The Chips Are Down

BY VALUE, CHINA imports more semiconductors than oil. For the past two years, chips have been the country’s most valuable import.

That, in itself, tells this Bystander how much of a foundational challenge China still faces in becoming a technological rival to the United States until it is the leading provider of chips, the bricks of the digital economy, and especially the most advanced designs.

The national drive for self-sufficiency in the design and fabrication of semiconductors is long-standing. Domestic production is being ramped up rapidly, and the pace has accelerated since the US imposed sanctions to deny it access to US chipmaking technology.

Domestic output rose by one-third last year over 2020’s level, to reach 359.4 billion units, according to data newly released by the National Bureau of Statistics, having grown by 16% in 2020 over 2019.

However, last year’s production was still less than imports, which reached 432.5 billion units.

More significantly, China still does not yet produce the most advanced chips. The indigenous chip industry is still only nibbling at the edges of the leadership of foreign chipmakers like TSMC, Samsung, and Intel in cutting-edge chips. It is also an industry in which economies of scale favour the market leaders.

That adds to the risk of China’s strategy to leap-frog to compound semiconductors or ‘third-generation’ chips. Chipmaking is an industry ill-suited to decoupling.

Investment of some $26 billion in production facilities in 2021 — and the mobilisation of state planning resources on the scale of the development of the atom bomb in Mao’s time — is moving China’s chip makers up the technological ladder and reducing the country’s vulnerability to sanctions and external shocks.

The Covid-19 disruption to supply chains was a further wake-up call in that regard if any was needed. However, supply chains in the sector are complex and transnational, making self-sufficiency in chips beyond China (and indeed any country) for the foreseeable future.

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