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China Semi Sector – 2022 Sanctions – Part 2

China Semi Sector

2022 Sanctions - 02

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Recent news coverage in western media suggests that US sanctions against China’s semiconductor sector have caught the CCP and mainland industry leaders off guard. In this Part 2 of our two-part series on China’s semiconductor market, we do a deep(er) dive on the mainland Chinese chip sector, examine the Chinese government’s strategic plan to decouple China’s reliance on western technology suppliers, and evaluate the outcomes of that strategy.
SINOLOGIX Staff
www.sinologix.io
info@sinologix.io
2023-02-22
China Semi Sector - Part 2 - China's Strategy

Executive Summary

China's Drive for Self-Sufficiency

For the last several years, the US has been imposing progressively stricter sanctions against companies in China’s high-tech sector, and in particular, its local semiconductor companies. In August 2018, the National Defense Authorization Act for FY 2019 banned Huawei and ZTE from participating in US government contracts. In September 2020, the Trump administration imposed significant limits on technology that could be sold to SMIC, China’s most advanced chip-maker. Finally, on October 7, 2022, the US Commerce Department’s Bureau of Industry and Sanctions (“BIS”) imposed its strictest limits yet on all US companies selling semiconductor design software, lithography equipment, advanced semiconductors, components, and support services to Chinese chip and digital product manufacturers. To the extent that any these technologies and services are used by non-US manufacturers in the global supply chain, those market participants will likewise be under political and economic pressure to support the BIS sanctions.

In Part 1 of our two-part series on China’s semiconductor market, we examined the intertwined global value chain in the chip sector, details of the October 2022 sanctions, as well as the US’ specific objectives with respect to choking off China’s access to all technologies necessary for AI and supercomputing in military and commercial applications.

In this Part 2, we examine the Chinese government’s strategic plan to decouple China’s reliance on western semiconductor technology suppliers. The government has long recognized the critical role semiconductors play in its economy and national security, and has developed a comprehensive strategy to attain self-sufficiency in this domain that includes:

Government Investment – The Chinese government has invested heavily in its domestic semiconductor industry, providing subsidies and funding for research and development.

Acquisition of Foreign Firms – China has been acquiring foreign semiconductor companies and firms with advanced technology to gain access to their expertise and intellectual property.

Development of Domestic Capabilities – China has been actively developing its own semiconductor design and manufacturing capabilities, including building new chip fabrication plants and investing in advanced equipment and technology.

Encouraging Domestic Innovation – the government is promoting innovation in the semiconductor industry by supporting startups and local companies and encouraging the development of indigenous intellectual property.

These efforts are part of China’s broader plan to achieve technological self-sufficiency and reduce its reliance on foreign countries for a broad range of  technologies.

It’s worth noting that the CCP’s approach to cultivating a vibrant, independent semiconductor sector that is not susceptible to US sanctions is quite different from the free-market model employed by western governments. To fully appreciate the CCP semiconductor strategy, we’ve structured this analysis into three sections:

Chinese Semiconductor Market Overview – this includes market share analysis by sub-sector (fabless, foundry, OSAT, EDA, and lithography equipment).

Major Government Initiatives – contrary to most western media reports, China has long prepared for the impact of sanctions, so we’ve included the history of the 2014 National IC Promotional Guidelines, the 2015 Made in China 2025 initiative (MIC25), and of course the 2021 14th Five Year Plan (14FYP).

NOTE TO READER – the term “informatization” used in these programs references a broad range of digital technology goals that include AI, big data, supercomputing, as well as the effective use of digital technologies in government, research, and industry. This is such a broad topic that we’ve limited our discussion to just the subset that applies to semiconductors – design, wafer etching, chip manufacturing, and integration into end-user products.

Outcomes – as with many of the CCP’s strategic initiatives, the semiconductor programs are long-term, with many targets set for 2030 and beyond. Two important outcomes are worth examining – the overall rate of fab construction (to date and planned) and SMIC’s (and other mainland foundries) recent success with sub-10nm chip production.

