China’s largest chip maker, Semiconductor Manufacturing International Corp. (SMIC), is ramping up production of a decade-old chip technology that is key to many industries’ supply chains and could be aided by the government’s trillion yuan ($143 billion) support package it is considering for its chip industry. China has a track record of dominating key technologies by flooding the market with cheaper products and wiping out global competition as it did with solar panels and 5G telecom equipment. If it does that with chips, it would give China leverage over every country and industry – military or civilian – that depend on 28-nanometer chips–a major part of the chip universe. These 28-nanometer chips have been used commercially since 2011 and are widely used in automotive, weapons and internet-related technologies.
In 2020, China had 9 percent ($39.8 billion) of the global chip market—up from 3.8 percent ($13 billion) just 5 years ago. China wants to increase that market and could provide further aid to SMIC and other chipmakers in China by providing government subsidies to produce chips, thereby aiding companies to be able to sell them at a low prices, flood the market with cheap products and wipe out competition. Non-Chinese companies won’t be able to compete since they cannot make a profit at those levels.
SMIC, founded in 2000, is a giant in older technology, including chips that regulate power flows in electronics. The importance of older chip technology hit the industry in 2021 as a shortage of those chips prevented the manufacturing of millions of cars and consumer electronics. SMIC’s revenue was close to $2 billion in the third quarter of this year, roughly double the same period last year during the global chip shortage.
With U.S. export controls making it impossible to produce advanced chips using U.S. technology, SMIC is doubling down on mature technology chips and has announced four new facilities since 2020. When those come online, it would more than triple the company’s output. SMIC is becoming a major competitor to Taiwan’s UMC Microelectronics Corp and U.S.-headquartered Global Foundries Inc.
The impact of the huge ramp-up in new chip facilities across China will likely start to be felt in 2024. It is expected to be full-blown by 2027. If China’s semiconductor development continues its strong momentum and assuming growth rates of industries in other countries stay the same, the Chinese semiconductor industry could generate $116 billion in annual revenue by 2024, capturing upwards of 17.4 percent of the global market share. U.S. semiconductor production accounts for 12 percent of the global total, down from 37 percent two decades ago.
China’s Potential Aid Package
China is working on a more than 1 trillion yuan ($143 billion) support package for its semiconductor industry as a major step towards self-sufficiency in chips and to counter U.S. actions to slow its technological advances. If it goes as planned, China will roll out what will be one of its biggest fiscal incentive packages, allocated over five years, mainly as subsidies and tax credits to increase semiconductor production and research in China. The majority of the financial assistance would subsidize the purchases of domestic semiconductor equipment by Chinese firms, mainly semiconductor fabrication plants, which would be entitled to a 20 percent subsidy on the cost of purchases. The plan could be implemented as soon as the first quarter of next year.
U.S. National Defense Authorization Act of 2023
The U.S. National Defense Authorization Act 2023 includes a section barring the U.S. government from using chips from SMIC and two other Chinese memory chip makers. However, it is not clear what impact the restriction, which kicks in five years after it becomes law, will have on SMIC’s output. The U.S. Senate and House are expected to pass the legislation this month.
This version of the bill is a weaker version than the one proposed in September that would have required U.S. federal agencies and their contractors to stop using semiconductors manufactured at China’s SMIC, as well as chips made by Chinese memory chip leaders YMTC and CXMT. The final version no longer forbids contractors from using those chips. It also pushed the compliance deadline back to five years from the immediate or two-year implementation deadlines included in the prior version.
Because chips are not typically labeled with the names of the companies that manufacture them, it would be costly and difficult for companies to determine whether SMIC manufactured the chips contained in a vast number of products, particularly since chips made by SMIC are commissioned by companies all over the world.
Conclusion
China dominates many areas in the transition to a net zero carbon economy, including the electric vehicle battery supply chain, critical mineral processing, and solar panel production. Now, it wants to dominate the semiconductor global market which also is essential to all energy forms, and particularly to wind and solar power. China is planning to propose financial assistance to its companies to do so. The issue is serious since semiconductors are used in many products—both civilian and military. In August, the United States passed the $52.7 billion Chips and Science Act to prevent a resurgence of supply chain problems experienced last year. But now the United States will be in competition for chip production and advancement with China. And since manufacturing of chips is extremely energy-intensive, the United States will be limited by the energy choices President Biden is mandating. China has no such limits.
