Semiconductors at the Heart of the US-China Tech War - How a New Era of Techno-Nationalism is Shaking up Semiconductor Value Chains
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JANUARY 2020 Semiconductors at the Heart of the US-China Tech War How a New Era of Techno-Nationalism is Shaking up Semiconductor Value Chains BY ALEX CAPRI RESEARCH FELLOW, HINRICH FOUNDATION
Contents
CONTENTS 2
LIST OF GRAPHS 4
LIST OF TABLES 4
FOREWORD 5
EXECUTIVE SUMMARY 6
INTRODUCTION 7
China’s Semiconductor “National IC” Plan 8
US – Counter Measures 9
The Proliferation of Non-Tariff Measures (NTMs) 9
Impact on Trade Flows and Global Value Chains 10
REPORT OBJECTIVES AND FOCUS 11
1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS 13
MANUFACTURED?
What are Semiconductors? 14
How are Semiconductors Manufactured? 15
Semiconductor Value Chains Operating Models 16
Semiconductor Manufacturing Cost Breakdown 17
2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS 20
The Large Gap between China Semiconductor Companies
and their Competitors 21
Dominance of American Semiconductor Companies 22
3. CHINA’S SEMICONDUCTOR INDUSTRY 23
China’s Technology Gaps in Semiconductors 23
Can China Produce Semiconductors? 24
Chinese Fabless Companies: Slow but Steady Design Progress 24
New Fab Projects in China 25
SPOTLIGHT: Huawei’s Latest Microchip Design Capabilities 26
Semiconductor Demand by Chip Size 27
SPOTLIGHT: China’s State-backed Production of Memory
Chips Could Lead to Overcapacity 29
4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND 30
INDUSTRIAL POLICIES
Made in China 2025 30
China National Integrated Circuit Industry Investment Fund (China’s Big Fund) 31
Inward and Outward Investment Strategies 32
SPOTLIGHT: China’s Inward and Outward Investment Strategies 33
SPOTLIGHT: The Impact of Foreign-Invested Enterprises (FIE’s) on China’s GDP 34
SPOTLIGHT: Global Semiconductor Sales: China versus other Markets 35
The US China Decoupling of Semiconductor Companies 36
Technology Acquisitions by Chinese State-funded Actors 37
CASE STUDY: California Chip-Designer Atop Tech and a
Mysterious Chinese Buyer 38
5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS 39
Export Controls of “Dual Use Technologies” 39
China’s Military-Civil Fusion Initiative 41
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Contents
Wassenaar and the International Application of Export Controls 41
Export Control Classification Numbers (ECCNs) and Supply Chain Traceability 42
Tracing ECCN’s in the Semicon Value Chain 43
Blacklisted Entities/Parties, Specially Designated Nationals (SDNs) 44
Semiconductor Value Chains are Deeply Entangled 44
CASE STUDY: American Technology Inside Huawei’s P30 Smart Phone 45
Chinese Acquisitions of US Companies 46
Blocked Chinese Technology Acquisition Deals 46
SPOTLIGHT: Mergers And Acquisitions in the Semiconductor Industry 47
6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS 49
The “De-Americanization” of Global Value Chains 49
SPOTLIGHT: De Minimis Example 50
CASE STUDY: International Traffic in Arms Regulations (ITAR regulations) 52
The Second Incorporation Rule 52
Moving More Value-added Operations out of the United States 53
Ring-fencing and Off-Shoring Operations —China and Beyond 54
Vertically Integrated Semiconductor Value Chains 54
Exclusions and Waivers on Export Controls 55
SPOTLIGHT: Increased Cyber-Security Threats 55
Federal Register Notices 56
Decoupling Due to Excessive Regulations 57
Specially Designated and Blocked Persons List (SDN) 57
7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES 58
Increased Government Intervention 58
Trans-Atlantic Technology Alliance 59
Semiconductors and Techno-Nationalism 60
The Evolution of China’s Techno Nationalism and Techno Mercantilism 61
Should the West Emulate China’s Industrial Policies? 61
The IDAR Methodology 62
SPOTLIGHT: Milestones of Chinese Techno-nationalism 63
The Scale of China’s Technology Laboratory 64
The Proverbial Horse Race 65
Military Involvement in Semiconductor Research 66
SPOTLIGHT: The Galapagos Syndrome 67
8. THE DECOUPLING OF US-CHINA VALUE CHAINS 68
The Decoupling of Talent 69
De-Americanization of Value Chains by Chinese Companies 70
The European Union and China 70
Japan in the Semiconductor Landscape 71
