Semiconductors are a critical element of all electronic devices, including those used within communications, healthcare, computing, automobiles, and weaponry. Production of this tiny yet powerful technology is segmented across the globe. As a result, it is easily subject to disruption, be it economic or geopolitical. Semiconductor policy offers a rare window into how China is navigating supply chain dependence and complex interconnection.
China imports more than $300 billion in semiconductors annually and holds between 15 and 20 percent of global semiconductor capacity. Despite clear demand, domestic chipmakers are underdeveloped; with international firms continuing to serve as major Chinese suppliers and as producers of the highest value elements. American companies earn more than 25 percent of their revenue from the Chinese market. American firms help to supply equipment, software, and materials for Chinese firms to fabricate chips, and there are no clear domestic alternatives in the short- or long-term.
Dependence on foreign companies (American, in particular) creates an odd dynamic for domestic firms, especially in light of US policies that threaten to cut off access to US chips. While China is unlikely to reach total independence for the foreseeable future, large-scale investment and support has increased the likelihood that Chinese firms will become internationally competitive in areas like chip design and memory production.
As political frictions and US export controls become more aggressive, Chinese semiconductor firms have benefited from targeted government measures to support self-reliance. Monetary and policy support for self-sufficiency is not new, but the scale, commercial focus, and alignment between government and industry has accelerated over the past year. This year, China began a new effort to promote sales of components and support semiconductor innovation needed to upgrade China’s supply chain.
Understanding China’s semiconductor policy
Over the past decade, China has made self-sufficiency in semiconductor manufacturing a national objective. The 2006 Medium and Long Term Plan for Science and Technology (MLP), 13th Five Year Plan, and the controversial Made in China 2025, all highlight the need for China to upgrade its semiconductor capacity in order to remain economically competitive. More recently, the Central Economic Work Conference and the 14th Five-Year Plan both reaffirmed the objective, now framing semiconductor independence as core to China’s sustainable growth strategy.
China’s Ministry of Industry and Information Technology (MIIT) regulates the production of electronics and ICT products, among other responsibilities. MIIT has outlined a comprehensive vision for semiconductor development. This vision includes creating a new national committee for the development of integrated circuits, defining what types of semiconductor companies will receive state support, and supporting development of semiconductor components.
Building domestic capacity through standard setting
In January, MIIT released a proposal to establish a new “National Integrated Circuit Standardization Technical Committee.” The committee would research, develop, and revise standards for all types and components of semiconductors, including integrated circuit materials and equipment, semiconductors, integrated circuit module, integrated circuit chips, and micro-electromechanical systems (MEMS). The idea is that the committee will promote R&D among China’s domestic firms, which are heavily reliant on international competitors for high-value components.
The proposed membership includes 90 organizations and individuals, including experts, research institutes, colleges and universities, and industry associations. It is unclear to what degree foreign research centers and businesses will be asked to serve as advisors to this body, or to what degree the committee will be supportive of foreign participation in this sector. If existing standards committees are any indication, foreign contributors will be limited in their influence and input. If foreign players are denied a seat at the table, it is possible that China will embrace domestic standards that favor its own producers, likely at the expense of foreign and multinational companies.
Notably, the proposed participants include the Semiconductor Manufacturing International Corporation (SMIC), Huawei, and its chip design producer, HiSilicon. All three companies have faced restrictions by the US government on national security grounds. Explicit and continued support for SMIC and Huawei signals that Beijing is committed to its vision for promoting domestic semiconductor champions and indigenous development despite the potential political costs.
Accelerating funding for chip manufacturing
Funding is another key component of government support, both in the form of direct investment, preferential treatment, and growth target goals for key supporting industries. MIIT is the largest single investor in both Phase I and Phase II of the China National Integrated Circuit Industry Investment Funds. As of 2019, 67 percent of Phase I investments focused on chip manufacturing. In 2021, MIIT also released a draft notice to promote development of China’s integrated circuits and software industries through state support for software companies that promote national industrial policies, use core technologies, and prioritize innovation.
This type of financial support for the semiconductor industry is longstanding. However, in 2021, MIIT is targeting more funding and long-term planning at boosting domestic sales, signalling support for market-oriented development. To increase development of component production, MIIT published a blueprint for China to reach RMB 2.1 trillion yuan in total electronic component sales from domestic companies by 2023.
Implications for multinational companies
China’s push for semiconductor development has both direct and indirect impacts on multinational companies (MNCs). For those operating in any sector of the semiconductor supply chain, these measures raise concern of unfair support for domestic competitors and add to the already considerable challenges of operating in this sector in China.
On a bilateral level, China’s support for semiconductor development plays into the strategic competition between China and the United States. While China is outlining its vision for high tech development, the Biden administration—still dealing with significant semiconductor shortages that began last year—has also expressed that it will seek greater strategic independence in this sector. The US defense spending package for 2021 partially funded a proposal to expand investment in US semiconducting manufacturing capacity, and a proposal to devote another $50 billion to the cause is in the works.
Despite ambitions to become more self-sufficient, neither country can succeed in semiconductor production and development without a certain degree of collaboration. China, for example, is still heavily reliant on imported technology; Chinese firms can only meet 14 percent of domestic demand at present. The United States, for its part, leads in semiconductor innovation, but is highly dependent on overseas manufacturing. Zooming out to the regional level, 75 percent of global capacity for wafer fabrication—a core component of producing semiconductors that requires highly technical expertise—is concentrated in East Asia.
The interconnectedness of semiconductor supply chains, coupled with increased support for strategic independence, places MNCs in this sector in a vulnerable position for the foreseeable future. In the meantime, any disruption, geopolitical, logistical, or otherwise, stands to have immediate and costly impacts for both producers and customers.