Many western analysts continue to throw shade on the CCP’s efforts, citing prior failures of government-corporate initiatives and, most importantly, western countries’ technological lead over China in the chip sector. We have no doubt that the overall semiconductor program will experience many setbacks. But we would also point out that the scope of this particular program(s) dwarfs anything ever attempted by either the public or private sectors in the west, both in terms of budget and timeframe. To those who contest this, we would further draw the reader’s attention to the Chinese space program (space lab, moon landing, and Mars rover), the national high-speed rail system (at 40,000 km, the world’s largest), and a host of other highly technical accomplishments. We have no dog in this fight, but it would foolish to summarily dismiss China’s ability to achieve its objectives in the semiconductor sector.

Semiconductor Sector Overview

Global Semiconductor Market

Global semiconductor sales have grown from $204.4 billion in 2000 to $595 billion in 2021 and are currently growing at an average 6.8% CAGR. Global sales are projected to reach $1.2 trillion by the end of the decade.

NOTE TO READER – in the following analysis, we examine China’s market share from the perspective of both a supplier and a consumer to/from world markets. The disctinction between these two roles is important:

Supply Side – As a supplier,  China is a dominant competitor in the various semiconductor markets in which it provides components and finished products.

Demand Side – China is the world’s largest consumer of globally produced semiconductor components, as well as finished wafers and chips, therefore US sanctions will have a material impact on American suppliers.

End-user (Finished) Product  At the end of the semiconductor supply chain, China manufactures 36% of the world’s electronic devices (2020), which in turn are either exported or consumed in domestic markets – the domestic Chinese market accounts for 25% of global end-user electronics sales.

Market Share – Supply Side

Maintaining US dominance in market share is critical to the US economy, as semiconductors account for $49 billion of total US exports (2020), 277,000 direct jobs, and 1.6 million indirect jobs (2020). Moreover, technological supremacy is of paramount concern, as advanced chip performance is closely correlated to AI and supercomputing used in both military and commercial applications.

After losing market share in the mid-1980’s, the US regained its leadership role in chip manufacturing beginning in 1992, and, as of 2020, had 47% market share, compared to China’s 5% market share.

Market Share - Supply Side X Country (%) (2020)

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Market Share - Supply Side X Country (%) (2020)

Data Source – SIA / WSTS

NOTE TO READER –  the supply side of the semiconductor sector is an integrated supply chain consisting of fabless design companies (e.g. NVIDIA), foundries (e.g. TSMC), outsourced assembly and test (e.g. Amkor), as well as end-user product manufacturing (e.g. mobile phones, computers, automobiles). Furthermore, major manufacturers (e.g. Samsung, TSMC) maintain global operations, so market share statistics are somewhat distorted by the overlap between manufacturer HQ, location and segment within the end-to-end supply chain.

The following charts provide additional insights into the complexities of the global chip market and the challenges of implementing sanctions. Each chart below shows supplier market share based on corporate HQ location, device assembly location, and end-user product location.

Market Share - Supply Side X Location (%) (2019)

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Market Share - Supply Side X Location (%) (2019)

Data Source – SIA / UN Comtrade / BCG

Market Share – Demand Side

The Asia Pacific market currently is the largest consumer of semiconductors, with $271 billion in 2020 purchases, or 61.5% market share. Considered as a separate market, mainland China had $151 billion in 2020 purchases, or 34.4% market share.

Market Share - Demand Side X Country (%) (2020)

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Market Share - Demand Side X Country (%) (2020)

Data Source – SIA / WSTS

CHART NOTES

  • APAC market share includes China, Japan, Korea, and other countries.
  • Only China and Japan are shown as separate countries.

Key Takeaway – China is the largest single market for semiconductor technology, it is one of the largest manufacturers of end-user semiconductor-enabled products and is one of the largest markets for those finished goods. It is an indispensable market participant in end-to-end semiconductor supply chain. From the US perspective, sanctions against Chinese firms may be counter-productive. From China’s perspective, a competitive edge in both chip and end-user product manufacturing is key to maintaining its position in the global supply chain.

Issue – Manufacturing Self-Sufficiency

As the world’s largest market for semiconductors – in any given year, China accounts for approximately 34% of the global chip market. But nearly 84% of that is imported from multinational suppliers, meaning China has had a paltry 16% self-sufficiency rate.

Furthermore, numerous foreign semiconductor companies operate fabrication plants and design facilities in China, including SK Hynix, TSMC, Samsung, UMC, Texas Instruments, Micron and Intel. So, of its recent annual $24 billion of domestic production, only $1.6 billion, or 6%, is produced by mainland-headquartered chip manufacturers.