South Korea 72
Qualcomm-Samsung 5G Axis 73
SPOTLIGHT: Taiwan: A Strategic Semiconductor Hotbed 74
CONCLUSION 77
APPENDIX A: REFERENCES 79
RESEARCHER BIO: ALEX CAPRI 84
FOOTNOTES 85
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Contents
LIST OF GRAPHS
Graph I: Global Semiconductor Sales Revenue from 1987 to 2020 7
(in billion US dollar)
Graph II: China’s Top Imports and Exports 8
Graph III: Semiconductors: At the Core of all Future Industries 13
Graph IV: The Semiconductor Ecosystem 15
Graph V: Rising Costs of Keeping up with Moore‘s Law and 17
Growing Release Dates for Intel lead-generation Chips
Graph VI: Highly Integrated Semiconductor Value Chains 18
Graph VII: Geographic Dispersion: Semiconductor Value Chains 19
Graph VIII: Location of Semiconductor Companies, in Global Value Chains 19
Graph IX: Global Market Share (Sales: Company Nationality by Market Share) 20
Graph X: Top Semiconductor Companies 2018 21
Graph XI: Global Semiconductor Sales and American Semiconductor 22
Companies by Market Share
Graph XII: China’s National Champions vs. Global Leaders 23
Graph XIII: Market Share of China’s Semiconductor Firms 24
Graph XIV: Semiconductor Demand by Microchip Size 27
Graph XV: Dominance of Foreign Firms in China’s Semiconductor Market 28
Graph XVI: Made in China 2025 Foundry Targets 31
Graph XVII: US Semiconductor Firms Joint Ventures in China, 2014-2018 34
Graph XVIII: Global Semiconductor Sales: China versus 35
US Sales: American & Foreign Firms
Graph XIX: US Semiconductor Company Revenue from China Sales (2018) 36
Graph XX: Made in China 2025 & Export Controls in the US 40
Graph XXI: Export Control Classification Numbers (ECCNs) 43
along a Semiconductor Global value chain
Graph XXII: Export Control Classification Number 3C002.a 46
- Selected List of Chinese Restricted Entities 9/2019
Graph XXIII: CFIUS Reviews of Proposed Acquisitions and Mergers 47
Graph XXIV: De Minimis Rule Example 1 50
Graph XXV: De Minimus Rule Example 2 51
Graph XXVI: Second Incorporation Rule 53
LIST OF TABLES
Table I: Operating Models: Semiconductor Industry 16
Table II: 2017 China’s IC Design Industry’s Top Ten Company Ranking (PWC) 25
Table III: Huawei Smartphone American Technology Providers 45
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Foreword
Semiconductors have become essential original research into the causes and
to our modern life and the world’s effects of trade issues. The ongoing
commercial and military technology. disintegration of technology-driven
Extraordinary innovations have global value chains (GVCs) will have
occurred in semiconductors in the last impacts on growth, innovation and
20 years, for the benefit of consumers geopolitics.
and industry.
This report discusses whether the
However, the commercial competition self-sufficiency narratives and national
between industry participants security-related neo-mercantilist
from the US and China (and indeed, approaches that are now playing out
participants from Taiwan, South Korea in the semiconductor industry – what
and Japan) has not been allowed to the author calls “techno-nationalism”
develop in a market-driven way. Whilst – might erode the last 70 years of
value chains have developed across gains from trade. The report looks at
borders in the search for competitive the impacts that a fragmentation of
advantage, government intervention semiconductor value chains along
for long term geopolitical purposes geopolitical lines may have in the
has distorted markets. Recent events longer term on innovation, economic
threaten to disintegrate previously transformation and growth.
integrated value chains, dilute the
efficiencies gained over past decades, We initiated this research to trigger a
fracture common standards and slow broader discussion about the effects
innovation. of the US China technology rivalry
on sustainable and inclusive growth.
Because of the ubiquitous nature of Please join us in the discussion.
semiconductors, much is at stake in
this new era, including fundamental
values about how business enterprises
contribute to the national security
agenda. Is it possible that the
unapologetic industrial policy approach
of the Chinese Communist Party could
find its way into liberal democratic
economies?
