China’s semiconductor sector has emerged as a cornerstone of its technological ambition, propelled by significant government investment and a strategic push for self-sufficiency. In 2024, the industry was valued at £134.2 billion, with projections indicating a compound annual growth rate (CAGR) of 7.8% from 2025 to 2034, potentially reaching £283.7 billion by 2034. This growth reflects China’s determination to reduce reliance on foreign chips, which accounted for 83% of its £185.5 billion chip consumption in 2020, and to establish itself as a global leader in semiconductor innovation. The sector’s rapid development, driven by advancements in artificial intelligence (AI), 5G, and electric vehicles (EVs), positions China at the forefront of the global tech race, though geopolitical tensions and technological gaps present significant challenges.

China’s semiconductor industry began in earnest during the 1980s, with early efforts like Project 908 and Project 909 aimed at building domestic capabilities. These initiatives, including partnerships with foreign firms like NEC, faced setbacks due to outdated technologies and global market downturns. A pivotal shift occurred in 2014 with the National Integrated Circuit (IC) Industry Investment Fund, or “Big Fund,” which injected £17.6 billion initially, followed by £23.3 billion in 2019 and £36.8 billion in 2023. The “Made in China 2025” strategy set ambitious targets of 40% self-sufficiency by 2020 and 70% by 2025, though the actual figure reached only 30% by 2025, underscoring the complexity of achieving technological autonomy. Despite this, China’s 53.7% share of global chip consumption in 2020 highlights its position as the world’s largest semiconductor market.

Key players dominate China’s semiconductor landscape. Semiconductor Manufacturing International Corporation (SMIC), the country’s largest foundry, reported £9.77 billion in revenue in Q1 2024, a 19.7% year-on-year increase, making it the world’s second-largest pure-play foundry behind Taiwan’s TSMC. SMIC’s production of 7-nanometer chips, such as the Kirin 9000S for Huawei’s Mate 60 Pro, demonstrates its ability to innovate despite U.S. export controls. “SMIC is at most only a few years behind Intel and Samsung,” noted industry analyst Dylan Patel, highlighting its progress in advanced node manufacturing. Hua Hong Semiconductor, the second-largest Chinese chipmaker, holds a 2.6% global market share, focusing on mature node chips. HiSilicon, a Huawei subsidiary, designs advanced chips like the Kirin series, while Yangtze Memory Technologies Corporation (YMTC) has achieved a 5% global market share in NAND flash memory, with plans to surpass 10% by 2027. Other notable firms include Hygon Information Technology, producing x86-based CPUs, and Loongson Technology, developing MIPS-compatible microprocessors for domestic applications.

Opportunities for partnerships are abundant, particularly in mature node manufacturing and emerging technologies. China’s dominance in EVs, with 35 million vehicles projected for 2025, drives demand for power management and sensor chips, creating openings for collaboration with foreign firms. For instance, joint ventures like Vanguard International Semiconductor’s partnership with NXP to form VisionPower Semiconductor Manufacturing Company in Singapore highlight the potential for cross-border cooperation. The rise of 5G, with China projected to have 430 million users by 2025, further fuels demand for advanced chips, offering opportunities for firms specialising in AI and IoT applications. China’s focus on RISC-V architecture, supported by companies like Alibaba’s T-Head, presents a pathway for partnerships in open-source chip design, reducing reliance on Western intellectual property like Arm.

However, the sector faces significant risks. U.S.-led export controls, tightened in October 2023, restrict access to advanced lithography equipment, particularly extreme ultraviolet (EUV) machines critical for sub-5nm chips. ASML, a Dutch firm with a monopoly on EUV technology, remains a chokepoint, as noted by the Federal Reserve: “A single Dutch company, ASML, has 100% market share for the most advanced lithography machines.” China’s Shanghai Micro Electronics Equipment (SMEE) has developed a 28nm lithography machine, but closing the gap to 5nm or below remains a challenge. Geopolitical tensions, including U.S. tariffs and sanctions on firms like Huawei, exacerbate supply chain vulnerabilities. “U.S. trade restrictions on China can hamper its global position as a manufacturing hub,” warned Fortune Business Insights. Overcapacity in legacy chips, driven by aggressive subsidies, risks price wars that could destabilise global markets. Additionally, a talent shortage and high capital costs (SMIC’s 2023 budget rose 18% to £5.82 billion) pose internal challenges.

