China’s trillion dollar barrier to leap into the top global semiconductor ranks
Last month this column – along with the world’s capital markets – wondered why Beijing would violate its own tech stars like Ant Financial, Didi Chuxing and TAL with a barrage of new regulations. My thought was that President Xi Jinping was waving a red flag to China’s tech talent: turn your attention away from the zippy consumer technology: online loans, ridesharing, tutoring games, and the like. Deal with strategically important core technologies, for example semiconductors. Xi’s efforts to achieve national self-sufficiency of at least 70% in critical technology by 2025 are blocked by China’s weakness in this strategically most important of all technologies.
A bit of history. In November 50 years ago, America’s Intel laid the foundation for the digital age with the 4004, the world’s first microprocessor. The project began in 1969 as a partnership with Japan’s Busicom, which had negotiated exclusive rights to the 4004 in computers.
Intel retained the rights to other uses, including the personal computer in the late 1970s. The rest, as they say, is history. Intel, which both designs and manufactures chips, has never given up its global sales leadership and takes advantage of global size.
China is getting semiconductors. It is the second largest consumer of semiconductors in the world, a little behind the US, and will catch up soon. But mainland China lags far behind the US when it comes to making advanced microprocessors that power everything from giant server farms to the world’s 5 billion cell phones. So far, China’s main role in the semiconductor world has been that of assembler and packager.
The absence of a mainland-based company from the leading global semiconductor ranks is a strategic black hole for Beijing. Of the 15 semiconductor companies with the highest sales worldwide, eight are in the United States. There are two each in Europe, South Korea and Taiwan. Japan has one. With semiconductors the fourth most traded product in the world (by value), behind crude oil, refined oil, and automobiles, it is a mystery why China hasn’t cracked the top 15 by 2025 to reach core technological independence.
The semiconductor flagships in mainland China are Huawei from Shenzhen in the design and SMIC from Shanghai in contract manufacturing. Both compete on the world stage; neither has cracked the top 15 in the world in semiconductor sales. (Of course, like Apple, Huawei gets most of its sales from cell phones, not chips.) Huawei is a world-class company, but its ability to enter markets that make up the majority of global GDP has been constrained by the former Trump administration’s policies.
Thus, SMIC is China’s laggard in the race for independence from core technologies. In 2020, SMIC’s global share of custom chip manufacturing was only 4%, compared to Samsung’s 18% and TSMC’s 50% (and even more dominant in advanced chip manufacturing at 80%). Most analysts estimate that SMIC is three to four years behind TSMC’s technology. This loophole has forced SMIC to compete more closely at the level of raw materials – cheap phones, appliances, automobiles, and so on. What could SMIC get into the top ranks? In a word, Huawei. The Shenzhen superstar needed a top factory partner since Trump’s 2020 actions prevented Samsung and TSMC from fully serving Huawei.
China also needs to build a world-class chip manufacturing equipment business. This is not trivial. The etching of transistors on silicon on a 5-nanometer scale – a human hair’s breadth is around 90,000 nanometers – is a technological masterpiece. Very few device manufacturers can do that.
The investments required to realize Xi’s dream of independence from core technologies, in semiconductors only, are estimated at between $ 1 trillion and $ 3 trillion. But it takes more than just money to achieve this goal. It takes trust in the scientists, engineers, bold thinkers and loners, as well as the experimentation and creative finances required to make this happen. It cannot happen automatically with a top-down command. Meanwhile, Intel, Samsung, TSMC and others are not sitting still.