The Hinrich Foundation focuses on Merle Hinrich
advancing mutually beneficial and
Founder
sustainable global trade. We support
Hinrich Foundation
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Executive
Summary
This report analyzes the growing US- subsidies and funding as well as forced
Techno-nationalism is at the core China tech war and how it is impacting technology transfer and intellectual
of the US-China tech war. Tech- the global semiconductor industry — property acquisition mandates. It also
nationalsim is a set of mercantilist-like the critical technology at the core of focuses on countermeasures taken by
policies that link tech innovation and the world’s commercial and military the US government, such as export
enterprise directly to the national technology. controls, investment restrictions, the
security policies, economic prosperity BIS’s Restricted Entity List, blocked
and social stability of a nation. The purpose of the report is to technology acquisitions and new
answer questions about how the industrial policies.
US-China tech war is changing global
value chains and trade flows in Finally, the study drills down into the
semiconductors, and how both state consequences and possible outcomes
and non-state actors are behaving in resulting from techno-nationalism,
this fluid landscape. including how companies devise
strategies to circumvent onerous
More specifically, this report attempts controls and mitigate collateral
to answer questions about government damage. This includes an analysis
intervention and protectionist policies of scenarios involving the so-called
and how they impact and influence US-China decoupling and “de-
behaviors in semiconductor value Americanization” of semiconductor
chains. To put the US-China tech war value chains, the fragmentation and
in context, the author defines and reshoring of global value chains, and
develops an emergent narrative: the formation of new corporate and
“Techno-nationalism”. national alliances.
This includes a focus on China’s
industrial policies, which employ state
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Introduction
The United States and China are in the And at the core of all these future
At stake is supremacy in the industries early stages of an historic tech war or technologies are semiconductors,
of the future: data analytics, robotics, era of techno-nationalism. which provide the vital materials
AI and machine learning, surveillance and circuitry necessary to produce
technology and 5G networks Techno-nationalism is a new strain microchips — which, in turn, are
of mercantilist thought that links required to operate everything from a
tech innovation directly to economic smart phone to an advanced satellite
prosperity, social stability and to the weapons system. In short, microchips
national security policies of a nation. In are the central nervous systems and
this regard, government intervention brains inside all new age technology.
in markets is justified as protection
against opportunistic or hostile state In 2018, global sales of semiconductors
and non-state actors. and related technology topped $468
billion.1 China’s semiconductor market
Techno-nationalism seeks to attain represents, by far, the world’s largest
competitive advantage for its own importer. Semiconductor-related
stakeholders, on a global scale, in technologies are China’s largest import
order to leverage this advantage for products, exceeding even its imports
geopolitical gain. of oil. 2
At stake is supremacy in the industries As will be revealed in this study, China
of the future: data analytics, robotics, depends almost entirely on American
AI and machine learning, surveillance and other foreign companies to supply
technology and 5G networks, to name its needs for integrated circuits, either
a few. as imports, or as foreign producers
within China’s domestic market.
Graph I – Global Semiconductor Sales Revenue from 1987 to 2020
(in billion US dollar) 3
500
450
400
350
300
250
200
150
100
50
0
2020*
2008
2000
2005
2009
2006
2004
2007
1999
2003
2015
2019*
2002
2016
1998
2018
1988
2014
1994
1989
1995
1996
2010
1993
2013
2017
1992
2001
1997
2012
1987
1990
2011
1991
Source: WSTS (2019) Sales revenue (in billion U.S. dollars)
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INTRODUCTION
China has rolled out ambitious Graph II: China’s Top Imports and Exports4
strategies to acquire and develop TOP IMPORTS (2017) TOP EXPORTS (2017)
semiconductor technology to reduce 250
its dependence on foreign producers.
