US Think Tank Report: China's Chip Innovation Progresses Slowly, Breaking Through is Challenging

Original Title: US Think Tank Report: China's Chip Innovation Progresses Slowly, Breaking Through is Challenging

Recently, CSIS (Center for Strategic and International Studies), one of the two major US think tanks, published a report titled "Learning the Superior Techniques of the Barbarians: China’s Pursuit of Semiconductor Independence," which presents an American perspective on China's semiconductor development.

The author of this report, James Andrew Lewis, is a Senior Vice President at CSIS. Before joining CSIS, he served as a Foreign Service Officer and Senior Executive at the US Department of State and the Department of Commerce.

The report argues:

• China has invested heavily in semiconductors, and these investments are yielding results, but it still relies on Western technology.

• China is a net importer of technology, and chip and technology imports will remain the norm for many years to come.

• The trend of China's innovation growth faces risks.

Although China has made enormous investments in science and technology, and these investments are producing results, it still depends on Western technology.

This is especially true in the semiconductor field. For decades, China's reliance on foreign semiconductors has been a concern at the national level. China intends to end this dependency, reshape the global semiconductor market, and position its companies at the forefront.

However, despite 40 years of investment, China has been unable to manufacture advanced semiconductors. This process has seen costly failures.

Since 1979, China has achieved incredible economic growth through massive state investments in infrastructure, education, and research, as well as technology acquisition and supportive business policies. Western companies have been eager to access the Chinese market, which has become critical for many of them.

China Is a Net Importer of Technology

China remains a net importer of technology. China hopes to "move up the value chain" from assembling imported components into final products to creating advanced technology domestically, but chip and technology imports will still be the norm for many years to come.

Today, only 16% of the semiconductors used in China are produced domestically, with only half of those produced by Chinese companies. China relies on foreign suppliers for advanced chips. China aims to produce 40% of its semiconductors by 2020 and 70% by 2025.

China's semiconductor plan involves a total investment of $118 billion over five years, with $60 billion coming from provincial and municipal governments. In comparison, leading Western companies invest tens of billions annually in R&D. Intel spends over $13 billion on R&D, while Samsung and Qualcomm each invest over $3 billion. In China, Huawei and ZTE spend approximately $15 billion and $1.9 billion, respectively.

Viewing Semiconductors as Foundational Technology

China sees semiconductors as a critical strategic industry. Semiconductors are the backbone of the digital economy, relied upon for both consumer and industrial applications.

Semiconductor production is built on a complex global supply chain involving both large corporations and many smaller companies.

The industry itself is 60 years old, originating from discoveries in US laboratories that copper wires etched onto silicon wafers could replace bulky transistors (just as transistors had replaced even larger vacuum tubes). The industry trends include packing more circuits onto a single chip, designing chips for specific functions (such as gaming or artificial intelligence), and increasing the number and speed of operations a chip can perform.

Semiconductor production is at the forefront of physical and material sciences, as chipmakers integrate more computing power, memory, or functionality into individual chips. Many are familiar with "Moore's Law," which accurately predicted that the processing power of semiconductor processors would double every two years. For years, there has been speculation that we are approaching the end of Moore's Law. Some anticipate that the industry's ability to integrate more computing power into a single chip will slow down or even cease.

The table above outlines the steps in semiconductor production. Manufacturing a semiconductor requires over 400 steps and more than two months. The process can be divided into six stages: research, design, wafer production, processing, packaging, and testing.

Whether we ultimately reach this limit or not, each new generation of chips presents more difficult technical production challenges and higher costs. The semiconductor industry's heavy investment in R&D has sustained its rapid advancement so far. The potential end of Moore's Law increases the importance of private-sector R&D (semiconductors are one of the leading R&D investment sectors in the US, with large companies typically spending billions annually) and government investment in foundational research in physical and material sciences, which helps drive improvements in chip performance.

Another Wave of Large-Scale Investment in the Semiconductor Industry

R&D plays a crucial role in maintaining the semiconductor industry's competitiveness. Given China's decades-long investment in science, technology, engineering, and mathematics (STEM), this is one area where China may eventually gain an advantage.

However, currently, no mainland Chinese companies are among the top 10 in semiconductor R&D spending, although two Taiwanese companies are on the list. Four US companies account for 57% of the industry's total R&D spending (Intel alone spends more than one-third of the industry's total R&D expenditure).

Top 10 Global Chip Companies by R&D Spending

Government support for private-sector R&D in China is a potential advantage. However, the US has similar programs, such as the Defense Advanced Research Projects Agency (DARPA) multi-year $1.5 billion initiative (known as the Electronics Resurgence Initiative) and other projects aimed at developing new technologies to revolutionize chip production and performance. A key difference is that DARPA funds research, not companies.

In 2014, China set a goal to become a global leader in all areas of the semiconductor industry by 2030. However, the chip market is not easy to enter, which has hindered China's previous efforts. Decades ago, China invested tens of billions of dollars in building a domestic semiconductor industry but achieved limited results. The main difficulty for Chinese companies is not acquiring equipment but lacking experience and "know-how." This remains a significant issue today. China's pursuit of a domestic industry also runs counter to the trend of globally integrated supply chains, which are the most efficient for production and innovation. In a globally integrated innovation system, a domestic industry, even with financial subsidies, will remain secondary.

Despite Western restrictions on technology transfer, China can still achieve semiconductor independence through various means. First, by leveraging technology from Taiwan. Second, by utilizing "fabless" semiconductor production, where Chinese companies design chips but rely on specialized firms like TSMC for manufacturing. Finally, China can once again attempt to build a state-funded domestic industry. Chinese companies prefer fabless chip production, while the government's favored solution of building domestic semiconductor fabrication plants (fabs) is both expensive and risky.

Risks to China's Innovation

The long-standing debate over whether China can become an innovation powerhouse appears to be over, but two caveats remain. First, successful Chinese innovation is still constrained by the country's relative technological backwardness. Second, the trend of China's innovation growth may slow or reverse alongside greater state economic direction.

Both the US and China have their own strengths and weaknesses in governance, investment, and research competition. The transnational nature of research and innovation complicates any country's competition for technological leadership and will create forces that are difficult for either nation to control. Globally-oriented US industries may have an advantage over state-centric Chinese industries.

Government support means Chinese companies can continue operating even when unprofitable, harming both the Chinese economy and those of other countries. The expansion of Chinese government subsidies will squeeze semiconductor firms in other nations, reducing their revenues and numbers and diminishing their ability to invest in R&D. The overall impact of China's investment will be to weaken the global industry and slow the pace of semiconductor innovation.

How Should the US Respond?

Semiconductors are the backbone of the digital economy. The report argues that there is no simple solution to address China's efforts in the semiconductor field. The semiconductor industry is closely linked to national security. The US can safeguard its technological strength by increasing investment in fundamental science and government research.

About the Author:

James Andrew Lewis is a Senior Vice President at CSIS. Before joining CSIS, he served as a Foreign Service Officer and Senior Executive at the US Department of State and the Department of Commerce.

This article is adapted from New Zhiyuan.