China's important role in the global electronics supply chain
China is the world's largest manufacturing center, producing 36% of the world's electronic products-including smartphones, computers, cloud servers and telecommunications infrastructure-which has consolidated China's position as the largest node in the global electronics supply chain. In addition, China has nearly one-fifth of the world's population and is the second largest final consumer market for embedded semiconductor electronic equipment after the United States.
The driving force behind these dynamics is the highly globalized semiconductor and ICT supply chain. Chinese local and multinational contract electronics manufacturers import semiconductors in China, then assemble them into technological products, and then export or sell them in the domestic market for final consumption.
To emphasize this point, let's look at a set of numbers. In 2020, China imported up to 378 billion US dollars of semiconductors; assembled 35% of the world's electronic equipment; exported 30% to 70% (depending on the product) of global exports of TVs, personal computers and mobile phones; and consumed all support A quarter of semiconductor electronic products. Entering this huge market is critical to the success of any globally competitive chip company today and in the future.
As a latecomer in the semiconductor field, China's local chip industry is relatively small, accounting for only 7.6% of total global semiconductor sales. Chinese chip companies mainly sell discrete semiconductors, low-end logic chips and analog chips to the consumer, communications and industrial end markets. Chinese chip companies are clearly absent from the market for high-end logic, advanced analog and cutting-edge storage products.
China's domestic semiconductor supply chain is even less developed. It is significantly behind in advanced logic foundry production, EDA tools, chip design IP, semiconductor manufacturing equipment and semiconductor materials. Chinese foundries are currently focusing on more mature nodes, and China's supply chain capabilities at the equipment and material level are currently limited to older technologies.
In the highly interconnected, hierarchical global semiconductor supply chain, China currently has some significant advantages. It is already a global leader in outsourced assembly, packaging and testing (OSAT). China's leading OSAT companies rank among the top 10 OSAT companies in the world, and in 2020 will account for 38% of the total OSAT market. Chinese OSAT companies are also going global, with more than 30% of their manufacturing facilities located outside of China.
Although China only accounts for 7.6% of the global chip sales market, this number is growing rapidly, and due to the vigorous development of the domestic market, China is making significant progress. Chinese fabless companies and IDM leaders have made significant progress in the development of mid-range mobile processors and basebands, embedded CPUs, network processors, sensors and power devices.
By 2020, mainland Chinese companies have accounted for 16% of the global fabless semiconductor market, ranking third, second only to the United States and Taiwan. China is also rapidly closing the gap in artificial intelligence chip design, partly because of the rapid growth in demand in China's ultra-large-scale cloud and consumer smart device markets, and the low barriers to entry for chip design. Chinese fabless companies are now developing 7/5 nano chip designs for everything from artificial intelligence to 5G communications.
China is also an important front-end wafer manufacturing country. With Chinese and foreign foundries and IDM establishing wafer fabs to ensure proximity to customer supply chains, about 23% of the world’s wafer installation capacity is currently located in mainland China, 30% of which are owned by multinational companies mainly from other East Asian countries. Although nearly 95% of the installed local production capacity in China is a relatively backward node (>28nm), as the digital transformation of our economy accelerates the demand for new and old chips, the relevance of these more mature manufacturing technologies should not be ignored.
China's semiconductor industry policy
Although the Chinese government has long had an industrial policy to support its emerging chip industry, after China issued the "National Integrated Circuit Promotion Guide", the guide set ambitious goals in terms of industrial revenue, production capacity and technological progress. Therefore, Since 2014, China has accelerated the development of integrated circuits. A year later, China announced the controversial 2025 plan, which set the ideal goal of achieving a 70% semiconductor self-sufficiency rate in China by 2025. The core of China's semiconductor industry policy is the National Integrated Circuit Industry Development Investment Fund (known as the "Big Fund"), which was established in 2014 and has tens of billions of dollars in financing. The big fund received a second round of financing of more than 35 billion U.S. dollars in 2019, and has begun to invest in multiple vertical areas of the industry. In addition, China has announced more than 15 local government IC funds with a total of 25 billion US dollars, which are specifically used to fund Chinese semiconductor companies. With the addition of national funds, this is equivalent to US$73 billion, which is unmatched by any other country. However, this does not include government grants, equity investments, and low-interest loans that only exceed US$50 billion. This is equivalent to $73 billion, which is unmatched by any other country.
The role of the Chinese government in supporting the country’s semiconductor industry cannot be overemphasized. An OECD study in 2019 found that between 2014 and 2018, four state-owned semiconductor companies in China received a total of US$4.85 billion in below-market loans from Chinese financial institutions, accounting for 98% of the below-market loans of 21 companies. %. In addition, in the entire industry, 43% of the registered capital of the Chinese semiconductor industry (a total of US$51 billion) is directly or indirectly owned or controlled by the Chinese government, indicating that the government has a significant influence on the development direction of the industry. Other incentives tailored by the Chinese government to support the domestic semiconductor industry include grants, lower utility rates, preferential loans, substantial tax cuts, and free or discounted land. These incentives provide Chinese companies with significant cost advantages and sometimes shield them from market competition. In fact, a 2020 report by the Boston Consulting Group found that the cost of building and operating a fab in China is 37% lower than in the United States.
With the intensification of geopolitical tensions, with the support of the government, China's efforts to establish a local supply chain in the past few years have once again become urgent.