Key Takeaway – Although China is the world’s largest chip market, it is highly dependent on foreign suppliers, not only for chips, but for EDA software, lithography equipment and advanced foundry technologies. The economic and political risks associated with this lack of self-sufficiency at nearly every point in the end-to-end supply chain is the driving force behind Beijing’s semiconductor strategy.

China Semiconductor Sector - Segments

Notwithstanding its weak aggregate self-sufficiency rate, it’s worth noting that China is not a homogenous (chip) market – it has significant strengths and weaknesses in each segment of the chip supply chain.

Market Share – Supply Side X Segment (%) (2020)

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Market Share – Supply Side X Segment (%) (2020)

Data Source – SIA / BCG

China Semiconductor - 28nm Manufacturing Focus

In addition to the supply chain segment perspective, it’s important to consider chip technology – to date, the bulk of China’s indigenous chip design and manufacturing has been focused on the mature 28nm market.  While not as glamorous as the advanced sub-10nm chips that are the focus of the latest US sanctions, 28nm chips are used in many, if not most, end-user consumer products, including desktop/laptop computers, automobiles, and other personal devices.

China has excelled at manufacturing 28nm chips and its traditional competency in low-cost/low-margin manufacturing is expected to give it an edge through the end of the decade – in the aggregate (of all chips), China’s chip sales are expected to grow at a 30% CAGR to top $115 billion by 2024.

The Road to Self-Sufficiency

Overview

Contrary to most western media reports, China has long prepared for the impact of sanctions, so we’ve included the history of the 2008 Thousand Talents Program (TTP), the 2014 National IC Promotional Guidelines, the 2015 Made in China 2025 initiative (MIC25), and of course, the 2021 14th Five Year Plan (14FYP). While each of these initiatives were branded as separate programs, they’re really all part of a comprehensive effort to achieve self-sufficiency in the semiconductor sector, often referred to by Chairman Xi as a “whole-of-nation” exercise. The investment and economic analysis following the overview of these programs is cumulative, as program-specific investments tend to overlap each other.

2014 National IC Promotional Guidelines

The 2014 National IC Promotional Guidelines is a strategic plan launched by the Chinese government in 2014 to promote the development of China’s integrated circuit (IC) industry. The plan aims to improve China’s self-sufficiency in IC technology, reduce its reliance on foreign suppliers, and increase its global competitiveness in the IC industry.

To achieve these objectives, the plan specifies increasing investment in IC research and development, expanding the domestic IC market, promoting the development of high-end IC products, improving the quality of IC manufacturing, and providing financial incentives for companies to invest in these areas.

China has implemented several measures to support the plan, including establishing a National Integrated Circuit Industry Investment Fund, providing tax incentives for IC companies, and promoting mergers and acquisitions in the IC industry to increase competitiveness. China has also increased government funding for IC research and development and established partnerships with foreign companies to gain access to advanced IC technology (see economic and investment analysis below).

2015 Made in China 2025 initiative (MIC25)

Made in China 2025 (MIC 25) is a strategic plan launched by the Chinese government in 2015 to upgrade and transform China’s manufacturing industry into a high-tech, innovation-driven sector. MIC 25 aims to reduce China’s dependence on foreign technology and increase its global competitiveness in industries such as information technology, aerospace, biomedicine, and new energy vehicles. More importantly, it seeks to transition China’s economy from the “factory of the world” to higher-value upstream product design and development.

To achieve these objectives, the plan calls for increasing R&D spending, promoting innovation and entrepreneurship, improving intellectual property protection, upgrading manufacturing processes, and enhancing workforce skills. It also provides financial incentives for companies to invest in these goals and establish partnerships with foreign companies to gain access to advanced technology.

2021 14th Five Year Plan (14FYP)

China’s 14th Five Year Plan, which covers the period from 2021 to 2025, includes specific objectives for the development of the semiconductor industry in China. The plan aims to increase self-sufficiency in the production of semiconductors, reduce China’s dependence on foreign technology, and promote the development of advanced semiconductors.