200
Intergrated circuits Telephones
Crude petroleum Intergrated circuits
Iron ore Office machine parts
in billions US$
150
Cars Computers
Gold Broadcasting equipment
100
50
0
Source: https://oec.world/en/profile/country/chm/
The intensifying nature of the US-China One such initiative is the Made
tech war, combined with the scale in China 2025 government plan,5
and depth of China’s market—and the with some estimates putting the
massive economic gains it provides to Chinese Communist Party’s funding
American and foreign semiconductor commitment at $300 billion over a ten-
companies—creates a collision of year period.6
vested interests that has sparked
a flurry of protectionist policies in The Chinese Communist Party’s
Washington and elsewhere. semiconductor financing efforts go
well beyond Made in China 2025,
China’s Semiconductor however. For example, China’s official
“National IC” Plan government numbers claim that, as of
2019, some $29 billion of funding has
In an attempt to reduce its
been provided for the China National
dependence on American and other
Integrated Circuit Industry Investment
foreign semiconductor technologies,
Fund.7
as well as advance China’s own
innovation, the Chinese Communist
Simultaneously, the government has
Party (CCP) has rolled out ambitious
been pumping large sums of money
strategies to promote and fund the
into other technology funds, such as
development of China’s technology
Tsinghua Holdings, the technology
in critical sectors. This funding
investment arm of one of China’s
is earmarked for attracting key
top state-led universities, which the
investment and technology transfer
Chinese Communist Party has charged
into China as well as acquiring critical
with funding and advancing China
technology overseas, through state-
innovation in the semiconductor
backed acquisition initiatives.
industry.8
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INTRODUCTION
The US has passed a slew of laws
aimed at controlling the ownership
and export of strategic technology.
U.S. Counter-Measures propose that the ECRA’s newly added
In response to Beijing’s semiconductor tech controls also be adopted by its
initiatives, the U.S. passed the Export allies under the multilateral framework
Control Reform Act (ECRA), in 2018.9 of the Wassenaar Arrangement12,
This was born largely from a broader which includes 41 other member
narrative shift that links the level of countries. Meanwhile, the Foreign
development of a nation’s commercial Investment Risk Review Modernization
technology directly with national Act (FIRRMA)13 of 2018, enforced by
security —which increasing numbers of the U.S. Department of the Treasury,
policy makers in the U.S. military and has led to a substantial increase in
security establishment argue is more foreign investment reviews by the
important than trade deficits or tariff Committee on Foreign investment in
rates. the United States (CFIUS). As such, the
number of high-profile acquisitions of
Under the ECRA, The Department of US technology companies by Chinese
Commerce’s Bureau of Industry and entities have ground to a halt.
Security (BIS) is currently reviewing
the addition of new “emerging” The Proliferation of Non-
and “foundational” technologies,10 Tariff Measures (NTMs)
for inclusion on U.S. Department of The US-China technology rivalry is
Commerce’s Controlled Commodity driving an escalation of non-tariff
List (CCL)11, which would require export measures (NTMs), which could have
licenses for the sale and transfer of more profound effects on global supply
such technologies. At issue is the chains than tariffs.
relevance of “dual use,” which is
The most noteworthy NTMs include:
defined as a commercial technology
• Sanctions
or product which can be used for
• Export controls
military purposes–which would apply
• Licensing requirements
to virtually all of the industries of the
• Restricted entity lists
future.
• Blocked acquisitions and
investments
These new measures will spill over into
other markets, as the U.S. will likely
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INTRODUCTION
By definition, an export control is And then there are military, space and
US export controls are damaging simply a regulation that is put in place defense related articles as defined
American semi-conductor companies, to protect national security, promote under the International Traffic in Arms
with ripple effects throughout foreign or domestic policy, and, in Regulations (ITAR) in the US, which
extended global value chains. some instances, control the export of control the manufacture, sale and
items in short supply. An export control distributions of such items. Here, a
is not, by itself, a prohibition to sell or simple transaction with a restricted
buy something. party is forbidden. Many companies
are asking how broad might the ITAR
Export controls, however, mean that an controlled list become?
export license may have to be issued by
the appropriate government licensing Impact on Trade Flows and Global
agency to allow an exporter to sell, Value Chains
transfer or transport a product to a
The world’s semiconductor companies
foreign market, depending on where
are now caught in the middle of the
the final buyer is located, who the
US-China tech war.
buyer is, and how the controlled item
will be used. In almost all cases, when
Export restrictions on Huawei and
the facts surrounding a controlled item
other Chinese entities have inflicted
are reviewed, US government agencies
collateral damage on American
issue export licenses in the vast
semiconductor companies such as
majority of instances.
