A Chip on China's Shoulder

Semiconductors are essential components of most electronics in use today. (Pxfuel)

On Monday, October 25, Taiwan Semiconductor Manufacturing Company (TSMC) announced that it would comply with a U.S. Department of Commerce request for its inventory, sales, and client details. The request is part of an apparent government effort to quantify semiconductor supply chain risks during a global semiconductor shortage. Chinese media and commentators, however, have lit up the internet with worries that the request is really a U.S. government ploy to more precisely target its support for U.S.-friendly firms and sanction China-friendly ones.

Chinese media loudly praises magnanimous Chinese globalism in contrast to apparent U.S. chip nationalism: a Global Times piece from April highlights how the China Semiconductor Industry Association called for free trade, open communication, and supply chain security cooperation. Indeed, Chinese state media outlets are promoting the idea that free trade is the best remedy to the semiconductor shortage.

Yet, perhaps inadvertently, China is engaging in the same chip nationalism that the U.S. is. The very next line of the Global Times article says that “China is also climbing up the ladder to create self-reliant semiconductor technology.” China is indeed making progress—but its gamble for semiconductor manufacturing power still faces pitfalls. 

What’s Chip and Happening

Raimondo speaks at a 2016 conference. (Startmag)

On September 23, representatives of the world’s big tech and semiconductor companies met in Washington to deliberate resolving the world’s semiconductor chip shortage. At the meeting, U.S. Secretary of Commerce Gina Raimondo issued a voluntary request for sales details to these companies intended to allow policymakers and businesses to “get more granular into the bottlenecks and then ultimately predict challenges before they happen.”

Raimondo  threatened the conference’s participants, indicating that if companies did not answer her request themselves, “then we have other tools in our toolbox that require them to give us data.” She privately warned companies that the U.S. government “would mandate information sharing if necessary.”

TSMC, which supplies advanced semiconductors to Chinese and U.S. companies alike, attended that September 23 meeting. In late October, it acceded to Raimondo’s request, though promising not to disclose confidential information or harm “the rights of our customers and shareholders.”

Professor To-hai Liou at National Cheng-Chi University in Taiwan concurred that Raimondo’s request is “certainly targeting China,” since the United States already wants to prevent TSMC from inadvertently helping Chinese companies. The Chinese government has not commented directly about Raimondo’s request or TSMC’s agreement. 

Though there is no concrete evidence that the information Raimondo wants will definitely harm the Chinese economy, TSMC’s positive response to her request gives Chinese commentators reason to fear. Xi Chen, at Peking University’s Institute for Global Cooperation and Understanding, suggested that Raimondo’s request would help the United States “create domestic jobs, accurately acquire international companies with potential, and place sanctions on key Chinese companies.” On Zhihu, a Chinese version of Quora, users argued that companies that agree to Raimondo’s request “will provide data that supports policymaking that further suppresses China.” 

“Addressing the chip shortage is an excuse,” another commenter agreed. “It’s aimed at … carrying out more precise sanctions. Using its administrative power to interfere with companies’ internal operations with its long arm, [the U.S.] showed its hegemonic face.”

Fabricating Policy

In May 2021, TSMC announced it would expand its factory in Nanjing. Many mainland commentators derided the move as an attempt to dump standard semiconductors onto the Chinese market in order to flush out Chinese competitors. The Global Times later mentioned that the Nanjing plant “does not have advanced manufacturing capability due to political pressure from the island of Taiwan and the US.”

Perhaps it’s true that TSMC is choosing not to bring its most advanced technology to China. The Global Times highlights how TSMC captured 56 percent of the semiconductor fabrication market in 2021, giving it outsize power to determine what semiconductors are produced where.

Taiwan Semiconductor Manufacturing Company bases most of its semiconductor “fabs,” or fabricators, in Taiwan. (Wikimedia Commons)

But state media has actually been fairly frank that, despite local industry growth, China has a domestic semiconductor production problem. Xinhua, a Chinese government paper, countered nationalist opinions with an op-ed titled, “There is no quick pill to save chips,” a piece which other Chinese state mouthpieces parroted. The op-ed wrote: “The more complicated the global situation is, the more the Chinese semiconductor industry needs to completely blend into the global supply chain such that nobody can easily escape [one another].” Chip nationalism and protectionism are not the best policies.

TSMC can make semiconductor chips far more advanced than China’s biggest semiconductor firm, Semiconductor Manufacturing International Corporation (SMIC). As such, “Chinese high-tech enterprises rely heavily on Western chip suppliers. Even in 2020, China was meeting 80 percent of its chip demand through imports.” True domestic self-sufficiency is not currently feasible. “Excluding foreign fabs from China would make it even more impossible to achieve [China’s self-sufficiency] targets,” Stewart Randall at Intralink concurred. China has reason to prefer free trade.

With this logic in mind, Chinese media continue to critique the United States’ protectionist semiconductor policies as a threat to the benefits of globalization. The Global Times judged that U.S. and non-U.S. companies have been “trapped in the US’ geopolitical arm wrestling match with China—which clearly runs counter to their long-term development.”