Growth projections remain optimistic despite these hurdles. The global semiconductor market is expected to grow at a 15% CAGR from 2025 to 2030, reaching £777.7 billion by 2030, with China’s share projected to increase significantly. The memory segment, led by firms like YMTC, is anticipated to surge by 24% in 2025, driven by high-bandwidth memory (HBM) for AI applications. China’s focus on mature nodes (28nm and above), which account for 40% of the global market by 2030, aligns with its strengths in automotive and industrial applications. “Chinese foundry players are performing well in 2024, with a high utilisation rate of around 87% expected in 2025, thanks to the ‘Design by China + Manufacturing in China’ policy,” stated a Wikipedia analysis. Investments in 110 new fab projects since 2014, totalling £151.9 billion, underscore China’s commitment to expanding capacity, with 40 fabs operational and 38 under construction.

The integration of AI and 5G technologies is a key driver of growth. China’s leadership in 5G, with over one million base stations and 80% year-on-year growth in 5G smartphone shipments in 2021, creates a robust domestic market for semiconductors. The automotive sector, particularly EVs and autonomous driving, demands sophisticated chips for battery management and sensors, further boosting demand. “The semiconductor supply chain, spanning design, manufacturing, testing, and advanced packaging, will create a new wave of growth opportunities,” said Galen Zeng, Senior Research Manager at IDC Asia/Pacific. However, the industry’s reliance on government subsidies, estimated at £116.3 billion over the past decade, raises concerns about sustainability and market distortions, as noted by the Semiconductor Industry Association.

China’s semiconductor sector stands at a crossroads, balancing remarkable progress with formidable challenges. Breakthroughs like SMIC’s 7nm chips and YMTC’s 200+ layer NAND flash demonstrate innovation, yet the lack of EUV technology and geopolitical headwinds limit cutting-edge advancements. “It is entirely possible that five or ten years from now there is a far more developed indigenous ecosystem for Chinese chip equipment suppliers,” suggested Feldgoise in a CKGSB Knowledge article, pointing to long-term potential. As China continues to invest heavily and foster partnerships, its semiconductor industry is poised to reshape global supply chains, offering both opportunities and risks for international stakeholders.

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On 24 October, a notice went around Chinese chip maker Yangtze Memory Technologies Co Ltd (YMTC): the company had terminated the contracts of all US citizens and green card holders. Just like that, a number of senior employees in core research and development positions were forced out of the company as YMTC rushed to ensure compliance with the US CHIPS and Science Act. As Foreign Policy remarked: “after four years of watching Donald Trump inflict flesh wounds on China with his ineffectual trade war, US President Joe Biden appears to have found the jugular.”  

The CHIPS and Science Act (CHIPs stands for ‘Creating Helpful Incentives to Produce Semiconductors’)  is a new US export control, effectively undermining China’s ability to import, manufacture and export the semiconductors that run the world. The legislation not only restricts foreign semiconductor manufacturers from selling specific chips to China or providing Chinese firms with the technologies required to manufacture them, but also encourages them to invest in facilities in the US through the issue of subsidies. The Act will unlock some $280 billion worth of financing provided the recipient does not build any similar facilities in China. It is a major piece of legislation that marks the most significant shift in US policy toward shipping technology to China since the 1990s, given that it suggests that President Biden now wants to contain China’s advances rather than just level the playing field. 

It is a policy that harks back to the tough regulations implemented at the height of the Cold War. And while “China isn’t going to give up on chipmaking… this will set [them] back years,” says Jim Lewis, a technology and cybersecurity expert at the Centre for Strategic and International Studies (CSIS).

Background 

In 1947, researchers at Bell Labs, a subsidiary of the telecommunications giant AT&T, invented the transistor, a switch that controls electric current and is a building block of modern electronics. Within the decade, researchers were placing several transistors on a slab of silicon to make an “integrated circuit” or chip. Today, chips are used in everything from mobiles to missiles and have become fiendishly complex. 

Prior to the Covid-induced supply chain bottlenecks brought about by port closures in various countries – including China – and a spike in shipping costs, the fact that the Taiwanese Semiconductor Manufacturing Company (TSMC) and Samsung manufacture almost all of the global supply of the most advanced chips did not seem to bother American policymakers all that much. Trump-era export controls prevented either company from manufacturing chips for firms on the government’s trade blacklist, plus it seemed inconceivable that Beijing would use military means to level the playing field with America, South Korea and Taiwan. 