In China's newly released "14th Five-Year Plan", semiconductors have been clearly identified as a strategic technological priority, requiring the joint efforts of the whole society to "realize technological self-reliance." In August 2020, China further expanded its semiconductor tax incentives, including a 10-year corporate tax exemption policy for semiconductor manufacturers worth more than 20 billion U.S. dollars.
China's domestic technology companies are also stepping up into the semiconductor industry. In fact, the pace of semiconductor investment has accelerated significantly. In 2020 alone, there will be more than 22,800 newly established semiconductor companies in China, an increase of 195% over 2019. 40 semiconductor companies in the supply chain are listed on China's new Nasdaq-style science and technology innovation board. These companies raised a total of US$25.6 billion during the initial public offering.
Progress and challenges
So far, most of the Chinese government's subsidies have been used for fab construction. Thanks to this support, Chinese companies have announced more than 110 new fab projects since 2014, with a total investment of 196 billion U.S. dollars. However, the actual investment amount is obviously low, and there have been some obvious failure cases. Among them, 40 wafer fabs have been completed and put into production, another 38 new production lines are under construction, and 14 projects have been suspended. Therefore, China’s semiconductor industry is expected to spend USD 12.3 billion and USD 15.3 billion on CAPEX in 2021 and 2022, respectively, accounting for 15% of the global total. It is expected that its installed wafer capacity will nearly double in the next 10 years to reach the global level. About 19% of the installed chip capacity.
Chinese chip makers are focusing on making breakthroughs in memory and mature node logic foundries to gain an advantage in the global market. Since 2016, China has invested at least US$16 billion to build a state-owned memory factory to develop the domestic 3D-NAND Flash and DRAM industries, and initial results have been achieved. In addition, China's leading foundries and several foundry start-ups have accelerated the pace of construction of backward fabs. According to VLSI data, China's memory and foundry capacity is expected to grow at a compound annual growth rate of 14.7% in the next 10 years.
With the support of the Chinese government’s ICT procurement and import substitution program, Chinese fabless companies engaged in the development of other high-end chips will also increase innovation, improve technological capabilities, and expand product supply, because China purchases and imports through local ICT Alternative plans support them. For example, China's top CPU companies have announced plans to develop GPUs for the government server and PC markets in 2020.
In addition, due to increasing restrictions on the import of foreign ICT products and fears that export controls will increase, China is vigorously developing its local supply chain capabilities. This includes accelerating investment in EDA design companies, semiconductor manufacturing equipment and materials. In the EDA field alone, more than 8 startups have been established in the past 24 months, raising a total of nearly US$400 million in funding. Chinese EDA companies are now providing more and more powerful products for traditional chips, and Chinese domestic equipment companies are expected to provide strong capabilities for mature node (40/28nm) production in the next few years.
Although the Chinese government fully promotes the localization of semiconductors, the Chinese semiconductor industry may achieve different successes in the highly competitive and technologically complex global market. As mentioned earlier, China is expected to be competitive in areas such as memory, mature node logic foundries and fabless chip design, especially in consumer and industrial applications. However, China’s leading logic foundry process technology (just like the United States, mainland China relies on Taiwan and South Korea to produce 100% advanced chips below 10nm), general high-end logic (ie CPU/GPU/FPGA), advanced manufacturing equipment and Materials (ie photoresist, photolithography, etc.), as well as EDA software and IP related to cutting-edge logic chips.
When based on transparent international trade rules and a level playing field, increasingly fierce competition will make the global chip industry stronger, more dynamic, and more innovative. However, certain aspects of China's semiconductor industry policies and practices have attracted attention. This includes some of China's industrial subsidies that may cause market distortions (especially below-market equity injection), as well as China's intellectual property practices and compulsory technology transfer measures. If left unchecked, Chinese semiconductor companies may pose a major challenge to the US semiconductor industry base.
Although we should take these challenges seriously, the answer cannot be a large-scale decoupling of our economy. The semiconductor industry is truly global, and access to the global market is essential for US companies to maintain high levels of R&D investment and capital expenditures. In fact, the semiconductor industry is the most R&D and capital-intensive industry in the world and requires a huge scale to sustain these investments. A recent study found that the expansion or even complete decoupling from China will cause US chip companies’ global market share to fall by 8% to 18%, leading to significant reductions in R&D and capital expenditures, as well as the loss of up to 124,000 US jobs, and ultimately leading to the US The global leadership in the industry has declined. Keeping American semiconductor companies into the Chinese market to sell general-purpose commercial chips is critical to ensuring American competitiveness.
The correct way to resolve conflicts with China’s industrial policy is to work closely with our allies to force China to change its methods and to formulate new global rules and standards to improve market access and ensure fair competition. If export controls are necessary to safeguard the national security interests of the United States and its allies, the government should work closely with industry and allied partners to ensure that such controls are multilateral, narrow, targeted, and effective. Will not overly damage our collective innovation ability.
The real, long-lasting solution to the increasing competition in semiconductors from China is to speed up operations by investing in our own technological competitiveness and strengthening the resilience of our domestic and alliance partners’ supply chains. As an important step forward, earlier this month, the US Senate passed the bipartisan American Innovation and Competition Act, which included US$52 billion in federal semiconductor investment. The two parties voted 68 votes to 32 votes to show that if the United States wants to compete and win in the future game-changing technology field, it must lead the world in the semiconductor field. This is widely recognized by Congress. The bill includes funding for a bold semiconductor manufacturing grant program, a new National Semiconductor Technology Center, and increased research and development funding for institutions such as DARPA and NIST. We think it is time for this bill to be passed?