China undeniably plays a vital role in global integrated circuit (IC) production and boasts a rapidly growing domestic industry. However, defining whether China is the dominant force behind IC production worldwide is a complex subject. This article delves into the contributing factors to China’s influence in the global semiconductor industry and its implications for the industry to understand its role.
Integrated Circuit Production Globally
The global IC market is highly contested, with China, the US, Japan, South Korea, and Taiwan all vying for a piece of the action. Home to tech titans such as Samsung, TSMC (Taiwan Semiconductor Manufacturing Company), Intel, and Qualcomm, these countries occupy a hefty slice of the global pie. However, the Asian-pacific trio of China, Taiwan, and Korea mainly dominate the global IC production sphere.
A recent report by Market Research Future predicts a surge in the global IC market from USD 1.01 billion in 2022 to USD 1.28 billion in 2023 and USD 3.16 billion by 2030. This growth is due to the heightened need for advanced computing and data centers, and the development of the IoT and AI industries’ expansion contributes to this prediction.
The automotive sector is also propelling expansion in the IC industry thanks to the rising appeal of electric vehicles and self-driving technologies. These systems require sophisticated and specialized ICs to operate effectively, spurring IC makers to create and introduce new offerings to meet the surging demand.
As the IC market expands, manufacturers are striving to innovate packaging technology to enhance IC compactness and efficiency. For instance, in 2021, Taiwanese chip maker TSMC announced a three-year, $100 billion investment to develop new semiconductor manufacturing solutions which promise to make ICs more energy-efficient and simpler to incorporate into various electronic devices.
The IC production sector keeps advancing, with novel technologies and innovations propelling progress and transformation. These advancements will lead to further miniaturization of ICs, improved performance, and lower power consumption.
Integrated Circuit Production in China
China’s consumption of all the chips made globally is estimated to make up a colossal 40% of global demand. The country’s expanding middle-class population is attributed as a significant cause, as it has created an insatiable market for consumer electronics that depend on semiconductors to work.
Also, substantial investment in the latest technologies, such as AI, 5G, and the Internet of Things (IoT), drives China’s IC market. These cutting-edge advancements require advanced semiconductors, thus driving up demand in the country.
The availability of cheap labor provided by China’s large population is also a significant contributor to China’s production growth. With lower manufacturing costs, Chinese ICs have become increasingly competitive globally. As a result, many foreign buyers prefer Chinese ICs, further boosting China’s IC production growth.
With that said, China’s domestic IC production levels are yet to meet its teeming IC demand as the country is still only 12% self-sufficient. To bridge the gap, the Chinese government has pumped hefty investments into China’s IC production industry to wean the country off imports and enable it to compete in the global market.
Some measures the Chinese government has taken to bolster the sector include government subsidies, dishing out tax perks, and committing to R&D. Plus, the country’s educational infrastructure pumps out proficient engineers and scientists who have been integral to the semiconductor industry’s expansion.
Strategic partnerships with overseas companies and purchases of overseas semiconductor firms also provided Chinese companies a doorway to cutting-edge technology and know-how to turbocharge industrial growth.
Additionally, China’s domestic semiconductor industry has experienced a surge, with startups, suppliers, and services blooming in its wake. This flourishing ecosystem enables the cross-pollination of ideas and innovation, further propelling the sector’s progress.
Comparison of Key Players Behind Global IC Production
China’s stake in the global semiconductor production market is influential at 24%. However, it is imperative to acknowledge Taiwan’s more significant impact on the industry. Taiwan is responsible for producing over 60% of the world’s semiconductors, with an impressive 90% contribution to the most advanced ones.
By analyzing these statistics, one can contend that Taiwan takes precedence over China in the worldwide IC production sector. However, although Taiwan may lead in global IC production, uncertainty remains due to geopolitical conflicts and policy changes that can affect the market dynamics between Taiwan and China.
China’s Policies and Investments Impacting Global IC Production
National IC Industry Development Guidelines
In 2014, Chinese policymakers issued the National Integrated Circuit Industry Development Guidelines, charting a course for the industry till 2024. The directives set production goals, R&D objectives, workforce-building initiatives, plus provisions to foster collaboration among industry, academia, and government.
Made in China 2025
China’s Made in China 2025 initiative, inaugurated in 2015, is an industrial policy to encourage the development of advanced manufacturing technologies in the IC sector. It endeavors to shift China from a manufacturing center of low-cost products to a hub of top-notch technological innovation producing 70% of domestic needs by 2025.
China has pumped a lot of money into grooming a skilled labor force for the IC sector. It has set up specialized universities and research centers devoted to semiconductor and IC research to prompt Chinese students to study abroad in semiconductor-related fields.