Broadcom, Qualcomm, Intel, Nvidia,
and others, while the ripple effects of
But NTMs such as export controls add
these actions are being felt throughout
a layer of uncertainty to GVCs and
extended global value chains.
threaten to turn a long-time supplier
into an unreliable supplier. Export
The US-China tech war presents an
controls also mean that a company’s
historic inflection point, therefore,
global value chains will be examined
for technology companies, with far-
under the proverbial regulatory
reaching consequences for trade flows.
compliance microscope, adding
This rivalry signals the beginning of
compliance costs, delays and risks.
a momentous shift in global value
chains. Multinational companies in the
Such was the case when the US
semiconductor industry and beyond
threatened to block the sale of
will need to react and adjust to this
American technology to Chinese
changing landscape.
telecoms company ZTE (which was later
rolled back). Subsequently, Huawei,
The ensuing sections of this report
HikVision, SenseTime and other key
delve into these issues and aim to
Chinese tech firms have been placed on
answer the key questions, outlined
the US Restricted Entities List.
below.
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10Report Objectives
and Focus
As the US-China tech war escalates, Key Sections of the Report
trade flows and supply chains involving To answer the above questions, the
semiconductors are being disrupted. research, data and analysis are broken
into eight distinct sections.
Key Questions
• What are semiconductor products? The report begins with an overview
Where are semiconductor of the complexity and nature of
products manufactured? What do semiconductor global value chains.
semiconductor value chains look Then it reveals the market leaders
like today and how extensive is and dominant players, and describes
the interconnectivity between the current semiconductor industry
international firms? landscape in China. This is covered in
the following sections:
• What countries produce the most
semiconductors? What are the top 1. What are Semiconductors and
semiconductor companies? How Where are Semiconductors
significant is their lead? Manufactured?
• Can China make chips and what 2. Top Semiconductor Companies,
are its current capabilities in the Innovators and Market Leaders
semiconductor industry?
3. China’s Semiconductor Industry
• How will non-tariff measures such
as export controls, export licensing The report then delves into China’s
and BIS entity lists disrupt the funding initiatives and the Chinese
semiconductor industry? Communist Party’s techno-nationalist
efforts to promote the development
• Are semiconductor value chains
of Chinese semiconductor companies
destined to fragment along
geopolitical lines? or national champions. The analysis
features a deep dive into its inward
• How will companies mitigate risks and outward strategies to attract
and circumvent industrial policies specialized foreign direct investment
and/or protectionist measures? (FDI) and its efforts to acquire
• How will “techno-nationalism” fuel semiconductor companies, assets and
new industrial policies? technology abroad.
• Is US-China decoupling for
This is followed by an examination of
semiconductor companies
US protectionist policies designed to
inevitable?
prevent China from obtaining sensitive
• What does the future hold for and controlled US tech. Here, the reader
semiconductor trade flows? is introduced to the different kinds of
enforcement mechanisms being used
in the export control process and how
they impact global value chains and
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11REPORT OBJECTIVES AND FOCUS
trade flows. Finally, the report concludes by looking
Next, the reader is presented at the direction in which semiconductor
with different scenarios whereby value chains appear to be heading
semiconductor companies leverage under techno-nationalist pressures,
strategies to circumvent and reduce the and outlines potential scenarios for re-
risks of export controls and restrictions, alignment, restructuring and US-China
with an analysis of how these different decoupling:
outcomes could transform the global
semiconductor industry. 7. Techno-nationalism and Industrial
Policies
These themes are explored in sections:
8. The Decoupling of US-China
4. China’s Tech Funds, Government Semiconductor Value Chains
Subsidies and Industrial Policies
The author’s analysis and conclusions
5. US Export Controls and the BIS were drawn from a variety of research
Entity List methodologies including review
of salient literature and corporate
6. Strategies to Manage Tech Controls publications, interviews with company
Within Global Value Chains management at various semiconductor
companies, and from the dissemination
of questionnaires to entities in the
semiconductor ecosystem.
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121. What are Semiconductors?
Where are Semiconductors
Manufactured?
Graph III: Semiconductors: At the Core of all Future Industries14
Artificial Quantum Wireless Internet of
Intelligence computing networks Things
Robotics Gaming
VR/AR Medical devices
Laptops and computers Planes
Power equipment Military devices
Additive Autonomous Smart Storage and
Source: Author’s compilation manufacturing drivings phones memory
The fabrication of a state-of-the Only a small number of multinational
art microchip represents, perhaps, companies can compete in this
humankind’s greatest technological dynamic environment, where R&D
achievement. The process of designing, costs run to the billions of dollars and
creating and mass-producing, for represent more than 20 percent (and
example, a 7-nanometer integrated rising) of annual profits.15
circuit, with virtually zero margin of
error, is the result of one of the world’s The cost of building a highly
most complex, knowledge-intensive automated, AI-enabled factory starts at
processes. $10 billion, and requires “clean-rooms”
that are 100,000 times more sterile than
the average hospital environment.16
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131. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
What are Semiconductors? Integrated circuits are the most
A semiconductor (also referred to as a common microchips and are often
“microchip”) is a material that provides the technology that is referred to
conductivity between an insulator and as “semiconductors” in the press
other materials. and academic journals. This paper
will use “integrated circuits” and
There are three types of “semiconductors” interchangeably.
