In their latest year-on-year predictions for the worldwide growth of semiconductor revenue, the International Data Corporation (IDC) has estimated there will be a 13.1 percent decrease for 2023. However, it has also noted large growth in demand for chips in the automotive industry (growing around 9% in 2023) and in AI (growing around 40% in 2023). Partly driven by those growth areas, the IDC predicts a 20.7% growth in revenues for 2024, and under a 15-year outlook scenario, it predicts that the overall semiconductor industry will double in size in less than a decade, with total market revenue reaching one trillion U.S. dollars in 2032.
Such large figures re-emphasize the importance of the battle for who will own and control that growth. The U.S. banned advanced semiconductor exports to China in 2022, as well as equipment knowingly used to make advanced logic or memory chips below certain sizes or above specified numbers of layers. U.S. government statements have emphasized blocking off AI development and military technology progress as the driving force behind the ban, but semiconductors can also be used to power cloud data centers, edge computing, smart cities, fully autonomous vehicles and 5G internet in mobile phones. So controlling where they’re built and sold has wide-reaching economic and social implications.
Under those terms, even some tentative signs of progress for China are worth taking note of, and they are there to be found for anyone looking. The IDC says that as of 2023, China produces around 1% of advanced chips, based on the recent breakthrough of SMIC manufacturing a 7-nanometer chip for Huawei smartphones. It predicts only a fractional increase in this share up to 2027, but alongside this it also predicts China’s overall share of the market will continue to increase, reaching 29% in 2027, up 2% from 2023.
That shift will primarily be driven by Chinese progress in less advanced chips, resulting from Chinese manufacturers being forced toward self-reliance. “Customers headquartered in China are … moving more of demand directly to the local foundry ecosystem,” explained Mario Morales, the group vice president of IDC’s enabling technologies, semiconductor, storage and DataSphere research during a webinar earlier this month. “That’s going to continue to drive demand for the two big players in the region [Hua Hong Semiconductor and SMIC], along with some of the smaller players. And so because of that we see more of a growth opportunity for these companies, especially as they continue to price more aggressively in the mature technologies over the coming year or so.”
However, there are also some signs of potential in advanced chips. Chinese equipment vendors are “active in building” the equipment that will help to increase China’s foundry capacity for building advanced chips and there is a “yield rate [that] keeps improving,” according to Galen Zeng (曾冠瑋), senior research manager at IDC Asia/Pacific. And he’s not alone in this sentiment.
Chris Miller, author of “Chip War: The Fight for the World’s Most Critical Technology,” told a Nikkei Asia webinar earlier this week that the 7-nanometer chip SMIC manufactured remains about five years behind Taiwanese manufacturer TSMC’s “cutting edge” chips. But in its favor it is “the most Chinese chip yet,” with almost all of the features within it Chinese made and Chinese designed. At the same webinar, Dan Hutcheson, vice chair of TechInsights, echoed some of that positive assessment. He said that while Chinese companies remain “decades behind” on building their own lithography machines — used for drawing highly complex circuit patterns — it “looks like they may have made major progress in the case of the EDA [electronic design automation tools for designing chips].”
So, if China is building better chips, are U.S. sanctions working, or are they just accelerating China’s progress?
“It depends on what you think the initial goal was,” Miller said. His view is that SMIC manufacturing a 7-nanometer chip for Huawei smartphones was not a surprise to those within the industry, but may have been for some in Washington, which has seen some influential members of the U.S. congress call for further restrictions. Hutcheson was less equivocal: “I think they’re working,” he said, explaining that in his view stronger restrictions risked starting a war, whereas — from the U.S. perspective — the current ones had succeeded in keeping Chinese chip manufacturers “a couple of [chip] generations behind.” He characterized the current 7-nanometer chip as a return to this position after a period where the gap had widened to three or four generations.
The right question, then, is perhaps where things go from here and whether China can bridge the gap in the long term.
Although Hutcheson believes that long term U.S. sanctions may help China become more self-reliant, neither Miller or Hutcheson are convinced that China — or anyone else — will be able to recreate an entire, top-level semiconductor supply chain within its own borders. It would be “only as strong as its weakest link,” Hutcheson says, pointing to the fact that “China had its own vertical supply chain in the 70s and it failed because it wasn’t competitive.”
However, one different kind of answer is that success comes in various forms. Both Miller and Hutcheson point out there are a multitude of uses for less advanced chips, with China for example already leading producer of chips for electric vehicles. Hutcheson says this particular success could be used as a foothold to develop the most advanced chips, but fundamentally the point here is that the most advanced chips are not the only part of the industry of massive value. Miller points out that China’s economy represents around 20% of global GDP, and with the potential for more protectionist measures such as the recent ban on state employees using Iphones, there could be plenty of market room for chips that are “good enough.”
Ultimately that success may have two important implications. Firstly, it directly helps Chinese industry grow. But secondly, it can operate as a threat against further sanctions from elsewhere, according to Miller. Chinese progress like the new Huawei Mate 60 Pro smartphone, released just before the Apple ban, makes it more plausible that companies like Apple can be replaced within the Chinese market. Thus, it effectively acts as a message to the rest of the international ecosystem, Miller says, telling them that they, too, are replaceable. As the country that often represents these companies’ second-largest market, that’s a significant message for them to take back to governments considering further sanctions on China.