Other notable investments in the Chinese semiconductor sector include talent recruitment programs such as the Thousand Talents Program and the Young Thousand Talents Program.
Thousand Talents Plan
In 2008, the Chinese government initiated the Thousand Talents Program to lure top talents worldwide and enhance innovation and economic growth. The program offered attractive incentives such as research funding, salaries, and housing.
However, the program received criticism from several countries, particularly the US, concerning intellectual property (IP) theft. Notably, some participants were found guilty of engaging in espionage and stealing trade secrets in the US.
Young Thousand Talents Program
The Young Thousand Talents (YTT) Program is a component of China’s Thousand Talents Plan aimed at attracting top talent to accelerate its scientific and technological progress. The YTT targets young Chinese researchers abroad, incentivizing them to return to China.
Although the program has also been controversial due to allegations of IP theft and espionage, it requires young talent to stay in China, reducing concerns about conflicts of interest and intellectual property compliance.
Technology Trade Regulations
China has implemented measures to foster the import of cutting-edge IC manufacturing machinery and know-how. Simultaneously, the nation has taken strides to boost exports of Chinese-manufactured IC products, including setting up IC manufacturing plants in other countries.
For instance, China has implemented several policies, such as the “Catalogue for the Guidance of Foreign Investment Industries,” which lists industries open to foreign investments, which includes the IC industry, allowing foreign companies to invest in China’s IC sector and bring advanced machinery and expertise into the country.
China’s Advancements in IC Production Technology
Advancements in Artificial Intelligence
China has invested heavily in AI and machine learning, devoting resources to building sophisticated algorithms and hardware. Huawei Ascend AI chip is a prime example, rolled out in 2020, and can process up to 2,000 images a second with pinpoint precision.
Development of Advanced IC Packaging Technologies
China strides ahead in creating state-of-the-art packaging techniques, which enable miniaturization and integration of ICs in gadgets. A shining example is the innovative wafer-level packaging XDFOI, developed for ultra-high-density Fan-Out Wafer-Level Packaging (FOWLP) technology, by Chinese semiconductor company JCET Group.
Investment in Research and Development (R&D)
China has poured considerable resources into R&D in the IC production industry to forge new technologies and streamline production. As a case in point, in 2021, Chinese chipmaker SMIC declared it planned to jointly invest in a $2.35 billion IC production project with the government of Shenzhen to make 40,000 wafers per month from 2022.
Expansion of Domestic Production Capacity
China’s capacity for ICs (integrated circuits) is increasing, bolstered by the government’s incentives for building new fabrication facilities. A standout instance is Chinese memory chipmaker Yangtze Memory Technologies’ opening of its second fab in Wuhan, which could further close the company’s technology and output gap with global leaders such as Samsung of South Korea and Micron Technology of the US.
Increased Collaboration With Foreign Companies
China is deepening its ties with global firms in the IC production business, focusing on tech transfer and joint progress. For instance, in 2020, Chinese chipmaker SMIC declared a collaboration with Qualcomm to develop cutting-edge 5G and AI innovations.
The Emergence of New Industry Players
China’s IC production industry is witnessing the rise of new players as domestic startups and smaller firms gain market access. One such player is Moore Threads, a Chinese GPU Chip design startup providing GPU (Graphics Processing Unit) technology and services to clients in various sectors, including the gaming, creative, and AI industries. The company, founded in 2020, is already a unicorn, poised to take on American giant chip maker NVIDIA.
Challenges Facing China’s IC Production Industry
US Trade Restrictions
The US government has been clamping down on commerce with Chinese tech firms, which has inflicted a heavy toll on the semiconductor sector. For instance, the recent sale prohibition of American chip technology to China due to US sanctions has forced Huawei to explore alternate suppliers, such as the Chinese chipmaker SMIC.
However, SMIC has had difficulty producing ICs with the same sophistication as those constructed by US companies, thus hampering Huawei’s ability to effectively compete in some IC markets where high-performance ICs are in high demand, such as in the AI industry.
China’s IC production industry faces a highly-skilled worker shortage. A white paper published by the government think-tank—China Center for Information Industry Development and the China Semiconductor Industry Association (CSIA) reveals a deficit of roughly 200,000 engineers in the Chinese IC sector, making it difficult for domestic IC foundries to keep up with foreign competitors with larger talent pools.
Many Chinese chipmakers have encountered considerable difficulties in creating cutting-edge IC technologies to rival the ICs of major industry players like Intel and Samsung. Despite many local Chinese semiconductor companies striving to develop domestic capabilities in 5G, AI, and cloud computing, they are yet to catch up to the latest innovation.
