ARGUMENT: CHINA’S CHIP STRUGGLESGreat Leap Nowhere: The Challenges of China’s Semiconductor Industry

Published 27 February 2023

China is struggling in the battle for advanced semiconductor technology. With President Joe Biden’s most recent round of export controls on semiconductors, China is now facing an increasingly urgent challenge as it seeks to ramp up its domestic innovative capacity for high-end chips. These difficulties and challenges notwithstanding, Elliot Ji writes, “U.S. policymakers should be keenly aware that China’s relative success with creative adaptation means that it can boost certain sectors of the chip industry by exploiting leaky export controls and engaging in cyber espionage.”

China is struggling in the battle for advanced semiconductor technology. With President Joe Biden’s most recent round of export controls on semiconductors, China is now facing an increasingly urgent challenge as it seeks to ramp up its domestic innovative capacity for high-end chips. Yet at the turn of the new year, Bloomberg reported that China is pausing its investment in its domestic semiconductor industry, most likely due to financial strain from COVID-19, ineffective subsidies, and corruption.

Elliot Ji writers in War on the Rocks that this came only two weeks after the news that Beijing is preparing a one-trillion yuan ($145.61 billion) incentive package to beef up the competitiveness of its indigenous chip industry.

He adds:

While the gigantic cost of the COVID-19 lockdown necessitates some belt-tightening, Beijing’s rollback of its massive chip investment should not be surprising. It is no secret that China’s previous efforts to improve its chip innovation did not bear much fruit. The reason for the lack of success, however, is more than the technical challenge of independently developing one of the most sophisticated products in the world. Rather, the political and institutional factors in China’s science and technology innovation base are also impediments to its desired success in reaching a chip breakthrough. Not only does China’s top-down model of innovation overshadow its domestic ecosystem of chip development, but the absence of effective oversight and the perverse incentives from the indiscrete dispersion of local government funding together render prospects for chip innovation grim. 

For U.S. policymakers, the messiness of China’s domestic semiconductor industry should be a significant factor to consider when devising export controls and enhancing cybersecurity infrastructures for both domestic firms and key allies. As the constraints of China’s innovative potential are intrinsic to its political system, the United States and its allies can be cautiously optimistic about their long-term competitiveness in semiconductor technologies.

Ji writes that even if the anti-corruption investigations manage to cleanse the industry of opportunistic and unscrupulous businesspeople, China still must confront the same problem that it encountered before— achieving significant breakthroughs using a backward and statist innovation ecosystem. Two particular challenges stand in China’s way. 

First, the technology involved in the semiconductor industry is exceedingly complex and requires original innovation, rather than duplication or imitation, to move forward. This is particularly problematic because China still uses a top-down approach to innovation that has been found to impede originality and “breakthroughs in both new component technology and architecture.” 

Second, the goal of semiconductor self-sufficiency is too big for any one country, no matter how advanced. The semiconductor supply chain is not a singular effort. Steppers, photoresists, and electronic design automation from the United States, the Netherlands, Japan, and Taiwan are all indispensable in the global semiconductor industry.

Ji concludes:

U.S. policymakers should be keenly aware that China’s relative success with creative adaptation means that it can boost certain sectors of the chip industry by exploiting leaky export controls and engaging in cyber espionage. As seen in the case of Semiconductor Manufacturing International Corporation, China could still try to work around certain technological hurdles with already acquired foreign technology and funnel the profit into areas in which they are currently lacking. This means that the U.S. government should continue to monitor Chinese imitation-style innovations, and work closely with key semiconductor allies to make the export controls against China as airtight as possible. This may entail nuanced multilateral negotiations to address the specific interests of key allies like the Netherlands, which is not fully aligned with the U.S. position on the bans on older machines. Additionally, the United States should consider supporting the cybersecurity efforts of its domestic semiconductor firms to mitigate the risk of cyber espionage, which China extensively employs to lower the hurdle of original innovation both in military and civilian settings.