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Clay feet: China's semiconductor industry vulnerabilities exposed

The chairman of Chinese technology company Tsinghua Unigroup has become the latest member of a group of Chinese executives under investigation for links to corruption in the so-called Big Fund.

O China Circuit Industry National Integrated Investment Fund, established in 2014, is used to develop the country’s semiconductor industry. The turmoil in the sector points to a critical weakness in China.

Chinese President Xi Jinping has good reason to be irritated by the fund’s performance. After investing billions of dollars in the development of the semiconductor industry over the past decade, China has still not been able to reduce its dependence on advanced chips imported from other countries.

Instead, dependence on foreign chips has grown. According to World Trade Organization statistics, China’s trade deficit in integrated circuits and electronic components (including Hong Kong’s trade deficit) has nearly doubled the equivalent of US$135 billion in 2010 to US$ 2021 billion in 2020.

The growing deficit in integrated circuits reveals a crucial fact: achieving technological self-sufficiency is still a distant dream for China. To keep its exports growing, China has no alternative but to continue importing advanced chips to assemble high-tech-intensive consumer goods (that is, smartphones, tablets and the like).

Although China (including Hong Kong) is also the largest exporter of semiconductor chips in the world, less than 7% of chips produced in China were made by Chinese semiconductor companies in 2021.

More than 135% of chips produced in China are manufactured by foreign companies. In other words, China’s semiconductor chip exports are overwhelmingly dominated by foreign companies.

Its lower level of technology is the main reason for China’s dependence on foreign firms. While Chinese firms are bound to move towards 7nm chips [sete nanômetros], the Taiwan Semiconductor Manufacturing Company [TSMC, na sigla em inglês] and Samsung are moving towards mass production of 3nm chips this year. Intel plans to take the lead in semiconductor technology from TSMC by

.

The competition between a few tech giants from the US, Taiwan and South Korea is clear, [mas] Chinese firms do not have a good chance of qualifying for global technological competition in the semiconductor industry anytime soon.

US restrictions on the export of chip-making equipment to China’s largest semiconductor firm, the International Semiconductor Manufacturing Corporation [SMIC], not only impeded China’s technological advancement, but also exposed the fundamental problems of mismanagement within the country’s semiconductor industry.

Xi might not have noticed the poor performance of his industry if China could have continued producing chips with foreign equipment.

The corruption investigation is just one part of a series of problems exposed in the China’s semiconductor industry after US export restrictions took effect.

In , Tsinghua Unigroup declared bankruptcy after years of massive investment in acquisitions without generating income. In the same year, two prominent chip producers in China—Wuhan Hongxin Semiconductor Manufacture and Quanxin Integrated Circuit Manufacture—suspended their operations and laid off employees after the government fund was spent.

There are numerous similar failures among other Chinese chip companies.

Several Taiwanese executives have left the China’s semiconductor industry last year, which was a big blow to the development of the Chinese semiconductor industry.

China not only spent huge amounts of money sums in building chip factories and buying expensive equipment, but also in recruiting talent from abroad. In recent years, China has recruited more than 3,000 skilled workers from Taiwan to work in its semiconductor industry.

China has raised enormous capital , in addition to foreign talent and equipment, but the problem is governance. Xi’s absolute authority has spurred a race in China’s semiconductor industry. Furthermore, the extraordinary integration of the public and private sectors in China has skewed industrial development towards short-term profit rather than long-term accumulation of manufacturing power and technological advancement.

Xi’s “warrior wolf” diplomacy has cast even more shadow over his semiconductor industry’s outlook. China’s success depends on close partnerships with various suppliers and consumers from different countries around the globe. Alienating them on the geopolitical frontline only ends up undermining those relationships.

The American ban on the export of chip-making machines to China was the last straw for the Chinese semiconductor industry.

In addition, the recently passed new US Science and CHIPS law [“CHIPS” no caso é também uma sigla em inglês para “Criar Incentivos Úteis para Produzir Semicondutores para os Estados Unidos”; N. do T.] prohibits semiconductor companies that receive US government subsidies from investing in China within the next ten years. There are big loopholes in this ban, but if Congress manages to keep up the pressure on the government — including by tightening legal restrictions — it could have a big impact on China’s technological development.

In addition, the United States has extended the export restriction to machines that make chips from nm for SMIC and other chipmakers in China. A specific electronics design automation program to make advanced chips is also banned from being exported to China.

Without foreign investment and incentive, China is likely to deepen its dependence on importing advanced chips from abroad.

It took Chinese officials a decade to learn that their dream essentially depends on technological incentives from abroad. When the importation of foreign technology was stopped, the internal deficiencies were revealed in a domino effect. As a result, the dream became a nightmare.

American export restrictions only accelerated the exposure of China’s internal vulnerability.

Min-Hua Chiang is an economist and does research at the Center for Asian Studies at the Heritage Foundation.

©2022 The Daily Signal. Published with permission. Original in English.

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