Since 2022, the United States has focused on restricting China's production of high-performance semiconductors. The Commerce Department has imposed strict export controls and allocated tens of billions of dollars to encourage advanced semiconductor production in the United States.
China has responded by implementing its own policies, focusing on less advanced but more widely used “legacy” chips, and new data shows Beijing is rapidly gaining influence in that market.
China is on track to add three times as much semiconductor manufacturing capacity this year as all other countries plan to do over the next three years combined, according to the nonprofit think tank Silverado Policy Accelerator. China will control about 40% of all legacy semiconductor production by 2027, according to research from the Rhodium Group.
“What China is doing in this market is the same as they've done in many other industries,” Silverado CEO Sarah Stewart told Yahoo Finance. “They're injecting this market with below-market loans and all kinds of subsidies that other people aren't offering, none of which are tied to real demand signals.”
China's efforts are raising concerns that the semiconductor industry is at risk of following the same path as solar power and steel, where Chinese overcapacity contributed to a global price collapse.
Pricing pressures are already building: Silverado's report found that Chinese companies offered prices 20% to 30% lower than non-Chinese competitors in 2022 and 2023. These price cuts came despite strong industry pricing, especially in 2022, when widespread semiconductor shortages led to record sales.
Chinese chips still mainly supply the domestic market, but deep discounts have allowed companies such as Semiconductor Manufacturing International Ltd. (SMIC), Huahong Co. Ltd. (1347.HK) and Nexchip Co. Ltd. (688249.SS) to grab market share from non-Chinese rivals such as GlobalFoundries Ltd. (GFS) and Samsung, according to consulting firm JW Insights.
China accounted for about a third of global legacy chip production last year, nearly double the amount in 2015, according to the Rhodium Group, which expects that figure to grow to 39% by 2027.
New and old
Although advanced chips represent cutting-edge technology, their use relies on a foundation built by older semiconductors.
The Commerce Department defines these legacy chips as semiconductors built on nodes of 28 nanometers or larger, which are considered fundamental because they are essential to nearly every electronic device, from smartphones to home appliances, medical devices and military vehicles.
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For example, a smartphone contains 160-170 chips, but only three of them are considered advanced chips, according to Silverado's research. GPS, Wi-Fi, battery life, and camera control are just a few of the features that rely on legacy chips.
“There are virtually no applications that require advanced chips that can function without the underlying chipset,” Stewart said. “The two go hand in hand.”
But Biden administration officials are focusing on producing more advanced chips rather than older ones, mainly because China lags far behind in that technology.
According to official data, the Commerce Department announced a total of $3.4 billion in investments to boost U.S. legacy chip production capacity, accounting for one-third of the incentives allocated to cutting-edge semiconductors.
National security is one reason for the focus on banning imports of advanced Chinese chips: Commerce Secretary Gina Raimondo said the administration's export controls are aimed at thwarting Chinese advances in artificial intelligence, military systems and mass surveillance.
“Supercomputers, AI technology, AI chips, in the wrong hands, could be as lethal as any weapon we could give you,” Raimondo said at the Reagan Defense Forum last year.
China strengthens manufacturing
China has been trying to develop a domestic semiconductor industry for years, pouring billions of dollars into domestic companies.
The current acceleration dates back to 2019, when the Commerce Department placed telecommunications giant Huawei on the Entity List, cutting off its access to critical suppliers like Google (GOOG), Qualcomm (QCOM), and Broadcom (AVGO), overnight.
The 2022 export controls effectively banned U.S. companies from supplying advanced semiconductors and cutting-edge semiconductor manufacturing equipment to China, further accelerating China's efforts.
Workers produce chips for mobile phones, cars and LED lighting at a factory in China's Jiangsu province on April 29, 2024. (Costfoto/NurPhoto via Getty Images) (NurPhoto via Getty Images)
Stewart said China has taken advantage of U.S. policies by increasing production of legacy chips in order to gain more global market share, expand its influence over the United States and control prices.
At the center of this effort is China's National Integrated Circuit Industry Development Investment Fund, which has raised $52 billion over 10 years for semiconductor manufacturing and design development, with an emphasis on older chips, according to a report by the Semiconductor Industry Association and BCG, and aims to raise another $40 billion by the end of the decade.
The industry is expanding with the help of Western companies. China was set to become the world's largest importer of semiconductor manufacturing equipment in 2023, importing $15 billion more than its biggest rival, Taiwan, according to Silverado.
New Concerns Over Legacy Chips
China's growing manufacturing capacity has raised alarm bells among policymakers and industry leaders.
California lawmakers signed a letter this month urging the Commerce Department to suspend unilateral export restrictions, saying further restrictions “could send long-standing U.S. businesses into a death spiral.”
Some, including Intel CEO Pat Gelsinger, have warned about the impact of broad export controls, saying too many restrictions could accelerate China's chip production timeline.
“If the line is too tight, China will have to make its own chips,” he said at Computex in Taiwan.
U.S. Secretary of Commerce Gina M. Raimondo attends bilateral meetings with U.S. President Joe Biden and Chinese President Xi Jinping in Woodside, California, November 15, 2023. (REUTERS/Kevin Lamarque) (REUTERS/Reuters)
The Commerce Department earlier this year began examining the country's supply chains to get a better handle on how U.S. companies are sourcing basic semiconductors.
And just a few months ago, the Department of Defense imposed its own procurement restrictions on government agencies, banning the use of Chinese chips after 2027. The National Defense Authorization Act also bans business with entities that use Chinese chips in critical defense and intelligence system products.
The European Commission has also taken notice of the situation and is investigating Chinese companies to better understand how they are weakening themselves by using outdated chips, according to multiple reports.
Countering China's semiconductor ambitions will ultimately require additional policy support and cooperation among U.S. allies, according to Reba Gougeon, director at the Rhodium Group.
“The US needs to effectively create a chip market outside of China to guarantee demand between the US and trusted partners,” Gougeon said. “The sustainability of the AI boom is a big variable, as is the US election. Either a Harris administration will continue this multilateral momentum, or we will see further fragmentation and mismanagement due to the polarization of partners by Trump 2.0.”
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