Starting in 2022, the US has focused heavily on limiting the production of high-end semiconductors from China. The Commerce Department has imposed stifling export controls and allocated tens of billions of dollars to incentivize the production of advanced chips in the US.
In response, China has created its own policy — and it’s heavily focused on less advanced but widely used “legacy” chips. Recent data shows that Beijing is gaining influence in these markets quickly.
China is now on track to install three times its chipmaking capacity this year as all other countries plan to do over the next three years combined, according to Silverado Policy Accelerator, a nonprofit think tank. The country is poised to control approximately 40% of overall legacy chip production by 2027, according to a study by Rhodium Group.
“What China is doing in that market segment is what it’s doing in many other industries,” Sarah Stewart, CEO of Silverado, told Yahoo Finance. “They’re providing that segment of the market with … below-market loans (and) all kinds of subsidies that nobody else is offering. It’s got nothing to do with the actual demand signal.
China’s efforts have fueled fears that the semiconductor industry could be at risk of following the path of the solar and steel industries, where overcapacity in China has led to a collapse in global prices.
Price pressure has built. Silverado’s report shows that the Chinese company will offer prices 20% to 30% lower than non-Chinese rivals in 2022 and 2023. The discounts come despite strong industry prices, especially in 2022, when a wide semiconductor shortage will lead to record sales.
While Chinese-made chips are still widely used to supply the domestic market, steep discounts have helped companies like Semiconductor Manufacturing International Corporation (SMIC), Hua Hong (1347.HK), and Nexchip (688249.SS) wrestle market share from non-Chinese competitors. including GlobalFoundries (GFS) and Samsung, according to consulting firm JW Insights.
China accounted for about a third of global legacy chip production last year, nearly double that in 2015, according to Rhodium Group. It is expected to increase this capacity to 39% by 2027.
New vs old
Although advanced chips are state-of-the-art technology, their use depends on the foundation built by older semiconductors.
The Commerce Department defines these legacy chips as semiconductors built at nodes that are 28 nanometers or larger. It is considered fundamental because it is essential for almost all electrical devices, from smartphones to household appliances, medical equipment, and military vehicles.
For example, a smartphone uses 160 to 170 chips, but only three are considered advanced, according to Silverado research. GPS, Wi-Fi, battery life, and camera control are just some of the functions that rely on legacy chips.
“There are no applications that require advanced chips that work without basic chips,” Stewart said. “They moved together.”
But Biden officials are focusing their efforts on producing more advanced chips than legacy ones, largely because China is lagging behind in the technology.
The Commerce Department announced a combined investment of $3.4 billion to build US capacity to produce legacy chips, according to official data. This is one third of the incentives given to advanced semiconductors.
National security is one reason for the emphasis on rejecting China’s advanced chips. Commerce Secretary Gina Raimondo said the government’s export controls are aimed at thwarting China’s advances in artificial intelligence, military systems, and mass surveillance.
“Supercomputing, AI technology, AI chips in the wrong hands are as lethal as any weapon you can give them,” Raimondo said at the Reagan National Defense Forum last year.
China increases production
China has been working to build its domestic semiconductor industry for years, pouring billions of dollars into local players.
The current acceleration can be traced back to 2019, when the Commerce Department placed telecom giant Huawei on its entity list, cutting off access to critical suppliers including Google ( GOOG ), Qualcomm ( QCOM ), and Broadcom ( AVGO ) overnight.
The 2022 export controls, which all but ban American companies from supplying advanced chips and advanced chip-making equipment to China, only add to the country’s efforts.
Stewart said China is taking advantage of Washington’s policy by ramping up production of legacy chips with the goal of expanding the country’s global market share, gaining leverage in the US, and controlling prices.
At the heart of the effort is China’s National Integrated Circuit Industry Development Investment Fund, which has raised $52 billion to develop semiconductor fabrication and design over 10 years with a focus on older chips, according to a report by the Semiconductor Industry Association and BCG. The goal is to raise $40 billion more by the end of the decade.
The industry is also developing on the back of Western companies. China is the largest global importer of semiconductor manufacturing equipment by 2023, importing $15 billion more than its nearest competitor, Taiwan, according to Silverado.
Renewed fears about legacy chips
China’s growing production capacity has set alarm bells ringing among policymakers and industry leaders.
This month, California lawmakers signed a letter asking the Commerce Department to pause unilateral export controls, saying further controls “could send long-standing U.S. companies into a death spiral.”
Some, including Intel CEO Pat Gelsinger, have warned of the consequences of broad export controls, saying that many of the restrictions could accelerate China’s timeline for chip production.
“If the line is too restrictive, then China will have to make its own chips,” he said, speaking at Computex in Taiwan.
Earlier this year, the Commerce Department launched a review of the country’s supply chain to better understand how U.S. companies get their basic chips.
And a few months ago, the Department of Defense imposed its own procurement restrictions on government agencies, banning the use of Chinese-sourced chips from 2027. The National Defense Authorization Act also prohibits transactions with entities that use Chinese chips in critical defense and intelligence. system product.
The European Commission has also taken note, scrutinizing companies to better understand how Chinese companies are using old chips to break them down, according to some reports.
According to Reva Goujon, director at Rhodium Group, fighting China’s semiconductor ambitions will ultimately require additional policy support and cooperation among US allies.
“The U.S. must effectively create an ex-China market for chips to ensure demand among the U.S. and its trusted partners,” Goujon said. through that plurilateral momentum or we see fractured and leaky control over the polarization of Trump 2.0 partners.
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