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Wednesday, September 14, 2022
Long-Term Challenges Ahead for China's Semiconductor Industry
Mo Dakang

In recent years, the United States has been suppressing the development of China’s semiconductor industry. Such a move has been effective when the U.S. imposed precise restrictions on some crucial technical links,

Since 2014, the relatively backward Chinese semiconductor industry has been focusing on driving development through investment. Yet, with the current trend of the industry being led by geopolitical factors, there have been many uncertainties in this regard.

There is no shortage of discussions among industry insiders in China on how the country should face such a situation. Some proposed retaliative moves against related American companies, while others suggested that China needs to step up the expansion of the production capacity of mature nodes such as 28nm.

According to Mo Dakang, the semiconductor industry research consultant at ANBOUND, in order to fully dominate the global semiconductor industry, the U.S. has announced its CHIPS Act, and has put more effort into semiconductor production equipment, software, investment, and other areas. This is with the objective of orderly suppressing its Chinese counterpart. Unsurprisingly, the difficulties faced by China's semiconductor industry will only increase. Mo is of the opinion that under such circumstances, while China needs to adhere to globalization, realistically it should also get ready for the persistence of this situation by improving its own conditions.

In terms of coping strategies, China needs to grasp the key points. While it is essential to resolve the issues of the survival of most semiconductor companies, for cultivating industrial competitiveness, it is more important to focus on breaking through some of the restrictive problems. Although this is a very tortuous and long path ahead, for China's semiconductor industry, there is no other way out, and it must be ready to face the difficulties.

Simple “de-Americanization” will not help China to solve the issue. What it needs is to break the restrictions and isolations imposed by the United States. China can promote domestic substitution in some fields, support and drive the development of some of the country’s semiconductor companies, and gradually form an industry-market ecology. That being said, it must be admitted that it is rather improbable for China to completely reshape the global semiconductor industry chain. Under the current situation, it can fully utilize its national system and the large market that it possesses to resolve certain restrictive issues. This is particularly true in its national system which can serve to its advantage to break through certain parts of the competitions. This will be one of the most urgent tasks for the development of its semiconductor industry at the current stage.

In recent years, China’s central government has repeatedly proposed a new national system. The advantages of this are mainly reflected in two aspects. The first is that, on the basis of national capital investment, commercial returns can be temporarily ignored. The second is that it can effectively organize excellent domestic human resource mobilization and technology utilization to solve some of the problems. If the national system can be used properly, it will be beneficial for China's semiconductor industry to break the blockade.

The suppression and counter-suppression of the semiconductor industry between the United States and China is essentially a comprehensive technological contest. It is less about the ability to develop technology in a closed-door environment, but more of the capability of opening the door to maintain cooperation. The semiconductor industry chain is long and embodies the crystallization of the industrial base of the West in the past century. Therefore, it is almost impossible for China to re-establish a parallel industrial chain that is completely independent of the rest of the world. With this in mind, the development of its semiconductor industry will need to pursue the path of global cooperation.

Yet, facing technological innovation of the U.S., what are the options for China’s semiconductor industry?

As it stands, China should accelerate the localization of its semiconductor industry, making U.S.’ suppression a counterproductive strategy.

Resolving the restrictive issues in the semiconductor industry, described in China as “neck choking”, will be a long-term struggle for the country. Mo believes that there are a few aspects in this regard. (1) The companies that possess cutting-edge technology are those that have won the competition for decades, and they have a monopoly position in certain fields in the global semiconductor industry. (2) Such companies have huge R&D investments and own a wide range of patents. (3) These foreign-funded companies have been in the Chinese market for a long time and have extensive cooperation with each other, and they have the advantage of taking the lead in the market.

Compares with these advanced countries and regions, China’s semiconductor industry is still in the preliminary stage, and there remains a lot of works to be done.

Final analysis conclusion:

The success of China's semiconductor industry depends on globalization. However, due to the obstruction of the United States and other countries, it is experiencing some upheavals, and China needs to adopt the localization move to partially counter this. From the perspective of industrial development, these problems, sometimes described metaphorically as “neck-choking”, must be resolved. Otherwise, the development of its semiconductor industry will face continuous challenges.

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