To achieve these objectives, the plan includes specific actions such as increasing investment in research and development of semiconductors, improving the quality of domestically produced semiconductors, and promoting the development of high-end semiconductor manufacturing. China also plans to establish a national fund to support the development of the semiconductor industry and encourage mergers and acquisitions to consolidate the industry.

In addition, the 14th Five Year Plan emphasizes the importance of collaboration between Chinese and foreign companies to improve China’s semiconductor capabilities. China plans to establish joint ventures with foreign companies to develop advanced semiconductor technology and expand cooperation in areas such as talent development, technology standards, and intellectual property protection.

China’s implementation of the 14th Five Year Plan includes initiatives such as establishing a semiconductor industry innovation center, investing in the construction of semiconductor manufacturing facilities, and providing tax incentives and financial support to semiconductor companies. However, China’s efforts to develop its semiconductor industry have faced challenges, including a shortage of skilled workers, a lack of intellectual property protection, and trade tensions with other countries.

Thousand Talents

Although not a chip-specific program, China’s Thousand Talents Plan (TTP) is a government-led initiative launched in 2008 to attract and recruit highly skilled individuals from overseas to work in China. It offers financial incentives, research funding, and other benefits to participating individuals who are expected to contribute to China’s scientific, technological, and economic development.

However, the plan has faced negative criticism from various countries and organizations, particularly the US government. Critics allege that the program is being used by China to steal intellectual property and sensitive technology from the West, and that some participants have been involved in espionage activities. The US has accused some participants of not disclosing their participation in the program and their financial rewards, which is a violation of US law – several notable cases have involved US citizens working at prominent universities.

Additionally, the program has been criticized for potentially undermining the global academic community’s values of openness, collaboration, and transparency. Some experts worry that the program could create conflicts of interest, incentivize secrecy and non-disclosure, and ultimately harm the integrity of international research.

Nevertheless, a study published in Science magazine examined some 300 Chinese PhDs who had obtained their degrees in western universities, then returned to academic positions in China – grant recipients ranked in the top 15% for publication output in the five years before returning to China, when benchmarked against their colleagues in the US.

Program Summary

Unlike most western economies, China’s hybrid planned/market economy employs a strong central government ingredient to encourage policies and investments that might not otherwise be undertaken by the private sector. Furthermore, the scope of these three programs is far beyond even the US’ $52 billion 2022 CHIPS Act.

However,  these programs have been criticized by the US and some of its western allies, who see it as a threat to their own IC industries and a violation of international trade rules. In particular, MIC 25 struck a nerve in western countries, and to mute criticism, the Chinese government has publicly downplayed MIC 25 in recent years.

To the extent that these programs relied on partnerships with western organizations for a transfer of technology, they have been thwarted by the October 2022 sanctions, which specifically seek to limit the transfer of advanced technology in the semiconductor sector, whether through acquisitions, product and equipment purchases, or support services.

The initial target of these programs was 70% self-sufficiency in technical domains such as semiconductor design and manufacturing. However, these targets have been downward revised in response to US sanctions.

Government Investments

The 2014 National Integrated Circuits Industry Development Investment Fund was initially seeded with $21 billion in state-backed financing. In 2019, it was renewed with another round of state financing that exceeded $35 billion. To date, the National IC Fund has invested $39 billion, of which 69% has been for fab manufacturing.

Consistent with the government’s top-down approach to policy implementation, more than 15 local government IC funds have been established with a total of $25 billion in financing.

The combined national and local funds under the 2014 National IC Initiative totals $73 billion, which is unmatched by any other country, including the US 2022 CHIPS Act.

In August 2020, Beijing modified its tax code, to provide a 10-year corporate tax exemption for semiconductor manufacturers, with an estimated value of $20 billion.

In December 2022, the Chinese government announced another $143 billion investment package in support of the 14FYP’s semiconductor objectives. This package will be allocated over the next five years in the form of subsidies and tax credits, notably a 20% subsidy for companies investing in fabs (chip foundries).

China’s total government investment in all technology-related programs is expected to exceed $1.1 trillion through 2030.

Local Semiconductor IPO's

Given government support for the chip sector, in 2019 the Shanghai Stock Market established the Science and Technology Innovation Board (STAR Market), which is dedicated, as the name indicates, to mainland technology companies. In 2022 alone, Chinese tech IPO’s raised more than $32 billion (including IPO’s on both the Shanghai and Shenzhen exchanges).

