China's Big Challenge: The Semiconductor Industry

Updated: Feb 22


Microchips © CristianIS/ Public domain/ Pixabay


Semiconductors, also known as microchips or integrated circuits, are an essential component of electronic devices; from computers, home appliances and medical equipment to military systems. The invention of the semiconductor is considered the most important advance for the history of information, after Gutenberg’s printing press (Łukasiak & Jakubowski, 2010). This article will highlight the recent developments of the global semiconductor industry, its impact on China’s local industry, and the steps taken by the Chinese government to adapt to these changes.


Although the semiconductor industry first developed in the US in the 1960s, Taiwan and South Korea followed suit, establishing their own factories to design and manufacture microchips in the following two decades (Zen et al., 2019).The crucial importance of microchips, along with the high tech and capital intensive nature of the industry, makes it incredibly competitive, cyclical and subject to frequent high and lows (Segal, 2021).


In 2021, there was a global chip shortage, created by the unfortunate combination of numerous events. Due to the global pandemic, millions of people started working from home, which triggered a high demand for personal electronics. Whilst in many sectors, sales plunged and manufacturers reduced their business projections and semiconductor orders. But, there was an unexpected stronger recovery which resulted in a growth of demand that exceeded the capacity of semiconductor manufacturers (Nikkei, 2021).


The recent US-China trade war and the threat of stricter sanctions, particularly for businesses like Huawei, worsened this crisis. In hopes of increasing its inventory before US restrictions applied, the company decided to purchase as much supply of semiconductors as possible, which further deteriorated the global shortage.. Furthermore, Taiwan, home to Taiwan Semiconductor Manufacturing Company (TMSC)– one of the biggest semiconductor manufacturers in the world –went through one of its most severe droughts, impacting heavily on the production of chips (which require a huge amount of water,using nearly 200,000 tons every day) (Nikkei, 2021).


This mismatch of demand and supply, trade restrictions, and the urge of companies to stockpile, contributed to the global chip shortage – which is projected to last until 2022, according to the CEO of Taiwan Semiconductor Manufacturing Company (TMSC). It has already had an impact on several industries and continues to cause major geopolitical issues related to tech dependencies.


The trade sanctions that the US imposed on Huawei denied China access to the equipment required for the production of cutting-edge chips, which subsequently affected local manufacturers e.g. the Semiconductor Manufacturing International Corporation (SMIC), China’s largest chip manufacturer, . The semiconductor industry is based on a global supply chain and is dominated by foreign companies. Having no access to North American tools and equipment meant that China would have to rely on its local industry, which was clearly not prepared.


Despite this critical situation, it was also the perfect excuse for China to focus on its long-desired goal of being self-sufficient across different sectors, including semiconductors, and reducing its tech dependency on the US.


Therefore, to empower and expand local semiconductor companies, Beijing started pouring more money into the chip industry. In 2020, 10.6 billion yuan (1.66 billion USD) was spent in subsidies in the semiconductor sector, which is a 12 fold expansion from a decade before (Nikkei, 2021). A total of 113 companies benefited, among them SMIC (Semiconductor Manufacturing International Corporation), which received around 2.5 billion yuan (393 million USD). As a result of these measures, investment in the chip industry reached 140 billion yuan (22 billion USD) in 2020, a considerable increase from the 30 billion yuan (4.7 billion USD) estimated in 2019. Sales increased by 17% following the spike in investments, according to the Ministry of Industry and Information Technology, and helped companies such as SMIC to ramp up capacity.


China also focused on tackling another problem - the lack of skilled labor. A study from the Chinese government stated that to fulfill the demand, an extra 230,000 engineers would be needed by 2022 (Nikkei, 2021). The authorities' solution was to open new training centers for engineers, where college seniors and postgraduate students could acquire the required skills for the industry.


As a result of this, coupled with government subsidies and secure contracts with important tech companies, new companies started to appear – but other problems began to arise.


The problem was rooted in the fact that government subsidies were mainly given to state-backed companies. These companies collected about 60% of the money, while representing just a third of the listed entities, creating an unbalanced playing field.