The Global Times even takes a downright neoliberal view of comparative advantage:

“The high-end semiconductor industry, after decades of globalization, has a highly diversified industrial chain with clear division of work. Countries and companies have been developing their most competitive businesses within the industrial chain based on their own comparative advantages. Any attempt to change such a well-established industrial chain would be extremely difficult, if possible.”

But this world of free trade among semiconductor fabricators and consumers is itself a fabrication. Three years of U.S. export controls and sanctions against China—initiated under the Trump Administration and continued during the Biden Administration—have forced firms producing for global semiconductor supply chains to choose between the U.S. and China. 

Analysts at the Global Times see the U.S.’s latest data request as another step towards splintering supply chains. “The data that TSMC and other chipmakers are required to provide [to the U.S.] will inevitably include a lot of order and production information specific to Chinese mainland companies, offering a glimpse into the technology progress, production capacity and other business secrets on the mainland,” they write. “The fact that the US could access these data will seriously compromise the commercial interests and business secrets of mainland semiconductor industries.”

Yet the Chinese media’s criticism of U.S. protectionism is self-serving and somewhat hypocritical: instead of calling for U.S. de-escalation, the article concludes with the defiant assertion that “in the long run, it is still essential for China to firmly push forward with the independent research and development of the semiconductor technologies to gain more saying [sic] in the industry.” China will respond to protectionism with protectionism of its own.

Sand in China’s Gears

Thankfully for the Global Times, Chinese semiconductor foundries are slowly growing more advanced and finding their own specialized niches along the way—and U.S.-imposed trade restrictions are to blame. Teng Ran, head of integrated circuit work at CCID consulting, told SCMP that, “Previously, the slots of … suppliers” at Chinese semiconductor expos “were all occupied by foreign brands, and local brands can only wait in line. But many companies in China are now proactively looking for domestic suppliers … and this creates business opportunities.” 58,000 new Chinese semiconductor firms emerged between January and October 2020.

In October, as the global shortage continued, Chinese semiconductor firms reported significantly high and improved profitability. “With business booming, domestic chip firms are also expanding their production lines,” wrote the Global Times. U.S. protectionism has unwittingly helped smaller Chinese semiconductor firms grow, and bigger Chinese semiconductor corporations thrive. In September, SMIC announced plans to build China’s largest new semiconductor fabrication facility, where material scientists turn sand into nanometer-thin silicon. SMIC’s new factories are poised to serve the needs of global supply chains and the domestic Chinese market by producing larger and better semiconductors as global demand for semiconductors persists. 

Chinese tech expos have been drawing crowds for the past decade. (Wikimedia Commons)

Moreover, in October 2020, Alibaba unveiled its own 5-nanometer semiconductor chip, the kind of advanced chip that TSMC excels at producing. While mass-production and commercial use are a long way away—a TechWire Asia article confirms that Alibaba will design the chip but not manufacture it—it’s clear that Chinese firms have some ability to fabricate advanced chips. 

Chinese policymakers have seized the opportunity in front of them.

After President Trump sanctioned Huawei, China issued a Number 8 policy, offering its domestic semiconductor industry “tax incentives, supportive financing and better training schemes.” And Tsinghua University “established a specialised chip college in April this year. Its goal is to train much-needed semiconductor engineers and ultimately to achieve the national goal of chip self-efficiency amid a global shortage which is exacerbated by the tech war between Washington and Beijing.” Already, Tsinghua Unigroup—a holding company managed indirectly by Tsinghua University and backed by a state-owned multibillion-dollar investment fund—has poured money into Chinese semiconductor firms to help them catch up with foreign competitors as soon as possible. Tsinghua Unigroup’s gamble has nothing to do with profits: even if most of the firms it invests in fail, China’s tech industry will benefit even if only a few firms innovate successfully.

Chinese policymakers know they need these investments as soon as possible. A recent report from Peking University’s China Institute for Educational Finance Research finds that China’s semiconductor industry will have a 300,000-strong shortfall in industry talent. A circuit industry whitepaper corroborated that claim with a figure of 250,000. “But based on a recent report by investment bank China International Capital Corporation (CICC),” writes TechWire Asia, “it is not a number issue, but it is regarding quality. In short, there is a lack of industry leaders, especially in chip manufacturing.” 

SMIC, for its part, is on the U.S. Department of Commerce’s Entity List—meaning it can’t get supplies and imports from U.S. and allied foreign firms, many of which offer advanced semiconductor technologies that SMIC doesn’t yet possess. So long as the industry’s most advanced firms cooperate with the U.S. and tolerate its increasingly adversarial stance to China’s ambitions for high-tech manufacturing, China’s pursuit of semiconductor manufacturing power faces an uphill battle.

Because obstacles like these endanger China’s gambit for domestic semiconductor manufacturing power, perhaps that’s why China isn’t being too public about its progress. Nonetheless, it’s clear that U.S. chip nationalism has driven Chinese chip nationalism; Chinese policymakers may never have intended to reap the benefits of U.S. protectionism in their quest for semiconductor manufacturing prowess, but U.S. policy has forced their hand and closed their economic circuit.