Shanghai Market Semiconductor Firms (2021)

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Shanghai Market Semiconductor Firms (2021)

Data Source – SIA / Winsoul

State-owned Enterprises and Joint Ventures

Another consideration with respect to Beijing’s commitment to the semiconductor sector is the fact that, across all segments in the supply chain, nearly 43% of the registered capital is linked to SOE’s or government-owned JV’s.

On the one hand, some Chinese SOE’s have been criticized for poor financial performance and return on equity (ROE). And the high-tech investment fund established in conjunction with Xinhua University has had several conspicuous failures.

On the other hand, the government’s direct participation in the chip sector gives the companies it controls (directly or indirectly) numerous advantages in the form of grants, reduced utility rates, favorable loans, significant tax breaks, and free or discounted land. A recent study by Boston Consulting Group found that the capex (capital investment and operational costs) for Chinese foundries was 37% less than those in the US.

Relative TCO for CH Manufacturers - Logic Chips

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Relative TCO for CH Manufacturers - Logic Chips

Data Source – SIA / BCG

Relative TCO for CH Manufacturers - Memory

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Relative TCO for CH Manufacturers - Memory

Data Source – SIA / BCG

Relative TCO for CH Manufacturers - Analog Chips

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Relative TCO for CH Manufacturers - Analog Chips

Data Source – SIA / BCG

CHART NOTES

  • TCO is the relative 10-year capex benchmarked against the capex for a comparable US factory (100).
  • CHIN-01 and CHIN-02 refer to TCO with and without technology sharing, respectively. 

WTO Trade Complaint

Although not part of the government’s strategic plans, China filed a WTO trade complaint in December 2020, arguing that the US sanctions imposed in October 2022 are illegal.

The US Trade Representative’s office countered that the October 2022 sanctions are a security matter and therefore the WTO does not have jurisdiction in this matter. It’s also worth noting that, in other trade disputes with China, the US has prevented proceedings from reaching a final decision, a tactic that is likely in this matter.

Outcomes

Disclaimer

Current chip sales and product development in this section, as well as future projections based on current CAGR and announced investments, are all based on data pre October 2022 US sanctions. The actual impact of those sanctions was not known at the time this article was written.

Local Market Participant Growth

In 2020, approximately 15,000 new companies were registered in the  semiconductor sector, many in the upstream software and fabless design segments.

Due to US sanctions. we expect that most new chip companies will focus on design and foundry services in the mature 28nm market segment. Nevertheless, there are a number of established companies and startups that have announced advanced sub-10nm projects.

Advanced Technology Commitments

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Data Source – SIA

Sub-10nm Capabilities

While the above-mentioned projects are aspirational (i.e. no announced successes), SMIC, China’s largest chip foundry, has in fact announced what may be a major breakthrough in sub-10nm technologies.

According to an analysis by Tech Insights, SMIC’s quasi-7nm process is an early success in China’s quest to break into the advanced chip market with home-grown technology that sidesteps the need for banned extreme ultraviolet (EUV) lithography equipment from ASML. While EUV technology is not absolutely necessary for 7nm chips, using earlier deep ultraviolet (DUV) lithography is a more complex manufacturing process.

Furthermore, the chips produced to date are targeted at the crypto mining market, which does not need a true 7nm chip with integrated scaled logic and memory bitcells.

On the one hand, China is still two generations behind western semiconductor companies, which are currently developing 2nm chips. On the other hand, the fact that SMIC was able to achieve even this level of design and production is an early indicator that China does indeed have the ability to develop its own design and lithography technologies.

Increased Manufacturing Capacity

As of 2021, China leads the world in announced plans to expand fab foundries, with 28 new projects announced in 2021 alone. In anticipation of further US sanctions, government policy has directed most new fab projects to focus on mature 28nm processes (see notes on SMIC’s 7nm announcement below).

As of late 2021, the foundry segment had added an additional 500K wafer per month (WPM) in local manufacturing capacity for 28nm processes. A nominal 10K WPM had been added for advanced sub-10nm processes.

