US & China's Rivalry over Semiconductors

May 15, 2023

In recent months, the United States has attempted to restrict China's access to the most modern semiconductors, as well as the equipment and people required to manufacture them, citing national security concerns.

China has dismissed those fears, accusing the US of "technological terrorism" and unfairly impeding its economic growth. It has attempted to counteract US containment attempts.

Consider the following key issues in the so-called "semiconductor wars":

What is the significance of chips?

Microchips are the lifeblood of the current global economy: these small slices of silicon can be found in everything from LED lightbulbs and washing machines to automobiles and cellphones.

They are also essential to vital services including healthcare, law enforcement, and utilities.

According to a report published by McKinsey last year, the global semiconductor market is projected to reach $1 trillion (approximately Rs. 81,78,400 crore) by 2030.

China, the world's second-largest economy, relies on a constant supply of foreign chips for its enormous electronics manufacturing base, and nowhere is this more apparent than in China.

China imported more semiconductors than oil in 2021, spending $430 billion (approximately Rs. 35,16,200 crores) on semiconductors.

Why focus on China?

Aside from iPhones, Teslas, and PlayStations, the most powerful chips are essential for the advancement of advanced technologies such as artificial intelligence, as well as cutting-edge armaments such as hypersonic missiles and stealth fighter fighters.

Last year, the United States imposed a series of export limitations, claiming that they were meant to prevent "sensitive technologies with military applications" from being obtained by China's armed forces, intelligence, and security services.

In March of this year, the Dutch government followed suit, claiming national security while setting curbs on international sales to prevent military use.

Japan announced similar regulations the same month to prevent "military diversion of technologies."

The Netherlands, a NATO member, and Japan, a treaty ally of the United States, did not name China, but their limits enraged Beijing.

The limits target the most modern semiconductors and chip-making technology, which can be used for supercomputers, high-end military equipment, and AI development, among other things.

Why is China worried?

The process of making chips is very complicated and usually takes place in more than one country.

But many steps rely on US inputs. The other big players are Japanese companies and ASML, which is based in the Netherlands and makes most of the lithography machines that print patterns on silicon wafers.

This gives the three of them a huge impact on the world semiconductor business.

Chris Miller, author of "Chip War: The Fight for the World's Most Critical Technology," told Sources that it will take China years to make tools that are just as good as the ones it is losing access to.

"If it was simple, Chinese companies would have done it by now."

How have the sanctions affected people?

To cushion the damage, Chinese semiconductor makers hoarded components and machinery ahead of US export bans in October of last year.

However, one big semiconductor company told sources, that once that inventory runs out or needs to be repaired, the controls will start to hurt.

Some Chinese firms who were suddenly unable to guarantee chip availability saw lucrative overseas contracts collapse, forcing them to cut staff and halt expansion plans.

The restrictions imposed by the United States, the Netherlands, and Japan have directly impacted some of China's largest chip manufacturers, notably Yangtze Memory Technology (YMTC).

One of the most significant ways the sanctions have begun to hurt is by drying up a talent pool on which China has counted.

According to a recent semi-official assessment of Chinese chip businesses, there will be a demand for 800,000 foreign workers by 2024, a gap Washington has made more difficult to fill by excluding "US persons" from working in China's semiconductor industry.

How has China reacted?

Beijing has reacted angrily and defiantly, pledging to speed up its attempts to become self-sufficient in semiconductors.

To circumvent US restrictions, two senior Chinese Academy of Sciences semiconductor experts issued a blueprint in February advising Beijing to more effectively channel money into high-quality individuals and innovative research.

It hinted at a prospective strategy shift, and YMTC appears to be one of the key benefactors.

According to company documents, the US-sanctioned firm has received a $7.1 billion (approximately Rs. 58,100 crore) infusion since the new export limitations went into effect.

Is increased investment the solution for China?

Tens of billions of dollars invested by China in domestic industrial development have yet to bear fruit.

China had hoped to achieve 70 percent semiconductor self-sufficiency by 2025, but some think tanks believe it currently fulfils only 20 percent of demand.

"Money is not the problem," said Qi Wang, co-founder of MegaTrust Investment in Hong Kong. Instead, he pointed to waste, fraud, and a lack of ability.

John Lee, director of East-West Futures consulting, said, "China has no good choices other than to support the industry even more."

Experts say that China may reach its goal of being self-sufficient, but it will take a lot longer if these limits stay in place.

Bill Gates, co-founder of Microsoft, said on a show in March, "I don't think the US will ever be able to stop China from making great chips."

We will make them spend a lot of time and money to make their own."

By Girish Linganna
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Comment on this article

  • Daniel, Mangalore

    Wed, May 17 2023

    Semiconductors and AI are interdependents, so this war and why china trying to control or invade Taiwan, king of semiconductor industry and main supplier to US. India should increase semiconductor productions for world market like Taiwan. So in case of war india could supply to US and get big revenue / share in semiconductor business or but quality is foremost to be maintained.

  • k b r, Mangala Uru

    Wed, May 17 2023

    This is a frontier where china seems to be behind as of now.

  • Gautam Das, Bamgalore

    Mon, May 15 2023

    Good article from Mr Girish. First of all to start with it was the US who moved its businesses to China and made China rich and powerful it is now by believing china’s word to transform into democracy. But that didn’t happen instead China is giving now a dirty look at the US and trying to rival the US with its newly found wealth and arrogance. Still nothing is lost still US can pull out its businesses from China and teach China a lesson. The process has already begun.

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