semiconductors: What makes the science behind these
microchips so impressive is the size
at which these tiny devices perform
• Discrete
their functions. A silicon atom is about
• Integrated Circuits (IC’s)
half a nanometer in diameter and
• Opto-electronics
today’s most advanced microchips are
Discrete semiconductors contain only produced at commercial volumes that
one transistor. Integrated circuits attain a size of 7 nanometers or smaller.
contain multiple transistors, while (One nanometer is one billionth of a
optoelectronics detect and generate meter.17)
light pulses.
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141. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
How are Semiconductors can be managed. There are four basic
Manufactured? stages in a semiconductor value chain:
Semiconductor value chains in the
semiconductor industry have become 1. Research and Development
hyper-specialized, with critical portions 2. Design
of the global value chain located
3. Manufacturing
throughout the world. Highly complex
functions in the manufacture of these 4. Assembly, Testing and Packaging
products are performed at virtually any (ATP), also called Outsourced,
location that can confer competitive Assembly and Testing (OSAT)
or relative advantage, so long as risks
Graph IV – The Semiconductor Ecosystem18
Intelectual Property Raw Material
(IP) Companies Supplies
Provide IP cores Raw wafer, Lead frames
used to build chemicals packaging
advances ICs material
RESEARCH & DESIGN MANUFACTURING ASSEMBLING, DISTRIBUTION
DEVELOPMENT TESTING &
Provide services Provide PACKAGING
using specialized equipment
design tools and tools
Electronic Design Equipment
Automation (EDA) suppliers
Companies
Source: SIA Beyond Borders
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151. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
Semiconductor Value Chains Foundries - So-called “foundries”
Operating Models specialize solely in fabricating (hence
Participants in the semiconductor they are also known as “fabs”). A
industry fall into four categories: manufacturing foundry’s operating
model depends on contracts with
IDM – A number of companies such design firms to perform fabrication.
as Intel, Samsung and Micron are
vertically integrated, meaning that OEM/ODM – Finally, when a microchip
they can perform all phases in-house. completes its journey through the
These companies fall under the label semiconductor global value chain,
of integrated device manufacturers it will be delivered to an original
(IDMs). For example, Samsung makes equipment manufacturer (OEM) or
chips primarily for their own branded original design manufacturer (ODM)
products and finished goods such as such as Apple, Oracle, BMW or Airbus –
smart phones and TVs. Intel is also where it is incorporated into everything
vertically integrated in that it makes from smart phones, IoT infrastructure,
chips for a whole range of its branded autonomous vehicles and aircraft
components and subcomponents, but navigation software. Often, original
it will also sell its chips to third parties. equipment manufacturers use contract
manufacturers for the fabrication
Fabless – In a separate niche, “fabless” of their products, which adds more
companies focus on the research complexity and interconnectedness to
and design of semiconductors, or, the end of the value chain.
for example the electronic design
and automation (EDA) software tools
needed to design integrated circuits.
These companies do not do any
manufacturing.
Table I – Operating Models: Semiconductor Industry19
Fabless-Foundry Model
Outsourced Distribution
Research & Design (Fabless) Manufacturing (to OEMs/
Assembly & Test
Development AMD, Broadcom, (Foundries) ODMs)
(OSAT)
CEA-Leti, IMEC, Media Tek, Global Foundries, HH Allied
Amkor, ASE, ChipPAC,
ITRI, Spreadtrum, Grace,SMIC, Tower Electronics,
JCET, J-Devices,
SEMATECH, Qualcomm Jazz, TSMC, UMC Arrow
Powertech, SPIL
Semiconductor Electronics,
Research Avnet, Digi-Key,
Cooperation IDM Model Mouser
Electronics
Integrated Device Manufacturer (IDM)
Infineon, Intel, Micron, Renesas, Samsung, Texas Instruments
Source: SIA Beyond Borders
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161. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
Graph V – Rising Costs of Keeping up with Moore‘s Law
and Growing Release Dates for Intel Lead-Generation 100 BILLION USD
Chips21 0.8/0.15µm
0.13µm
OLDER
65nm
75 40/45nm
28nm
NEWER TECHNOLOGY
50 20nm
16/14nm
25
0
2015 2020* 2025*
TECHNOLOGY NODE (nm)
COST TO ADVANCE TO NEXT LEVEL OF CHIP DESIGN
200
600 MILLION USD 1993 to 2012 : ev er y tw o ye ars
180
500 160
140
400
120
300 100
200
80
60 14nm slip s 10nm slips
by 2 qua rt er s by 2 year s
100 40 7nm??
