor supply chain. To this end, the government will support relevant companies with tax reductions, financial assistance, and infrastructure, with the maximum tax deduction reaching 50%. Additionally, the South Korean government will establish a special fund of 1 trillion won for semiconductor equipment investment. Following the announcement of the plan, 153 companies, represented by Samsung and SK Hynix, actively responded, committing to invest a total of 510 trillion won (approximately $451 billion) from 2021 to 2030, aiming to achieve breakthroughs in raw materials, components, and advanced equipment and system semiconductors. At the same time, the South Korean industry is strengthening ties with ASML, the only EVU lithography equipment company globally, which will invest 240 billion won to build an EVU comprehensive cluster in Gyeonggi Province, South Korea. Japan is also making strides; in June 2021, Japan’s Ministry of Economy, Trade and Industry released the “Semiconductor Digital Industry Strategy”, regarding the semiconductor industry as a “national project” of equal importance to food and energy, seeking to expand Japan’s domestic semiconductor production capacity. To achieve this goal, the Japanese government will implement a three-step strategic plan that includes “accelerating the construction of IoT semiconductor production bases”, “promoting U.S.-Japan semiconductor technology cooperation”, and “innovating new technologies that can change the ‘game rules'”, ensuring semiconductor supply capacity from a national level. The Japanese government will provide special treatment beyond general industrial policies to attract overseas semiconductor foundries, especially TSMC, to invest in Japan. To this end, Japan will establish a construction fund of several hundred billion yen within the New Energy and Industrial Technology Development Organization (NEDO), as well as subsidies for up to 50% of the construction costs of semiconductor production facilities. In recent years, mainland China has also continuously introduced relevant policies to promote the domestic semiconductor industry. The “13th Five-Year Plan for National Strategic Emerging Industry Development” released by the State Council in 2016 emphasized enhancing the supply capacity of core foundational hardware. The “Announcement on Corporate Income Tax Policies for Integrated Circuit Design and Software Industry” released by the Ministry of Finance and the State Administration of Taxation in 2019 provided income tax exemptions for semiconductor-related enterprises. The “Several Policies for Promoting the High-Quality Development of the Integrated Circuit Industry and Software Industry in the New Era” issued by the State Council in 2020 again encouraged research and development related to chips and integrated circuits from the perspectives of taxation and funding support. The “14th Five-Year Plan for National Economic and Social Development and the Outline of Long-term Goals for 2035” also included integrated circuit-related content, emphasizing the need to tackle the “bottleneck” issues of high-end chip foundational components and accelerate independent innovation. Taiwan has the world’s strongest semiconductor manufacturing foundry capabilities, occupying a significant position in almost all process ranges. Currently, only Taiwan and South Korea have foundry capabilities for 10 nanometers and below, with Taiwan accounting for 92% of the entire foundry production share. Against the backdrop of the global chip shortage, Taiwanese foundries have increased their investments, with TSMC estimating that its capital expenditure in 2022 will reach $40 to $44 billion, prioritizing the layout of advanced processes such as 2nm, 3nm, 5nm, and 7nm. In April 2021, the Taiwanese authorities released the “Taiwan Semiconductor Forward-looking Research and Talent Layout under the U.S.-China Technology War”, aiming to introduce 1nm process chip production by 2030 and build a southern semiconductor materials S-type corridor. Additionally, the Taiwanese authorities are promoting the establishment of a dedicated “Chip School” to cultivate the next generation of semiconductor engineers and consolidate their dominant position in chip manufacturing.
3
Motivations for Intensified Competition
The semiconductor industry is not merely an economic or market issue; due to its special nature, more and more countries regard it as a strategic issue directly linked to national development, thus gaining increasing political significance on the international stage. This is primarily caused by the following three factors.