Global Semiconductor Sales – Chinese Market Share Growth

While there is no one single factor to account for China’s progress on the global stage, nevertheless Chinese chip sales have seen an impressive rise over the last five years – global market share has risen from $13 billion, a 3.8% market share, to $39.8 billion in 2020, a 9% market share.

China chip sales are now growing at a 30% CAGR, which puts mainland manufacturers on trajectory to reach $116 billion by 2024, which would surpass Japan, Korea, the EU and Taiwan.

Note that, due to US sanctions, most of this growth will be in the mature 28nm segment. At some point, we expect technical breakthroughs that will enable local semiconductor fabless and foundry companies to penetrate the sub-10nm market.

Local Market Participant Growth Rates

As of 2020, the mainland Chinese semiconductor sector has seen impressive growth in all three segments of the integrated supply chain – fabless design (+36%), foundries (+32%), and OSAT (+23%), as well as integrated design and manufacturers (+23%).

Top Chinese Chip Firms - Revenue ($B) (2020)

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Top Chinese Chip Firms - Revenue ($B) (2020)

Data Source – SIA

Update – Projected Semiconductor Market Slowdown (2023)

In spite of all the positive news in terms of capex investment, new registrations, advanced technology projects, and SMIC’s 7nm breakthrough, 2023 is likely to be a challenging year for China’s semiconductor market.

First, US sanctions are going to have a chilling effect on mainland companies’ near-term access to design and lithography technologies – China will need at least 5 to 10 years to develop home-grown alternatives, which will trigger a slow-down in some sub-sectors.

Second, industry analysts are forecasting a 4% decline in the global semiconductor market, due to a downturn in consumer demand for end-user devices such as smartphones and computers, as well as corporate plans to scale back data center expansions to 2.8% in 2023.

SINOLOGIX Analysis and Commentary

Thriving Chip Sector (in spite of sanctions)

The Chinese government has long anticipated pushback by the US an other western governments in response to its policies dating back to the 2008 TTP. MIC25 further inflamed concerns that China was on a trajectory to at least rise to parity with, or overtake,  the US as the technology and market leader in the chip sector.

The sanctions described in Part 1 of this series clearly have had a near-term impact on China’s ambitions to acquire and/or develop advanced sub-10nm design and manufacturing technologies. Most western analysts believe that the October 2022 sanctions will be the final nail in the coffin that will set back China’s ambitions by at least 10 years.

We won’t speculate on the impact vis-à-vis sub-10nm design and manufacturing capabilities. But when viewed from an aggregate industry perspective, two trends will prevail.

First, China will not only maintain its dominance in the mature 28nm process market, but will likely increase its market share in this important sub-segment. With a 37% cost advantage in mature chip manufacturing, it’s unlikely that western chip foundries will be able to compete in this cost-sensitive commodity market.

Second, while many analysts question the viability of a hybrid planned/market strategy in the rapidly changing semiconductor industry, there are numerous examples of China successfully bootstrapping previously non-existent industries – high-speed rail, mobile communications, and aerospace are just a few instances where China has developed world-class capabilities in less than two decades.

Granted, those successes occurred under more liberal access to western technologies, but  the government’s strategic approach to technical self-sufficiency in the chip sector has a greater probability for success than what might otherwise occur in a free-market economy.

  • Long-term objectives that provide economic elasticity for projects that may not have a near-term ROI.
  • Government financial support in the form of direct investment and various subsidies.
  • Coordinated and focused research in the form of regional technology centers.
  • Technology and data sharing to support a “whole-of-nation” approach.
  • Ability to sustain razor-thin margins unacceptable in western markets.

Finally, it’s worth noting that, while China may be handicapped in terms of access to advanced chip technologies, the primary objective for US sanctions is to limit China’s ability to develop advanced AI and supercomputing applications for both military and commercial use cases. China has demonstrated both a willingness and ability to use a kind of “brute-force” approach to AI and supercomputing that is not entirely reliant on state-of-art hardware. To that end, China’s AI sector seems to be flourishing.

It remains to be seen whether China can overcome the constraints of US sanctions. We believe that, in the long-term, the Chinese semiconductor sector will thrive in both the mature 28nm and the advanced sub-10nm segments.

