Analysis: US industrial policy versus… – Mobile World Live
Western pundits may sneer at Chinese President Xi Jinping’s often referred to concept of fostering new kinds of productive forces, aiming to boost the country’s growth with a focus on technological advancement and self-reliance.
But most economists the world over have a similar reaction to US President Joe Biden’s generous chips subsidies and continued barrage of trade sanctions against a growing list of Chinese tech companies, with special emphasis on Huawei and the mysterious move to ban TikTok.
President Biden had little choice but to pick up the mantle of protectionism from former President Donald Trump in 2020 from a domestic political standpoint, but he has resorted to bully allies as a US presidential election nears, including Taiwan, Japan and the Netherlands, to drive new restrictions on advanced chipmaking equipment, even as the moves have damaged US interests and done little to thwart China’s rise.
Nvidia, for one, has been hit hard. It recently cut prices of a modified (read less powerful) AI chip in China due to US trade controls after inventory levels soared.
Mainland China accounted for 14 per cent of Nvidia’s data centre revenue in 2023, down from 19 per cent in 2022.
In its 2023 annual report, released last month, Nvidia stated its “competitive position has been harmed” in China by the US export sanctions.
The revelation in August 2023 that Huawei managed to develop a domestic 7nm chip for its flagship Mate 60 Pro, despite local chipmakers not having access to the most advanced machinery rattled the US government. The ham-fisted response by the US Department of Commerce was to investigate Semiconductor Manufacturing International Corp (SMIC) for possible trade sanction violations, even though its machinery was imported before the new controls went into place.
SMIC reportedly found a workaround allowing it to use older deep ultraviolet lithography equipment to produce 7nm chips at the cost of significantly reduced yields, which has impacted margins. While the US government expressed near panic, the chips are two generations behind the most sophisticated semiconductors in commercial production.
Raising the stakes
Last month, the US Department of Commerce took the unprecedented step of revoking export licences held by Intel and Qualcomm to supply Huawei with chips for smartphones and laptops after being alarmed by the AI capabilities of the vendor’s latest devices.
Rather than indicating its measures are working, as US Secretary of Commerce Gina Raimondo claimed in April, Huawei’s developments demonstrate China is making some progress in its aim to achieve self-sufficiency in chips, however steep the cost.
Roughly nine months after the Mate 60 Pro surprise, Huawei’s latest flagship smartphone, the Pura 70 Pro, features a higher percentage of local components than the Mate 60, sporting an improved Kirin chipset and flash memory produced by domestic suppliers.
In the face of US trade sanctions, SMIC stepped-up investment, boosting capex 77.7 per cent year-on-year to $2.2 billion in Q1.
Last month, China launched an ambitious CNY344 billion ($47.4 billion) third chip fund backed by the Ministry of Finance and six state-owned banks to support the local industry with loans over a ten-year period. The allotment, which a banking analyst recently told Bloomberg could end up being much larger, seemingly dwarfs two previous pots of CNY139 billion in 2014 and CNY200 billion in 2019, but given they were five-year initiatives, the latest Big Fund is actually smaller than the second on an annual basis.
Questionable timing
The funding announcement came days after the South Korean government unveiled a KRW26 trillion ($18.9 billion) support package for its chipmaking sector, perhaps suggesting China’s move was prompted by a need for the government to highlight its own “massive” efforts to wean its economy off imported chips.
China’s composition of the funding is focused on loans. Local media reported there are a range of financing services including technology innovation loans and industrial chain finance to support specific projects.
The direct incentives by the US government required commitments for significant matching investments from chipmakers.
Following the initial phase of the Chips and Science Act in 2022 which provided some $24 billion in investment tax credits for chip plants in the US, the Department of Commerce awarded Taiwan Semiconductor Manufacturing Co (TSMC), Intel and Samsung additional funding to expand their local manufacturing capabilities.
TSMC received $6.6 billion in direct funding and up to $5 billion in government loans to build a third chip production facility in Arizona; Intel was awarded $8.5 billion; and Samsung $4.6 billion.
Supply chain split
The question is where will these moves lead the industry?
Chipmakers’ overseas investments often are not transferring their most advanced technologies. Research company TrendForce recently reported new TSMC facilities in Japan and Germany are focused on expanding mature 16nm and 28nm processes, with UMC and Powerchip Semiconductor Manufacturing’s overseas expansions centred on 28nm and above mature processes.
TrendForce noted geopolitical tensions are driving medium- to long-term demand for non-Chinese or Taiwanese chips from customers in Europe, the US, Japan and South Korea while China’s local production system competes with international supply chains, making the bifurcation of these two segments increasingly evident.
The split also is putting stress on the private sector, which is being forced to choose sides or attempt to bypass sanctions to continue doing business in the US and China.
There is also an open question on whether the global market will support multiple sources of supply
Deborah Elms, head of Trade Policy at sustainable global trade advocate organisation Hinrich Foundation, told Mobile World Live trying to break up the dominance of the existing chip supply chain is not going to be easy, as chipmaking is very difficult, particularly at the top end.
“It’s not just capital intensive, but requires substantial investment in training, talent and production capabilities. There are some good reasons global chipmaking is so highly concentrated.”
Elms explained the amount of money on offer to support new chip manufacturing is mostly too small and does not provide sufficient resources to shift the dial on all the other elements of the supply chain.
“There is also an open question on whether the global market will support multiple sources of supply” at the top of the market, she stated, noting at the less advanced level, manufacturing is possible in other markets.
As Radio Free Mobile founder Richard Windsor has railed against for some time, the push for technology independence will result in two incompatible networks, generating less value than one global system and slowing long-term growth for the entire tech sector over the next ten to 20 years.
The effectiveness of past state intervention certainly is not encouraging, with decades of economic studies and national examples showing such moves can only go so far, mostly in fostering new sectors by setting up the playing field, rather than trying to select winners.
Ultimately, it is market competition in fair and transparent settings which will define the outcomes.
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.
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