First, the global economy is digitalizing. The rapid digitalization of the global economy has led countries to place greater emphasis on the semiconductor industry. From a production perspective, the widespread application of new technologies such as mobile internet, IoT, and supercomputers, which center around chips, has caused disruptive impacts on the original production structure. From a lifestyle perspective, the COVID-19 pandemic has made the application of chip-based digital technologies and products a necessity in daily life. In terms of scale, the digital economy’s added value reached $32.6 trillion in 2020 across 47 countries, accounting for 43.7% of GDP. Additionally, the semiconductor industry also plays a significant role in driving GDP growth. With the acceleration of the global digitalization process, emerging industries represented by artificial intelligence (Artificial Intelligence), blockchain (Blockchain), cloud computing (Cloud Computing), and big data (Big Data) have become key factors in global competition in the digital age, making chips and the entire semiconductor industry crucial to supporting national digitalization efforts. Therefore, major countries worldwide have set their sights on these fields, issuing policies to support the development of related industries. Second, the nationalization of competitive entities. The third industrial revolution began in the 1950s, primarily represented by atomic energy, electronic computers, and space technology. These technologies were developed under the core goals of U.S.-Soviet rivalry through state projects and investments, rather than as a result of free market competition. Today, human society is in the early stages of the fourth industrial revolution; whether it is new technologies and business models such as artificial intelligence, blockchain, cloud computing, big data, or fundamental products like semiconductors and chips, they are all backed by state support. Major economies have made promoting technological innovation and digital processes a core task of government support. It can be said that in the global competition of the digital age, the state is the main competitor. For instance, in the EU, the “Important Projects of Common European Interest” (IPCEI) is a form of state aid stipulated by the Treaty on the Functioning of the European Union. After 2018, the EU approved three IPCEI projects related to microelectronics and batteries and established the IPCEI Strategic Forum as an important tool for European strategic autonomy. Regarding semiconductors, EU member states are actively discussing new European common interest projects related to this field, attempting to promote breakthroughs and development in the industry through state aid. Finally, the security of the industrial chain is a major concern. As countries increasingly prioritize the promotion of their digital economy as a core government objective, the previously dominant ideology of free markets is gradually yielding to political considerations. At the same time, the widening gap between rich and poor at both international and domestic levels has led to the rise of populism and anti-globalization forces around the world. The political consequence is that figures akin to Trump have emerged on the political stage, and governments have begun to implement economic nationalism policies, rapidly politicizing issues of economic imbalance, with the previously established interdependent economic systems becoming sources of crisis for various countries. Under the impact of the U.S.-China trade war and the COVID-19 pandemic, this sense of insecurity has been rapidly amplified, prompting countries to seek to reduce their reliance on foreign countries in key industries and fields to ensure supply chain security. The global semiconductor industry chain is almost entirely controlled by a few participants, leading to extreme dependence on a few enterprises and specific countries and regions. In the context of global geopolitics, this dependence brings serious psychological unease. To promote a more balanced interdependence, countries are implementing policy measures to establish a safe and resilient supply chain, ensuring that they no longer simply rely on a single country or company for chip supply.
4
Challenges and Opportunities Facing China
The COVID-19 pandemic has accelerated the global digitalization process while intensifying the security-oriented tendencies in the supply chain field, leading major powers to engage in a security competition in the semiconductor sector. The interplay between economics and politics, along with the unprecedented changes in the world, presents both opportunities and challenges for China.
The challenges mainly consist of two aspects. First, the technological challenge. Currently, China’s semiconductor products are mainly concentrated in mid- to low-end fields such as semiconductor materials, wafer manufacturing, and packaging testing, with production capacity primarily focused on mature processes above 28 nanometers. The technological gap necessitates a large amount of imports of mid- to high-end semiconductor products, with nearly all CPUs, GPUs, and memory fields relying on imports. According to the General Administration of Customs, China’s localization rate for semiconductor equipment is less than 20%, with an import amount of up to $432.5 billion in 2021 alone. The domestic technological level has become the biggest bottleneck restricting the development of China’s semiconductor industry. Second, the international political challenge. Since the U.S. established China as its main competitor, it has waged a trade war and engaged in “precise decoupling” with China, initiating a technological cold war, posing the risk of the hegemonic nation dividing the global semiconductor supply chain along ideological lines. The U.S. government aims to relocate American semiconductor enterprises to the U.S. mainland, Taiwan, Japan, and South Korea, regions within its control. Even amid the global chip shortage caused by the COVID-19 pandemic, the Biden administration still rejected Intel’s plan to expand production in China to prevent mainland China from acquiring advanced process capabilities. Moreover, the U.S. has intensified sanctions against Chinese enterprises like Huawei, suppressing the development of China’s high-tech companies to prevent China from posing a threat to the U.S.-led internet infrastructure. Under the dual impact of the pandemic and geopolitical tensions, the global semiconductor industry is bound to undergo a period of structural adjustment, which presents an important opportunity for China to optimize its industrial structure and enhance its value chain. First, U.S. suppression of China has shattered the myth of free markets, dispelling the illusion of “making things is worse than buying, and buying is worse than renting” in the minds of the Chinese people, further solidifying China’s determination and pace to master cutting-edge technology independently. Second, the U.S. “chip ban” has objectively provided Chinese enterprises with extremely valuable domestic market resources. For example, in the case of chemical mechanical polishing equipment, in 2017, U.S. Applied Materials and Japan’s Ebara held 98.1% of the domestic market, but now the 8-inch polishing equipment manufactured by China Electronics Technology Group has regained 70% of the domestic market. Third, increased government investment ensures the rapid development of China’s semiconductor industry. The National Integrated Circuit Industry Investment Fund was established in 2014, raising over 138.7 billion yuan in its first phase, with 67% allocated to integrated circuit manufacturing. According to data from the China Semiconductor Industry Association, the scale of China’s integrated circuit manufacturing industry has been growing year by year, reaching 256 billion yuan in 2020, a year-on-year increase of 19.11%, with a production volume of 261.47 billion pieces, a year-on-year increase of 19.55%.
