Semiconductors are an essential component of all electronic devices. Processor chips and other semiconductors are China's biggest single import and consume around 70% of global production. In the future demand will just continue to increase because of the new technologies such as 5G and IoT. China has spent heavily over the past two decades to build up its chip industry, but until now its manufacturers of smartphones and other electronic products still have relied on the United States, Europe, and Taiwan for their most advanced components.
US Congressman Mike Gallagher, the co-chair of the House Armed Services task force, projects that in the near future, 90% of the world’s semiconductor manufacturing will most likely happen in China, South Korea, and Taiwan. Especially China's rising role in semiconductor manufacturing is seen as a threat to the US economic dominance and thus had to be confronted. Since 2018 as many as 160 Chinese entities have been blacklisted by Washington. The largest victim so far has been telecommunication giant Huawei that the Trump administration got effectively banned in 2019 by unfounded claims of digital espionage. President Donald Trump also cut off Huawei's access to US processor chips and other technology to hinder China's high technology development. Last year, Trump tightened curbs by prohibiting global suppliers from utilizing US technology to make chips for Huawei. That threatens to cripple its smartphone business, which was the No. 1 global seller in early 2020 but has dropped out of the top five brands.
Push for China to become self-sufficient in semiconductor production has intensified during 2021 and registration of new home-grown semiconductor firms has tripled since the start of the year. Now after years of investment to build up its domestic semiconductor industry China is starting to find its footing. It has been taking a lead in addressing the global shortage of chips by accelerating the development and manufacturing of 14nm chips. According to statistics of the first half of 2019, the entire semiconductor market was worth about USD200 billion, of which 65% of chips used 14nm technology. 14nm chips are in the critical importance of the semiconductor industry and are expected to go into mass production in China in 2022.
Chip manufacturing is a highly complex process and China has faced many challenges during the years to achieve its goal of mass production. "China did not blindly pursue high-level manufacturing processes but 'go back to the well-developed technology to meet the general chip requirements and pay more attention to design and packaging optimization. The strategy helped trading time for semiconductor applications and the entire industry chain," says Dr Wen Xiaojun, Deputy Director, Institute of Electronics, China Electronics and Information Industry Development Research Institute. China has already overcome many key technical challenges in 14nm chip productin, including development of essential equipment such as etching machinery, thin film deposition suitable for mass application in large-scale production, packaging and integration technology required for mass production, polishing agents and sputtering targets.
This wouldn't be the first time for the US sanctions to backfire on themselves. As a part of the US trade war on China, the United States Department of Commerce added Huawei to its Entity List in May 2019. This prohibited U.S.-based companies from doing business with Huawei without first obtaining a license from the government. At the time Huawei was using Google's Android operating system on its smartphones and as Google is US-based company sanctions led it to prevent Huawei from using Android on its future smartphone products. This forced Huawei to release its own operating system called HarmonyOS. Today just two years later 500,000 developers have participated in developing HarmonyOS apps and over 10 million devices use it. HarmonyOS has so become the first real challenger to dominance by US companies Google and Apple on the smartphone operating system market. Similar faith can wait for the US from its attempts to hinder China's development in semiconductors.
The US sanctions not only brought challenges to Chinese companies but also caused a ripple effect on the whole ecosystem and damages throughout the supply chain, including the US semiconductor industry. The sanctions have caused a panic stockpiling in chipsets worldwide, leading to supply shortages that naturally drove prices up and resulted in higher price tags for consumer electronic products. This has led consumers to carry the burden of rising prices of electronic products. In the US consumers are already facing rising consumer prices with a jump of 5.4% just in July 2021, so it won't be easy to condone further rise in living expenses caused by increasing prices on consumer electronics.
The need to strengthen Europe’s capacity to develop the next generation of processors and semiconductors has been understood in the European Union, as shown in the Declaration: A European Initiative on Processors and semiconductor technologies, signed by most of the member states. Europe should look ahead to collaborate with China, as Chinese companies are looking to diversifying their supply chain to fulfill the rising demand for semiconductors. According to SIA’s report, Strengthening the Global Semiconductor Supply Chain in an Uncertain Era, building regional self-sufficiency in semiconductor supply would take an incremental upfront investment of at least 1 trillion US dollars, which would lead to an overall increase of 35% to 65% in semiconductor prices. Chinese-European collaboration would help to ease pressure on rising semiconductor prices and lead to a more stable, vibrant, and healthy global semiconductor ecosystem that would benefit everyone.
Founder and CEO of China Business Forum