20
0
65nm 45nm 28nm 22nm 16nm 10nm 7nm 5nm 0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Older INTEGRATED CIRCUIT DESIGN NODE Newer
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019
Semiconductor Manufacturing Cost According to the Semiconductor
Breakdown Industry Association, about 90 percent
As Moore’s Law20 reaches its end, of an IC’s value is derived from the
the costs of achieving the next design and manufacturing phases of
breakthrough in a semiconductor have the global value chain. 22
become increasingly expensive and
complicated, thus the semiconductor This is an important fact, as this has a
value chain could become more direct bearing on the state of China’s
unbundled as it migrates towards firms semiconductor industry, which has
that not only can absorb escalating been heavily concentrated in the
costs but also can hyper-specialize in assembly, testing and packaging
unique areas of the integrated circuit phase, at the low-value end of the
value chain. semiconductor value chain — and many
of these operations are performed by
Having reached the boundaries of the subsidiaries of US companies. 23
Moore’s Law with the silicon-based
chip, a race is on to develop the next This will be discussed later, in more
generation of technologies, including detail, in the context of the US-China
gallium and nitrogen-based materials tech war and what this could mean for
and quantum computing. international trade flows should heavy
export controls and restrictions be
imposed on semiconductors.
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171. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
Over the past twenty years of 3. Ingots are shipped to the US and
globalization, semiconductor global fabricated into blank wafers
value chains have evolved into the
most internationally integrated of any 4. T he wafers are then sorted and cut
industry. For example, when tracing the into dies within the US
end-to-end value chain of a microchip,
it may be exported and imported 5. D
ies are shipped to Indonesia to be
dozens of times, across multiple tested and assembled
borders before finally being imbedded
into a finished product. For example, 6. P
roduct-ready microchip goes
consider the following scenario for a through a centralized distribution
standard integrated circuit (see Graph center and is shipped to China
VI Highly Integrated Semiconductor
Value Chains): 7. M
icrochip is imbedded into end-
products in China
1. R&D is performed in the US
8. F inalized products are shipped to
2. B
ase silicon ingots are cut into customers around the world
wafers in Japan, Taiwan,
Philippines or Korea
Graph VI – Highly Integrated Semiconductor Value Chains24
Example of one
global value chain
adopted from SIA
Sorted and cut
into dies R&D
Chip integration by end-
4 1 product manufacturer
3 8 7 Cut silicon ingots into
wafers
2
Customer buys end
6
product
5
Final product shipped
for inventory
Dies are assembled,
tested & packaged
Source: SIA (2019)
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181. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
Graph VII – Geographic Dispersion: Semiconductor value chains25
Research and Design
Manufacturing
Assembly
Testing Intel Micron Toshiba Samsung Infineon NXP
Source: SIA Beyond Borders
A closer look at where semiconductor of key production activities for leading
companies perform their highest value- semiconductor companies Intel and
add activities (the R&D and critical Micron (US); Toshiba (Japan); Samsung
manufacturing stages) reveals that (S. Korea); Infineon (Germany) and NXP
they choose to ring-fence their most (Netherlands).
valuable intellectual property and keep
these processes close to home, while Leading US, European, Japanese
performing the lower-end assembly, and South Korean semiconductor
testing and packaging in other markets. companies all show similar behavior
regarding where they have placed
For example, Graph VII from the strategic assets, formed partnerships
Semiconductor Industry Association and optimized their global value chains.