5
Exploring Paths to Enhance Strategic Autonomy
To ensure the security of the chip supply chain, enhance the competitiveness of its high-end manufacturing industry, and strengthen its strategic autonomy in international competition, the government must take proactive measures to support and guide the semiconductor industry.
First, fully recognize the strategic nature of the semiconductor industry and treat it as a strategic project. The nuclear industry and aerospace industry of New China achieved great breakthroughs despite the blockades from the U.S. and the Soviet Union, not only due to their inherent national security nature but also because the state consistently regarded them as strategic projects. Given the crucial role of the semiconductor industry in the development of the national economy and national security in the digital age, and the reality of China’s lagging semiconductor industry, where key areas are “choked” by others, China should promote the development of the semiconductor industry as a national strategic project systematically. Second, strengthen government guidance and planning, and enhance top-level design. From an operational perspective, the main entities of innovation are various enterprises and research institutions. In the early stages of industrial development, the various supporting measures required for technological innovation often necessitate substantial capital investment, which market entities find difficult to bear due to the enormous costs and risks involved, thus requiring visible government support. On one hand, the government should determine a long-term roadmap for semiconductor industry development and adopt corresponding investment, taxation, financial, and intellectual property measures tailored to different development stages; on the other hand, it should also use macroeconomic regulation to allocate national resources across all segments of the semiconductor industry chain, establishing a complete innovation system for production, education, and research, providing a conducive development environment for domestic technological innovation and enterprise growth. Third, accelerate talent cultivation and introduction efforts. The competition in the semiconductor industry largely hinges on the competition for top global technology talent, and all countries face talent shortages, with China being no exception. China’s semiconductor industry began in the 1990s, and the workforce is primarily concentrated in the manufacturing sector, with both quantity and quality failing to meet industry needs. According to the China Electronic Information Industry Development Research Institute, the talent gap in China’s integrated circuit sector is expected to reach 250,000 by 2022. Therefore, it is essential to increase the cultivation of relevant talent. On one hand, strengthen general theoretical research, skills training, and educational investment to cultivate local knowledge and technical elites. On the other hand, establish an international talent introduction and naturalization system to build talent from both domestic and international perspectives. Encourage universities, enterprises, and research institutions to collaborate in cultivating various professional talents and reinforce talent supply. Only by gathering top talents from around the world can we fundamentally enhance our strategic autonomy in the semiconductor industry. Finally, focus on the long term and plan the development direction of the semiconductor industry. The strength gap between China and the U.S. in the semiconductor field is an objective reality that will persist. If China emphasizes independent development in the semiconductor industry too much, researching parallel technologies and producing parallel products, leading to a “decoupling” from the U.S. and the West, it would fall into their trap. China should continue to promote high-level opening up, grasp the development and market competition laws of the semiconductor industry, learn from the successful experiences of international semiconductor industry planning, and construct a new pattern of simultaneous domestic autonomous development and international cooperation.
Source:People’s Forum Network, “People’s Forum” magazine, July issue
Author: Cai Cuihong, Professor and Doctoral Supervisor at the Center for American Studies, Fudan University; Guo Wei, Master’s Student at the School of International Relations and Public Affairs, Fudan University, also contributed to this article.