Now, however, all the labs and ‘fabs’ – short for fabrication (read: manufacturing) facilities – seem far more strategically vulnerable, leading the Biden administration to try and entice some of that capability back to the US.

The race to self-sufficiency 

China has big ambitions in the chip race. Beijing currently spends more on importing semiconductors than it does on importing oil, according to a new book titled Chip Wars by Chris Miller. Since 2014, President Xi Jinping has made tens of billions in state subsidies available to improve indigenous capability. By measure of new chip companies registered, this innovation drive has been hugely successful: some 22,000 new chip companies registered in China in 2020. But China still imports most of its advanced chips, and Chinese firms continue to rely heavily on imported manufacturing technologies to produce less-advanced semiconductors. The industry has also witnessed several corruption scandals. 

The US is not hanging about either. As the White House press statement accompanying the CHIPS and Science Act points out: “America invented the semiconductor, but today produces about 10% of the world’s supply — and none of the most advanced chips.” That being so, the Biden administration matches Beijing’s sense of purpose when setting out its vision: construction of manufacturing facilities has increased 116% over the past year; total business investment in semiconductor manufacturing is at $150 billion, and US companies have announced a further $50 billion following the announcement of the policy; US semiconductor manufacturing will grow by more than 50% over the next five years; and government expenditure on R&D will return to levels not seen since NASA put a man on the moon. 

Neither China nor the US is likely to be particularly successful. Putting the rhetoric to one side, self-sufficiency, at least, will probably continue to elude the pair of them. Despite all the money the Biden administration is offering TSMC and Samsung, both companies plan to keep the bulk of their investment and know-how at home, only agreeing to build new fabs for conventional chip manufacturing in Arizona and Texas. And while China holds the upper hand in terms of its ability to leverage the advantage that scale brings to chip manufacturing, that remains negligible as long as the blueprints for advanced chip manufacturing machines remain beyond its grasp.

Technological power meets geopolitical power 

The CHIPS and Science Act represents a painful blow to China’s ambitions to rival the US in the semiconductor industry, and President Biden delivered it just as President Xi was setting out to delegates at the 20th Party Congress how China’s “great rejuvenation” would be achieved at least in part through making great technological strides. The CHIPS and Science Act demonstrates that “the US continues to hold tremendous economic and technological advantages over China, which, as Biden has signalled, Washington is becoming more willing to use against its Communist competitor,” according to long-time China watcher Michael Schumann. And whether China can retaliate in such a way that hurts US interests to the same extent without harming itself remains unclear. Beijing could, theoretically, target Apple’s manufacturing hubs in China, or rare earth materials exports to the US, but other markets (such as India and Vietnam) would jump at the chance to plug the gap at Beijing’s expense. 

Could this come back to bite the US?

Recently, German Chancellor Olaf Scholz travelled to Beijing accompanied by a delegation of German businesses, even though European leaders have jointly questioned Scholz’s decision to unilaterally meet with President Xi. US allies in the Asia-Pacific region have also demonstrated they are not always in alignment with the White House through various means. Chinese policymakers will probably be watching closely to see whether the US can corral its allies into adopting similarly tough measures designed to contain China’s technological development. US senior government officials briefed Reuters on the CHIPS and Science Act ahead of its announcement. They admitted that not only had the US not secured any promises that allied nations would implement similar measures and that discussions with those nations are ongoing, but also that the measures “risk harming US technology leadership if foreign competitors are not subject to similar controls” and can continue to collaborate with China and Chinese firms. 

The CBBC view

The race is on, and both the US and China will be eager to rally support to their sides. The US will probably find that its chip-manufacturing or exporting allies are somewhat reluctant to join in curtailing the capabilities of one of their biggest customers. It’s also hard not to detect a whiff of protectionism in the measures. That said, foreign know-how is already being forced to abandon Chinese firms, so even if the US acts unilaterally, the CHIPS and Science Act will have some effect. The measures could be fairly devastating if Washington is able to align allies with its cause. UK companies should monitor their compliance obligations vis-à-vis US-China trade tensions and watch to see if the UK government announces any similar regulatory changes.

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