China's Semiconductor Industry Advances despite U.S. Export Controls – CSIS | Center for Strategic and International Studies
Photo: Scott Kennedy
Commentary by Paul Triolo
Published March 7, 2024
There is no more important issue in the U.S.-China relationship than the semiconductor industry, which is characterized by what senior U.S. officials have called “intense competition” in the technology space. In trying to assess what has happened over the past five years since the Entity List actions against Chinese multinationals ZTE and Huawei, it has been difficult to determine how Chinese companies and senior industrial policy planners in Beijing have reacted to the many levels of export controls coming out of Washington in the Trump and Biden administrations. The situation has changed dramatically since the imposition of unprecedented end-use and U.S. persons controls on semiconductor manufacturing equipment in October 2022 and then again with an update in October 2023.
Since the author last wrote in detail on the topic of the capabilities and development of China’s domestic semiconductor industry in early 2021, the landscape has changed dramatically. This update to that assessment proved challenging in terms of trying to understand how key elements of the Chinese systems were responding to outside pressure, from the totality of China’s domestic industrial policy bureaucracy and more critically, to the many private sector companies key to the eventual commercial success of any long-term strategy to first adjust to and eventually attempt to overcome the choke point strategy being pursued by the Biden administration.
In researching and writing a lengthy updated assessment published recently in American Affairs Journal, it was clear that the entire topic had been much more sensitive than it was in 2021, and getting beyond the publicly available data and talking to people within the industry in China would prove to be very challenging. Much of what is written about the topic is from the viewpoint of Washington, D.C., and largely reflects an acceptance of the premises of the choke point strategy, slowing China’s development of advanced node production because of the potential application of advanced semiconductors for military end uses. The industry view on this approach of course is very mixed, and largely reflects growing concerns about what major U.S. technology companies view as moving goalposts, along with unclear national security gains, costs to research and development (R&D) budgets of reduced access to the China market, and criticism of the level of understanding in D.C. of the impact of the choke point strategy on the global industry in general and U.S. technology innovation in particular. These concerns are outlined in a previous Wire China article on the industry view of how US export controls have involved frequent moving of the goal posts
The China-centric paper therefore was written from the viewpoint of the global industry, particularly attempting to understand how key companies view and are reacting to parts of the complex supply chain that ends with production lines in manufacturing facilities, especially those that have produced advanced semiconductors for products like Huawei’s Mate 60 smartphone released last August. The Mate 60 generated considerable heartburn within the Beltway, but as the paper shows, it was the unsurprising result of adept adjustments to the new reality facing Chinese semiconductor companies in the wake of the October 2022 controls.
The American Affairs Journal article focuses on so-called advanced nodes but leaves for another forthcoming piece the impact of U.S. controls on mature or legacy node production in China, because this is a much different kettle of fish, with its own technology and commercial roadmap and multiple different types of mature semiconductor products, each with its own supply chain, market dynamics, and technology imperatives. This dynamic is much like the memory sector, which was also not addressed head on in this paper. (For more on memory, see this paper on the impact of the October 2022 controls on multinational memory firms operating in China.)
The findings of the paper fall along several axes. First, to an extent not apparent in 2021, the long-term ability of Chinese firms to source advanced semiconductors is now much more closely tied to the speed of development of China’s domestic toolmaking and manufacturing capabilities, given the substantial increase in the number of Chinese design firms now unable to use foreign foundries. Second, even though U.S. controls have so far focused on advanced manufacturing capabilities, Beijing and Chinese companies are also worried about future controls, and they will prioritize tool and material production lines free of Western inputs to reduce long-term risks. Third, officials in Beijing are developing new approaches to public-private collaboration to push innovation on key technologies, such as advanced lithography. Beijing, working closely with the private sector, is looking to overcome bottlenecks by easing the transfer of advanced state-backed R&D to designated private sector companies, by pushing companies to work together on critical technologies, and by pursuing approaches that have been successful in other sectors.
Many other pieces of the semiconductor manufacturing industry are also targets of renewed efforts to build domestic Chinese alternatives, such as design tools, advanced materials, advanced packaging techniques, and systems engineering approaches designed to improve performance via a systems-led approach, rather than relying solely on process-node improvements. All of these approaches will be important for China’s domestic capabilities going forward, particularly packaging, including chipset design and 2.5 and 3-D back-end packaging approaches, that will feature in-system engineering efforts to improve performance levels and bridge to new, domestic-only production processes.
None of the new government measures, industry collaboration, or technology breakthroughs mean that overcoming the challenges of U.S. controls will be easy. China’s semiconductor companies would all prefer to remain part of the global industry division of labor, compete with their peers, engage in cross licensing arrangements which benefit the entire industry, etc., but all are also concerned that the expanding U.S. controls constitute an effort to cut off China from the global industry—there is widespread skepticism within Chinese semiconductor firms, trade industry groups, and government industrial policy circles that the “small yard, high fence” strategy touted by U.S. officials is really narrowly tailored on national security goals. So China’s approach is to both continue to try and maintain linkages with the global industry but hedge by focusing more resources on key technologies already under pressure from technology control or likely to come under future restrictions. Given the number of different technology areas that are under intense development in China, it also remains to be seen when individual technologies or groups of key technologies will mature to the point of enabling scaled commercial production for a particular manufacturing supply chain element.
As with any complex industry, and the semiconductor industry arguably has the world’s most complex technology and geographically dispersed supply chains, the devil will always be in the details. The paper attempts to tackle the key choke point technologies and assess where Chinese firms may be in developing alternatives, but of necessity, a lot of detail has been left out. This was for both space reasons and due to the sensitivity with which these issues are now treated in both the United States and China. This paper deliberately avoided providing specifics about some of the sourcing for details, though the information provided is believed to be reliable and reflects the best available information. That said, it is almost certain that a lot of innovation and progress in this space will be more difficult to assess going forward because Beijing and Chinese companies will remain cautious in advertising successes, concerned they could invite further restrictions. When there is an accumulation of progress on tough issues, such as the development of the Kirin 9000s system on a chip at the heart of the Huawei Mate 60, there will be pressure to showcase the product, while obscuring the processes that led to its production. There will also be a political dimension to these types of developments—the author’s sources indicate that it was pressure from the highest levels that resulted in Huawei’s release, over the objections of the company, of the Mate 60 during U.S. Commerce Secretary Raimondo’s visit to Beijing in August 2023. This was a not-so-subtle message, but is part of the “intense competition” that will be seen going forward.
Paul Triolo is a senior associate (non-resident) with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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