What China Can Do In Face Of US Suppression Of Its Semiconductor Industry – Analysis
In the era of geopolitics, the semiconductor industry has taken on new importance. As semiconductors are widely used in civilian and military fields like never before as the world enters the information age, the ability of a country or an alliance of countries to control the semiconductor industry has become a unique strategic capability. Conversely, a country that is extremely lacking in the semiconductor industry will be in a passive position in this geopolitical game.
Taking the ongoing war in Ukraine as an example, according to the latest report of the Royal United Services Institute (RUSI), a British defense and security think tank, after dismantling the Russian-made weapons seized on the battlefields, 27 types of weapons and military systems were found. From cruise missiles to air defense systems, most of them rely on Western components, with about two-thirds made by American companies. A large number of chips are used in the weapon system. For example, in the Javelin missile system aided by the United States to Ukraine, there are about 250 chips. According to POLITICO, Ukrainian Prime Minister Denys Shmyhal stressed the war had come to an inflection point where the technological edge was proving decisive.
The U.S. is the source of most of the world’s semiconductor technology. In an era of intensified geopolitical friction, the U.S. frequently uses technological restrictions and trade sanctions against China in the semiconductor domain. Since the Trump administration, it has focused on strategic competition with China in high-tech fields, with semiconductor technology bearing the brunt, which is regarded by the U.S. as the key to restraining China’s high-tech development.
Compared with the Trump administration’s disorganized strategy, the logic of the Biden administration’s containment of China’s semiconductor technology development is more planned, targeted, and long-term. The “small yard, excessive fence” strategy is now used as a basic means of technological competition with China. The core of this strategy is that the U.S. must include key barriers to prevent adversaries from exploiting the technologies belonging to itself and its allies that could threaten its national security. Under this framework, semiconductor technology is the first to be included in the “small yard”. The Biden administration has made efforts both domestically and internationally to promote the formation of a comprehensive containment of China’s semiconductor technology through unilateral, bilateral, and multilateral approaches.
Following the official signing of the 2022 CHIPS and Science Act of 2022 in August this year, the Biden administration announced on October 7 new export control regulations for advanced computing and semiconductor manufacturing. First of all, specific high-performance computing chips, computer products containing such chips, and semiconductor manufacturing equipment, software, and technologies are added to the commercial control list (CCL). The second is to expand the scope of application of foreign-direct product (FDP) rules on the entity list. The third is to strengthen the management and control of end users and end uses. The U.S. Bureau of Industry and Security adopts the principle of “presumptive denial” for semiconductor companies whose end users are Chinese and conducts case-by-case reviews for multinational companies. This provision applies not only to American companies but also to U.S. persons. The fourth is to associate the unverified list with the entity list. This includes not only domestic companies and individuals in the U.S. but also foreign companies. From the perspective of control tools, adjustments have been made to the CCL, the entity list, and the unverified list, with unprecedented intensity.
As the U.S. government imposes a series of new measures, the pressure on China in the semiconductor field has increased significantly. According to Mo Dakang, semiconductor industry consultant at ANBOUND, the purpose of the U.S. in its suppression of the Chinese semiconductor industry is mainly reflected in three aspects. First, it is mainly to widen the technological gap between the two countries. In the past, the U.S. restricted the development of China’s semiconductor industry to maintain a two-generation technology gap, but now it has greatly increased the generation gap standard. The latest U.S. technology boundaries for China encompass aspects like logic chips with non-planar transistor structures (i.e., FinFET or GAAFET) of 16nm or 14nm or below; DRAM memory chips with a half pitch of no more than 18nm; NAND flash memories with 128 layers or more. According to industry insiders, this means that the U.S. must keep the technology generation gap of China’s semiconductor industry at four or more generations. The second is to balance interests. The U.S. not only wants to suppress China’s semiconductor industry but also to make money from the Chinese market. This means that it needs to maintain a balance between the two. The third is to prevent the success of China’s localization in the semiconductor field, especially to prevent it from achieving localized substitution in the field of advanced technology.
Hence, in addition to restricting technology, products, equipment, and others, the U.S. government also suppresses China in terms of talent, restricting American citizens or permanent residents from working in operating integrated circuit companies or research institutes. This is intended to drastically halt the talent in the development of China’s semiconductor industry. In addition, it has also promoted the formation of a Chip 4 alliance (the U.S., Taiwan, Japan, and South Korea) in an attempt to contain Mainland China.
In the face of the United States’ continuous, systematic and precise suppression of China’s semiconductor industry, what are the options for China?
In reality, under the current situation, China does not possess effective means to break through the situation. The process of responding to the suppression of the U.S. and seeking the development of the semiconductor industry is highly complex. What China can do are two main points; the first is the basic coping strategy, and the other is to resolve the talent problem.
When it comes to basic coping strategies, under the precise sanctions of the U.S., China’s integrated circuit industry in advanced manufacturing processes has been critically restricted, and it is unlikely to have opportunities to reverse the situation in the short term. Therefore, its focus should be on what can be done. This means China will need to develop mature manufacturing processes in technical fields that are not currently suppressed by the U.S., and strengthen system capabilities in mature manufacturing processes. Even though high-end chips produced by advanced processes are highly crucial, in most daily situations, mature process chips are still more frequently used.
Wu Hanming, a scholar at the Chinese Academy of Engineering, pointed out that China’s foremost priority is to increase chip production capacity and the proportion of its domestic chips, rather than focusing on the 14nm and 7nm markets. Wu also said that is more significant for the country to realize the independent control of 28nm and above mature process technology than to concentrate only on the 7nm one. Cai Guozhi, chairman of China’s leading foundry Nexchip, agrees with this view. He expressed that China should think about how to maximize the mature manufacturing process to drive the improvement and development of the entire semiconductor industry chain. Cai believes that as the world’s leading manufacturer of power semiconductors, the process used by Infineon’s most advanced products is only 65nm. Therefore, as long as China knows which area to focus on, even in mature manufacturing processes, Chinese semiconductor companies still have a lot of room for development. According to industry research data, if 28nm and above are categorized as mature processes, the total sales of mature processes will reach 76% of the global wafer sales in 2021, especially in the shipment of 12-inch wafers where they accounted for 86%, and there will still be a long-term and stable huge demand in the future. By maximizing products in mature manufacturing processes, China could replace imported chips and form a systematic industrial capability, and this includes the industrial chain, supply chain, technology, and talents.
In addition, China needs to alleviate the problem of industrial talent through various channels and aspects. The semiconductor industry is a technology-intensive industry, and the key to industrial competition lies in its talents. As the U.S. restrict talents from the country from working in Chinese companies, China needs to alleviate the shortage of talent in the semiconductor industry from multiple aspects, including (1) Making full use of all kinds of personnel who have worked in foreign semiconductor companies, as this can save training time and costs. China can also attract a large number of talents from other countries and regions. (2) The recognition and recruitment of talents in the semiconductor industry needs to be broadened, not only to attract leading talents in the field of entrepreneurship and R&D but also to attract a large number of excellent engineers and skilled workers. To this end, there should be systematic arrangements and measures in talent introduction, training, and education.
Final analysis conclusion:
The United States’ suppression of the Chinese semiconductor industry is part of its national strategy and will last for a long time. In this regard, China needs to adopt a pragmatic strategy to achieve mature manufacturing processes, so as to form sustainable industrial capabilities virtuous circle of industrial ecology. At the same time, it is also necessary for it to broaden the scope of talents and adjust its industrial education and training system.