China is scrambling for global semiconductor supremacy

When Leo Liu left China to study overseas almost three years ago, semiconductors occupied only a sleepy corner of the Chinese technology industry. Liu had chosen to study chip design because he was fascinated by the idea of creating advanced “black box” chips that could fend off hackers. When he returned to the country with a master’s degree from the Netherlands, he was deluged with job offers. Since he’d left, domestic chip makers had become desperate to find people with skills like his.

A lot had changed. When Liu left, he didn’t know the Trump administration would impose sanctions on some of China’s biggest companies, which restricted them from obtaining components produced using US technology. As US tech is integral to the semiconductor value chain, and semiconductors are the basis for every technology, this export ban could deal a blow to the global competitiveness of these companies.

The semiconductor industry has traditionally been defined by low hope of return for new entrants and high barriers to entry. Specialised companies exist at every stage of the production process, with many almost completely cornering their respective markets. Chinese companies, along with others, have long-relied on a globalised value chain, and supplies from other companies. But this reliance has become, in the words of those at its highest levels of government, a “choke point” for the country’s technological ambitions.

“It’s now a hot industry,” Liu says. Of the companies that reached out to him, many had projects already in progress and needed talent. Not all those Liu visited were innovating; some were developing products that had already been on the market for ten years, or trying to reduce individual unit production costs. Some companies added “chip” to their names just to find new funding. The threat of losing access to supplies, as a result of sanctions, energised China’s drive for more chip autonomy. It has also driven a rapid increase in the number of companies hoping to profit from these political dynamics.

China’s policymakers have been talking about developing the domestic semiconductor industry for decades. Several Chinese companies have become established players in some segments of the semiconductor value chain, such as SMIC and state-owned chipmaker Zhaoxin.

In 2014, China’s government established the National Integrated Circuits Industry Investment Fund, its “Big Fund” which raised 138.7 billion yuan (£15.4bn) in its first financing round from state-owned enterprises and banks. The following year, Made in China 2025, which set out an industrial blueprint to upgrade China’s manufacturing, emphasised the importance of increasing domestic market share in “basic core components”.

The government has ramped up policies that aim at more “chip autonomy” and decreased reliance on American technology. It offered chip companies tax breaks in March, and it set up another big fund of 204bn yuan (£22.6bn) last year. This is not only a source of funding; it’s also a strong signal the government prioritises semiconductors in its industrial policy. With this reassurance, vast amounts of private capital have flowed into the semiconductor industry. Much of this is facilitated by semiconductor companies listing on the Shanghai STAR market.

China’s policymakers have emphasised technological “self-reliance” as a key goal. While China is the world’s biggest consumer of chips, domestic companies only meet around 30 percent of local demand. Amid ramping geopolitical tensions between Washington and Beijing, the US has started to leverage its dominance in semiconductor production to curb China’s technological advancement.

In 2019, the US Commerce Department banned telecoms giant Huawei from buying parts and components from US companies without government approval, as the Trump administration claimed Huawei endangered national security. In May 2020, the department added more restrictions, by issuing rules that stipulated foreign manufacturers using American-made machinery or software must obtain a special licence to design or produce semiconductors for Huawei. In December 2020, the Trump administration blacklisted SMIC, China’s largest semiconductor foundry. The company says this will affect its R&D efforts and capacity to produce cutting-edge chips of ten nanometres (nm) and below.