Chinese trillion dollar hurdle to rank among world’s best in semiconductor industry


This column last month, along with global financial markets, questioned why Beijing would hurt its own tech stars, such as Ant Financial, Didi Chuxing and TAL, with a barrage of new regulations. My thought was that President Xi Jinping was waving a red flag at China’s tech talent: divert your attention from splashing mainstream tech: online loans, ridesharing, tutoring games, etc. Focus on core business-critical technologies, for example, semiconductors. Xi’s bid for at least 70% national self-sufficiency in critical technologies by 2025 is hampered by China’s weakness in this most strategic technology of all.

A little history. Fifty years ago, last November, the American Intel laid the foundations for the digital age with the 4004, the world’s first microprocessor. The project had started in 1969 in partnership with the Japanese Busicom, which had negotiated the exclusive rights of the 4004 in the calculators.

Intel retained the rights for other uses which in the late 1970s would include the personal computer. The rest, as they say, is history. Intel, which designs and manufactures both chips, has never given up its overall sales lead and enjoys the advantages of a global scale.

China gets semiconductors. It is the world’s second largest consumer of semiconductors, a little behind the United States and will soon catch up. But mainland China is miles from the United States when it comes to manufacturing advanced microprocessors, which power everything from giant server farms to the world’s 5 billion mobile phones. Until now, China’s major role in the semiconductor world has been that of assembler and packager.

The absence of a mainland-based company among the world’s leading semiconductor ranks is a strategic black hole for Beijing. Of the world’s top 15 semiconductor companies by sales, eight are in the United States. Two each are located in Europe, South Korea and Taiwan. Japan has one. Given that semiconductors are the fourth most traded commodity in the world (by value), behind crude oil, refined oil and cars, it’s curious why China has yet to reach the top 15. It is assumed that Xi knows this cannot hold up if China is to achieve basic technological independence by 2025.

Mainland China’s semiconductor flagship products are from Shenzhen Huawei in design and Shanghai Minimum wage in contract manufacturing. The two compete on the world stage; neither has made it to the world’s top 15 semiconductor sales. (Huawei, of course, like Apple, derives most of its sales from mobile phones, not chips.) Huawei is a world-class company, but its ability to tap markets representing the majority of global GDP has been limited by the policies of the former Trump administration.

Thus, the minimum wage is lagging behind China in its race for basic technological independence. In 2020, the global share of SMIC in contract chip manufacturing was only 4%, compared to Samsungis 18% and TSMC‘s 50% (and for advanced chip manufacturing even more dominant at 80%). Most analysts estimate that SMIC is three to four years behind TSMC’s technology. This gap has forced the minimum wage to be more competitive at the commodity level – phones, appliances, cheap cars, etc. What could bring the minimum wage to the forefront? In short, Huawei. The Shenzhen superstar needed a top factory partner since Trump’s actions in 2020 prevented Samsung and TSMC from fully serving Huawei.

China will also need to develop a world-class chip-making equipment business. This is not trivial. Engraving transistors on silicon at the scale of 5 nanometers (the width of a human hair is about 90,000 nanometers) is a technological feat. Very few equipment companies can do this.

The investment required to realize Xi’s dream of basic technological independence, in semiconductors alone, is estimated to be between $ 1,000 billion and $ 3 trillion. But achieving this goal will take more than money. It will take trust in the scientists, engineers, bold thinkers and mavericks, along with the experimentation and creative funding needed to make it happen. This cannot happen automatically by a top-down command. Meanwhile, Intel, Samsung, TSMC and others are not standing still.

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