A look at China's semiconductor industry – FierceElectronics
Even as the Chinese government is investing heavily to boost the country’s capabilities in the semiconductors, the industry there continues to face significant challenges in the domestic market.
The government recently announced a $47.5 billion fund to boost the development of its domestic chip industry. This is possibly the demand of the hour as domestic sales continue to plummet. According to the Semiconductor Industry Association, China’s semiconductor sales dropped 14% last year, the steepest decline of other regions worldwide and more than the global decline of 8.2% in 2023. Analysts see the slow recovery as a lingering impact from COVID-19 pandemic in China.
“The Chinese semiconductor industry, despite facing challenges, is making significant strides with government investment. SMIC [Semiconductor Manufacturing International Corporation], mainland China’s largest contract chip maker, has demonstrated resilience by achieving the No. 3 spot in global foundry revenue in Q1 2024… This success is driven by strong domestic demand recovery for applications like CIS, PMIC, IoT, and DDIC. SMIC’s strategic focus on serving mainland clients has helped mitigate the impact of US tech sanctions,” says Adam Chang, Research Analyst at Counterpoint Research.
About four years back, China came up with its Five-Year Plan to become more self-sufficient. It set a target of becoming economically and technologically independent to protect its domestic industry from the US-led sanctions. Four years after the Five-Year Plan, the Chinese semiconductor industry may need to rethink its strategy. There is no denying that it has made significant strides but several challenges threaten to push back the progress it has made so painstakingly.
Long Way to Go
“The Chinese semiconductor industry still has a long, long way to go. The major challenges faced by the Chinese semiconductor are related to technological gap, geopolitical tensions and domestic market challenges,” says Adela Guo, research director for semiconductor research at IDC Asia Pacific.
Technologically, China still lags behind global leaders in advanced semiconductor manufacturing technologies, particularly in producing chips with smaller process nodes. “The capabilities of Chinese companies in semiconductor design (for instance, ARM, RISC-V architectures) are improving but are still in some way behind established firms like Intel, AMD and NVIDIA,” says Guo. It is possible that China is focusing on mature technologies instead of new technologies since it is facing challenges in access to chip-making gear, for instance from the Netherlands’ ASML.
On the other hand, the geopolitical tensions between the US and China are impacting the latter’s progress. The US export controls on advanced semiconductor manufacturing equipment and Electronic Design Automation (EDA) software hinder China’s ability to procure critical technologies.
In addition, challenges in the domestic market are slowing the country’s progress in building a vibrant semiconductor ecosystem. The use of outdated technology due to US sanctions and low profit margins has led to the closure of around 22,000 chip-related businesses since 2019, according to a DigiTimes report.
“China’s domestic demand for semiconductors remains limited, which is mainly affected by macroeconomics. In addition, intense competition from international semiconductor giants makes it difficult for Chinese companies to gain market share,” elaborates Guo.
The Opportunities
Even though the road ahead for the Chinese chip industry is full of challenges it also comes with several growth opportunities. The country has increased its semiconductor manufacturing capacity. China is expected to grow its share of global semiconductor capacity by 13% year-on-year to reach 8.6 million wafers per month in 2024.
Along with the capacity increase, China is also investing heavily in research and development to advance its manufacturing and design capabilities. Recently, China launched the third phase of the fund, a $47.5 billion fund to boost the development of its domestic chip industry.
Huawei, a major Chinese smartphone and telecom gear maker, surprised the industry last year by featuring an advanced processor in the Mate 60 Pro smartphone, despite US sanctions.
“It is also carrying out initiatives to cultivate domestic talent through education and training programs in semiconductor-related fields, including the University of NJJU and School of Integrated Circuits at Tsinghua University,” says Gua of IDC.
On the policy side, the Chinese government is providing subsidies, tax incentives, and grants to semiconductor firms to promote domestic production and foster innovation. Stockpiling and diversifying critical components and localizing supply chains are other efforts taken by the Government to reduce dependency on foreign suppliers and mitigate geopolitical risks.
Gagandeep Kaur is an independent journalist and founder of Deepworkz Media Services.