Furthermore, public investments were offered recklessly to any project or enterprise, even those with poor credentials. With many projects failing, the results of public funding were not outstanding. The most notorious case involved Wuhan Hongxin Semiconductor Manufacturing Co, a Wuhan-based chip manufacturer, whose project received significant government support and yet, ended up being abandoned and taken over by public authorities due to malpractice. Consequently, in March 2021, authorities decided to tighten the criteria for receiving state aid, such as tax incentives, financing, and other measures.


It is also important to note that the semiconductor sector involves huge costs of entry and entails years with no profits. In essence, having easy access to initial investments does not guarantee an immediate profit or achieve sustainable growth. This has resulted in bankruptcy for some Chinese companies and the Tsinghua Unigroup crisis is a prime example of this challenge. This chip manufacturer (majority owned by Tsinghua University) was one of the most ambitious projects to develop in China’s local industry but is now drowning in debt, and unable to pay off outstanding liabilities.


Despite China’s big plans to become tech-sufficient, expectations are far from reality. China’s technology is still several years behind its competitors – the Taiwanese TSMC and the Korean Samsung – who can produce the high-end chips required for the most advanced smartphones (<10nm), holding a share of 63% and 37% in that field, respectively (Figure 1). Meanwhile, SMIC, China's most promising chipmaker company, is still manufacturing 14nm and 28nm microchips.


Source: IC Insights, 2021.

TSMC and Samsung dominate the semiconductor industry, and according to the semiconductor research firm IC Insights “there is no more important base of chip capacity and production than Taiwan, with its main company, TSMC supplying to major chip developers such as Apple, Qualcomm, Nvidia, and NXP. Meanwhile, SMIC has a mere market share of 5% among the top 10 global foundries, (TrendForce, 2021), way far from the 55% figure of TSMC (Figure 2) and 17% of Samsung.


Source: South China Morning Post, 2021.


On the brighter side, as a consequence of the global chip shortage and the surging demand, there was an increase in prices which resulted in a revenue boost for the global semiconductor industry, which rose by 10.4% in 2020 (Gartner, 2021). And SMIC’s net profit tripled that of the previous year. However, the ability for Chinese companies to innovate has been impacted by challenges such as the lack of access to advanced technology due to US restrictions and the pressure to expand global production.


Since 2006, there have been national policies focusing on the chip industry, but despite the huge amount of government aid, efforts were not enough. When China set out the “Made in China 2025” industrial policy, it established a target of 70% self-sufficiency in semiconductors by 2025. But IC Insights predicted that this ratio would be only 19.4% in 2025, and this number drops to 10% if we exclude the production made by overseas manufacturers that have factories in China e.g. Intel, Samsung, TSMC etc. Moreover, there is still a big gap between chip consumption and chip manufacturing in China. Although China’s chip market is the largest in the world since 2005, indigenous production falls short in comparison. In 2020, Chinese production only represented 15.9% of its $143.4 billion worth of chips sold in China. (Figure 3). All in all, China is still far from being a world leader manufacturer of semiconductors.



Source: IC Insights, 2021.


In recent years, Beijing has stepped up efforts to reduce reliance on US technology. But how far can this go? Will they be able to achieve this goal? Not only China, but other governments like Japan, the US, and Europe have started to increase their local production by offering public aid. Semiconductors have become a key to economic and national security.

Due to the greater complexity of technology and free trade, the semiconductor supply chain extends over numerous countries. Seeking self-sufficiency is a considerable challenge that has been questioned by many experts. Many of whom claim that aiming to move it back onshore, not only will take a considerable amount of time, but might also result in higher costs, slower technology advances, and a not-quite-self-sufficient supply chain.



Patricia Sanchez Vidal graduated from Law and Business Administration and Management at the University of Barcelona. She has participated in exchange programs at City University of Hong Kong (Hong Kong) and Dalhousie University (Canada). Her passion for the Asian culture made her continue studying Mandarin at the National Taiwan Normal University (Taipei). She is currently working in a SaS Tech company in Barcelona. You can find her on LinkedIn.



The opinions expressed here are those of the writers and do not represent the views of European Guanxi.


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