NOTES

References and Disclaimers

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Works Referenced

Ashwin Kaja, Ting Xiang. “China's 14th Five-Year Plan (2021-2025): Spotlight on Semiconductors.” Global Policy Watch, 14 Mar. 2022, https://www.globalpolicywatch.com/2021/04/chinas-14th-five-year-plan-2021-2025-spotlight-on-semiconductors/.

“Biden Needs More than $52 Billion to Counter China in Chips.” Bloomberg.com, Bloomberg, 9 June 2021, https://www.bloomberg.com/news/articles/2021-06-09/biden-will-need-more-than-52-billion-to-counter-china-in-chips.

“China's 14th Five Year Plan.” Global Policy Watch, https://www.globalpolicywatch.com/wp-content/uploads/sites/45/2021/04/1-14th-FYP-Article-SEM-14th-FYP-Mark-Up-Draft-8.pdf.

DanRosso. “China's Share of Global Chip Sales Now Surpasses Taiwan's, Closing in on Europe's and Japan's.” Semiconductor Industry Association, 10 Jan. 2022, https://www.semiconductors.org/chinas-share-of-global-chip-sales-now-surpasses-taiwan-closing-in-on-europe-and-japan/.

“Disruptive Technology: 7nm SMIC Minerva Bitcoin Miner.” TechInsights, https://www.techinsights.com/blog/disruptive-technology-7nm-smic-minerva-bitcoin-miner.

“Dutch Lithography Giant CEO: U.S. Export Restrictions to China Will Promote China's Successful Development of Its Own Technology.” Teller Report, Teller Report, 26 Jan. 2023, https://www.tellerreport.com/business/2023-01-26-dutch-lithography-giant-ceo--u-s--export-restrictions-to-china-will-promote-china-s-successful-development-of-its-own-technology.SJz1WGKx2s.html.

Shen, Qilai. “China Chases Chip-Factory Dominance-and Global Clout.” The Wall Street Journal, Dow Jones & Company, 27 July 2022, https://www.wsj.com/articles/china-bets-big-on-basic-chips-in-self-sufficiency-push-11658660402.

“SIA Factbook 2019.” Semiconductor Industry Association, https://www.semiconductors.org/wp-content/uploads/2021/05/2021-SIA-Factbook-May-19-FINAL.pdf.

“Taking Stock of China’s Semiconductor Industry.” SIA, https://www.semiconductors.org/wp-content/uploads/2021/07/Taking-Stock-of-China%E2%80%99s-Semiconductor-Industry_final.pdf.

Wang, Che-Jen. “China's Semiconductor Breakthrough.” – The Diplomat, For The Diplomat, 23 Aug. 2022, https://thediplomat.com/2022/08/chinas-semiconductor-breakthrough/.

Williams, Lara. “China to Take Lead in Global Semiconductor Growth.” Investment Monitor, 27 July 2022, https://www.investmentmonitor.ai/features/china-lead-global-semiconductor-growth-2030/.

Writer, Staff. “World Semiconductor Market to Shrink 4% in 2023 as Server Investment Slows.” Nikkei Asia, Nikkei Asia, 29 Nov. 2022, https://asia.nikkei.com/Business/Tech/Semiconductors/World-semiconductor-market-to-shrink-4-in-2023-as-server-investment-slows.

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China GDP vs UST Holdings (2010-22) (billions)

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China GDP vs UST Holdings (2010-22) (billions)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Western media is starting to pay attention to China’s efforts to influence members of the so-called Global South, or more specifically the BRICS+ and Shanghai Cooperation Organization (with substantially overlapping membership), to denominate international trade in the Chinese Renminbi (RMB), aks the Chinese Yuan (CNY) and/or other local currencies. For very different reasons, Russia has promoted the idea of an entirely new currency for trade settlement. This is an accelerating trend among countries that have formed close economic and political relationships with China.

Coincident with the pivot to the RMB for trade settlement is a growing sentiment among the BRICS+ and SCO members that holding USD as their primary reserve currency poses a risk in the event the US declares sanctions and/or freezes a country’s assets, as happened with Russia and Belarus in 2022.  

The combined effect of these two trends should be observable in a country’s US Treasuries holdings, and that’s exactly what we’re seeing in the chart above – China’s USD and Treasuries holdings peaked at $1.277 trillion in 2013 and declined by more than 32% in 2022.

Things change “slowly at first, then all at once”...

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