China frequently comes under criticism for its use of industrial policy and subsidies to support its domestic technology sector. However, despite these measures, China has been unsuccessful in significantly enhancing its semiconductor sector using its industrial policy.
Reflecting on the situation, several factors have hindered China’s progress in chipmaking. Apart from a deficiency in capital and talent within the industry, the largest barrier to China’s advancement is the absence of effective synergy among its upstream and downstream players in the value chain. Chips function as intermediate goods in the production of electronic and electric devices, a sector where China has a significant global presence. To maintain their competitiveness, Chinese downstream manufacturers have favored imported chips, which are cheaper, more powerful, and more energy-efficient than their domestically produced counterparts. Similarly, design tools struggle to secure orders from local chip designers; and domestic design software and IP, equipment, and materials face obstacles in being adopted by local foundries, as they often prefer superior imported alternatives. This lack of industry-level coordination stunts technological progress and results in disjointed industrial development.
The current structure of the semiconductor value chain is highly interdependent, though value distribution is uneven. The United States holds the largest market share (47 percent), primarily in chip design and core IP. It’s followed by South Korea, Taiwan, Japan, and China (as of 2021). Specialized equipment manufacturers, who operate within a niche but highly protected market, can only survive within this global network. For instance, ASML has investments from several downstream companies within the network. Despite its monopoly, ASML only garnered about 6.5 billion euros in 2022, making up less than 2 percent of the total semiconductor industry revenue. This structure of the value chain presents formidable barriers to latecomers, such as China, who are seeking to gain a foothold in the market.
Now, technology sanctions and export controls have inadvertently opened a window of opportunity for Chinese firms to catch up. In response to the chokepoint strategy, the Chinese semiconductor industry is forced to strive for self-sufficiency by fostering interdependent relationships within the ecosystem. The timing also works in favor of Chinese enterprises. Had the sanctions been imposed a decade ago, Chinese companies would have had limited technological accumulation to enable catching up. Over the past ten years, however, China’s investments in nearly every subsector of chipmaking have witnessed rapid generational upgrades within closed feedback loops, bolstered by collective investment from a wide array of players such as the government, tech companies, digital platforms, and downstream manufacturers. Thus, China is poised to stimulate a catch-up in chipmaking.
Predicting a specific timeframe for China’s catch-up in semiconductors is challenging. However, a complete stifling of progress is unlikely. Geopolitical disruptions, coupled with technological upheavals, have led to reduced stability and predictability. Indeed, the “chokepoint strategy” carries its own set of challenges and risks. It may inhibit global cooperation and innovation and stall the overall growth of the semiconductor industry, potentially affecting Western participants. Moreover, it could provoke retaliatory actions from targeted adversaries, further destabilizing global supply chains, and potentially leading to escalating conflicts or even warfare.
For China, maintaining an open mindset in chipmaking is vital. The sector stands to benefit from the diverse inputs of all stakeholders. Furthermore, China needs to strike a delicate balance between competition and cooperation with its foreign competitors whenever possible. Regrettably, self-sufficiency often runs the risk of leading to self-isolation.
For Japan, the export control measures could potentially impact bilateral relations and may escalate trade tensions, especially considering the historical conflicts between Japan and China. Japan is a significant trading partner for China, and the Chinese market remains vital for Japanese manufacturers in semiconductors. In retaliation to Japan’s alignment with the United States in curbing China’s chipmaking, Beijing could consider restricting the export of critical minerals to Japan and Chinese consumers could potentially organize boycotts of Japanese products, as they have during previous bilateral conflicts.
Worst of all, an intensification of the chip wars could potentially lead to a complete decoupling in technology. Such technological decoupling entails not just the separation of supply chains, but also the establishment of different technological standards, innovation ecosystems, and markets by the disconnected parties. This could bear significant economic and social repercussions.
Dr. Marina Yue Zhang is an associate professor at the Australia-China Relations Institute at the University of Technology Sydney. Marina’s research interests cover China’s innovation policy and practice, emerging technologies, and network effects in digital transformation. She is the author of three books, including Demystifying China’s Innovation Machine: Chaotic Order, co-authored with Mark Dodgson and David Gann (Oxford University Press, 2022).