If they hope to catch up to the global giants in capability, they must run even faster than they are doing. Although with each step they take, the goalpost keeps getting shifted. In 2019, the US blocked China’s access to the latest chip manufacturing equipment, the Extreme Ultraviolet Lithography system, by pressuring the Dutch government to deny an export license to China. Dutch firm ASML produces and sells the equipment critical for manufacturing 7nm chips and below and would take China years to replicate.
Global Supply Chain Disruptions
The COVID-19 pandemic has impacted the semiconductor industry, causing disruptions to the global semiconductor supply chain and slow demand for some products. These disruptions have been an obstacle for Chinese IC fabs and other industry players globally, thus demonstrating the need for more resilient and flexible procurement chains.
Intellectual Property Concerns
The IC industry in China has challenges safeguarding intellectual property (IP). Worrying reports of IP theft and infringement have brought the sector under greater scrutiny and regulation, leading to legal challenges in foreign jurisdictions due to the perception of weak IP protections and reduced partnerships with foreign companies.
However, China has put in motion measures to bolster IP protection for advanced chips and other high-tech products. Recently, the nation has strengthened its patent laws and established courts devoted to resolving intellectual property disputes, thereby lifting foreign investors’ confidence in the sector.
Implications of China’s Growing IC Production Dominance
Reduced Dependence on Foreign Technology
China aims to build a homegrown semiconductor industry to reduce its reliance on outside technology, a move that reverberates around the world. However, a Chinese upper hand in ICs production could weaken the leverage of foreign IC producers, further amplifying Chinese control over essential technologies.
A Shift in Global Supply Chains
China’s surging presence in IC production may cause a change in procurement channels globally as businesses will likely source components from Chinese producers more. This change could affect the profits and market share of countries that are major IC suppliers globally, especially neighboring countries such as Taiwan and Korea.
As China’s semiconductor market expands and strengthens, it will likely spark more competition in the global IC production market. This competition could result in lower consumer costs and a surge in innovation as firms attempt to stand out and capture market share.
Increased Investment in Research and Development
China’s growing influence as one of the major players in global IC production will likely trigger a boost in R&D spending as chip companies sprint to create innovative IC technologies and fabrication techniques to outpace competitors. As China makes up a significant segment of the global IC market, IC foundries globally, especially the major industry players, are sharply conscious of the need to fund R&D to stay competitive.
China dominating global IC production could potentially displace the US, Japan, and Korea and thus bolstering its geopolitical influence and reducing its vulnerability to outside coercion. China could also use its technological advancements for political gains, such as forcing other nations to comply with its requests or attaining an edge in global commerce.
Increased Trade Tensions
China’s growing influence in global IC production is already stoking hostility with other nations, particularly the US, escalating to export restrictions on crucial IC technologies to impede China’s access to US technology and protect the country’s national security. A Chinese global IC production dominance could further escalate these trade frictions and have far-reaching consequences on the world economy.
Future Outlook for China’s IC Industry
Increased IC Demand
The upsurge of cutting-edge technologies such as 5G, AI, and the Internet of Things will likely fuel strong demand for ICs in the coming years. It will probably result in the continued expansion of China’s IC industry, with some estimates forecasting a compound annual growth rate of 6 to 8 percent per year up to 2030.
China’s IC production industry’s rapid rate of innovation shows no signs of slowing, with new manufacturing processes and materials continuously emerging. We should expect more advances in semiconductor design, materials science, and packaging technology to drive new opportunities and applications for ICs.
Supply Chain Disruptions
The COVID-19 outbreak has exposed the weak points of worldwide supply networks, as interruptions in production and transportation wreaked havoc on the chip sector. Consequently, Chinese firms will likely prioritize fortifying and expanding their supply chains.
Regulatory and Political Factors
The Chinese market faces various political and regulatory pressures that could influence its growth and profitability. For instance, export controls and tariffs can impede the transit of components and equipment between countries, while government policies on IP and competition can shape the industry’s competitive landscape.
The semiconductor space is highly competitive, with major players vying for control alongside numerous small and mid-sized entities. Recently, consolidation has become a watchword, with big players gobbling up smaller ones to gain entry to new technologies and markets, and the Chinese semiconductor industry may adopt the same trend.
Like other industries, environmental sustainability is becoming an increasingly important issue for the semiconductor industry. Therefore, Chinese IC manufacturers will likely put money into developing new technologies and manufacturing processes that minimize the environmental consequences of semiconductor production. They will also work on enhancing the sustainability of their supply and production chains.
China’s growing influence in the global semiconductor industry is noteworthy. However, China’s standing as a dominant force behind global IC production is uncertain due to fierce competition and the rapidly evolving nature of the industry. Nevertheless, China’s continued development in this area promises to be intriguing, and its impact on global IC production in the future is worth observing closely.