A Chip on the Shoulder
China’s Technological Achilles’ Heel
Part 2 - china's path towards self-reliance
By Darryl Lau
Date: 13th June 2024
Holding up a micro-chip
Courtesy of Enrique Dans (2023).
The self-sufficiency of China Chip
While China boasts impressive growth, several critical hurdles impede its journey towards self-reliance. Addressing these challenges requires a multifaceted approach that fosters domestic innovation, cultivates a skilled workforce, and safeguards the industry’s resilience.
One of the most pressing concerns is the industry’s heavy dependence on imported chips. This vulnerability exposes it to disruptions in the global supply chain and external pressures. To mitigate this risk, China must prioritise investment in domestic R&D. Increased R&D funding will fuel breakthroughs in chip technology, ultimately reducing reliance on foreign innovations. In 2020, the Chinese government released Notice by the State Council of Issuing the Several Policies for Promoting the High-Quality Development of the Integrated Circuit Industry and the Software Industry in the New Era to provide further guidance and policies supporting the chip industry.
Measures like tax breaks and subsidies for domestic chip manufacturers ought to attract vital investment and create a more favourable landscape for local players. For instance, China has pumped 47.5 billion into semiconductor production through the China chip “big fund” (China integrated circuit industry investment fund). Moreover, private-public collaboration is also a major part that deserves attention. For instance, the creation of the National Science and Technology Success Transformation Guidance Fund 国家科技成果转化引导基金, and the reform to cap state investment level to 30%, attracts private support while showing state attitude.
Another critical challenge for China’s semiconductor industry is the talent gap. This industry thrives on a highly skilled workforce, but China currently faces a significant shortage of qualified professionals. To address this, China is actively developing targeted programmes to attract and retain top talent in the chip industry. These programs aim to attract and retain top talent in the chip industry. Offering competitive salaries and benefits is a crucial first step, as evidenced by the doubling of entry-level engineer salaries between 2018 and 2023. However, these salaries remain significantly lower than those offered in the US ($28,700 compared to $74,879). In the long run, fostering a culture of innovation and entrepreneurship will be instrumental. This will not only attract talent but also stimulate the development of a robust domestic talent pool. However, the current industry efforts to cultivate this culture seem to be falling short, with the shortage projected to reach 300,000 by 2025, up from 250,000 in 2022.
Geopolitical risks pose another significant threat. Restrictions on chip exports from the US and other countries create a major obstacle to China’s chip ambitions. To counter this challenge, China has been prioritising diversifying its supply chain. By sourcing chips from multiple vendors across different regions, China reduces its dependence on any single country. Additionally, building strategic stockpiles of critical chips can serve as a buffer against potential supply disruptions.
WIPO Director General Daren Tang meeting with Mr. Wang Zhigang, Minister of Science and Technology
Courtesy of World Intellectual Property Organisation (2023)
Struggles of Small Chip Companies
Adding to the challenges faced by China’s chip industry is the recent decline of small chip companies. The number of chip companies closing down in China has skyrocketed in 2024, with over 300 companies ceasing operations in the first half of the year. This closure rate is significantly higher compared to previous years.
US sanctions and the economic downturn are the two main reasons that led to the decline. US sanctions have restricted access to vital chip components and technologies, hindering the ability of small companies to compete with larger, more established players. The economic downturn has further exacerbated this issue, as many small chip companies struggle with financial difficulties and are unable to secure funding for research and development.
This trend of small chip company closures poses a serious threat to China’s long-term ambitions in the chip industry. Small and medium-sized enterprises (SMEs) are often at the forefront of innovation, and their decline could stifle the development of new chip designs and technologies. This, in turn, could slow China’s progress in catching up to leading chip manufacturers like TSMC and Samsung.
The Chinese government is aware of this challenge and has implemented some measures to support struggling SMEs. These measures include providing financial assistance, tax breaks, and easier access to loans. However, it remains to be seen whether these efforts will be enough to reverse the current trend.
TSMC headquarters.
Courtesy of Li Ji-lin (2014).
China’s Rare Earth Export Restrictions
A Sledgehammer in the Geopolitical Arena of Technology
To counter the export control of the US and the Netherlands, China announced a ban on the export of two rare earth metals used in the manufacture of high-end AI chips starting in Aug 2023. The rare earth metals can also be used in the production of solar panels, wind turbines, and electric vehicle batteries. As a result, there’s growing concern in the West about its dependence on China for these vital resources.
This dependence has spurred the US and its allies to invest heavily in efforts to lessen their reliance on China. China’s control over the processing of many critical minerals, including rare earths, is a major point of contention. These rare earths are essential components in a vast array of products, ranging from consumer electronics to defence systems and clean energy tech. Furthermore, China holds the top spot globally in producing solar panels, wind turbines, and electric vehicle batteries.
Western nations are understandably anxious about this dependence on China. It creates a vulnerability that China could potentially exploit in geopolitical disputes. Imagine China restricting access to these critical materials – it could disrupt the global economy, exert pressure on other countries, or even gain a military edge.
To counter this dependence, the West is taking a multi-pronged approach. Firstly, there’s a push to develop domestic supplies of these critical minerals. Secondly, significant investments are being made in renewable energy technologies to lessen reliance on Chinese dominance in that sector. Thirdly, research and development are underway to create new technologies that don’t necessitate dependence on Chinese materials. Finally, there’s a drive to diversify supply chains and move away from China as the sole supplier.
However, this effort to lessen dependence faces significant hurdles. China is a powerhouse in the production of many of these materials, and they have a strong economic incentive to maintain their leadership position. Additionally, the West has its own political and economic hurdles to overcome if it’s to successfully reduce its reliance on China.
New York Stock Exchange.
Courtesy of Carlos Delgado (2012).
A Look Ahead
How does a tiny chip affect global politics?
The future of China’s chip industry remains uncertain. On the one hand, China has made significant strides in recent years and is now a major player in the global chip market. The government’s commitment to domestic chip production is unwavering, and large, state-backed companies are making progress in developing advanced chip technologies.
On the other hand, China faces significant challenges. US sanctions, the decline of small chip companies, and the overall economic climate all pose significant hurdles. Whether China can overcome these challenges and achieve its goal of technological self-sufficiency remains to be seen.
Finally, the question arises of how geopolitics may affect the development of the global chip industry, as well as other technologies; at the same time, how the Chinese chip industry may reversely affect the geopolitics, especially when it comes to the China-Taiwan dispute. While the West is intensifying its control on chip exports, China is also trying to tighten the export of rare earth metals. The battle for semiconductor supremacy is a high-stakes game with far-reaching consequences. China’s ambitions to become a leader in chip technology pose a significant threat to the US’s economic and security interests. If China succeeds, it could disrupt global supply chains, reshape the global electronics industry, and increase the risk of cyberattacks and other security threats.
China’s self-sufficiency in semiconductors would also have major implications for Taiwan. Taiwan’s status as a major chipmaker has been a deterrent to Chinese aggression, but if China can produce its own chips, that deterrent could be weakened.
The next few years will be critical for China’s chip industry. The success of government initiatives, the ability of domestic companies to innovate, and the evolution of US-China trade relations will all play a major role in shaping the industry’s future. More importantly, the “chip war” is not just about technology; it is about the future of the global economy and the balance of power. The outcome of this competition will have a profound impact on everyone around the world.
Military training exercise in Beijing.
Courtesy of Dan (2009).
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