(SIA) shows the geographical dispersion
Graph VIII – Location of Semiconductor Companies, by step in
production, in Global Value Chains26
U.S. 51% U.S. 62% U.S. 10% U.S. 17%
S. KOREA 6%
JAPAN 2%
JAPAN 5%
TAIWAN 73%
TAIWAN 54%
S. KOREA 28%
JAPAN 1%
EUROPE 2%
TAIWAN 18%
CHINA 12%
JAPAN 11%
CHINA 10%
EUROPE 7% SINGAPORE 12%
CHINA 7%
TAIWAN 73%
OTHER 1% OTHER 7% OTHER 2%
Design, manufacturing, Design, no manufacturing Manufacturing Assembly, testing
assembly and testing or assembly (fabless) (45% (foundry) (45% of value (OSAT) (10% of value
(IDM) of value chain) chain) chain)
TYPE OF COMPANY
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact,SCMP Stratford 2019
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192. Top Semiconductor Companies:
Innovators and Market Leaders
The semiconductor industry has high barriers to entry. In the past two
Market share and innovation has been been dominated by a small group of decades, however, a handful of Asian
dominated by US and South Korean companies, comprised primarily of semiconductor companies including
companies. American semiconductor companies, Toshiba (Japan), Samsung (South Korea)
which have been able to build upon and TSMC (Taiwan), have managed to
first-mover advantage and create grow market share.
Graph IX – Global Market Share (Sales: Company Nationality
by Market Share)27
Japan
Korea
9%
24%
US
45%
EU Taiwan China
9% 6% 5%
Source: SIA, World Semiconductor Trade Statistics (WSTS), IHS, Global, PwC
The Asian late-comers benefited and foreign direct investment. 28
from a timely combination of Ambitious industrial policies by the
government support, a narrow focus Japanese, South Korean and Taiwanese
on specialization and innovation, and governments assisted these companies
access to key foreign partnerships to achieve success.
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202. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS
The Large Gap between China Graph X, below, provides a snapshot
China’s semiconductor companies Semiconductor Companies and their of the top semiconductor companies
have less than 5% market share and Competitors by revenue and how a select group
are multiple generations behind in This begs the question of whether of multinationals dominate global
technology. the Chinese government will be able markets.
to play catch-up and replicate these
success models on a larger scale under What is noteworthy is the conspicuous
its own ambitious Made in China 2025 absence of China semiconductor
industry policy objectives or whether companies, not only from global
the current state of geopolitics will markets but also from the China
prevent such an outcome. market, which is almost entirely
dependent on foreign firms for the
Given the growing US-China tech microchips required for both its
rivalry (and the US’s historic allies domestic and export markets.
in Europe and Asia) as well as the
overwhelming amount of influence According to the SIA, China’s current
that both American semiconductor national champion semiconductor
companies and the US government companies supply less than 5 percent
wield in the semiconductor industry, of the worldwide market and are at
the answer to this question is far from least two generations behind in their
certain for China. ability to produce microchips for
consumer electronics. 29
Graph X – Top Semiconductor Companies 201830
COMPANY HEADQUARTER LOCATION OPERATING MODEL 2018 REVENUE
(IN BILLION US$)
Samsung Electronics South Korea IDM $65.90
Intel United States IDM $61.70
TSMC Taiwan Foundry $32.20
SK Hynix South Korea IDM $26.70
Micron Technology United States IDM $23.70
Broadcom United States Fabless $17.80
Qualcomm United States Fabless $17.00
Texas Instruments United States IDM $13.90
Toshiba/Toshiaba Japan IDM $13.30
Memory
Nivida United States Fabless $9.40
NXP Semiconductors Europe IDM $9.30
ST Microelectronics Europe IDM $830
Infineon Europe IDM $8.10
Sony Japan IDM $7.90
Western Digital United States IDM $7.80
Source; IC Insights (2018)
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212. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS
Dominance of American This also means that should the
Semiconductor Companies US government choose to impose
American semiconductor companies additional export controls on American
enjoy a large footprint in all of the technology there could be extensive
world’s markets, another indication collateral damage, impacting American
that should the US-China tech war multinational technology companies
morph into a full-scale neo-mercantilist primarily, but extending well out into
rivalry across global markets, the US their first, second and third levels of
government and its allies in Europe and suppliers and service providers.
Asia could collectively weaponize a
substantial installed base of American
technology already imbedded in
extensive supplier networks and
industry.
Graph XI – Global Semiconductor Sales and American Semiconductor
Companies by Market Share31
Americas market
$103bn
Chinese market
$154.4bn
Europe market
$43bn
Japan market
$40bn
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019, Author’s compilation
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223. China’s Semiconductor
Industry
China is currently the largest consumer percent) and smart televisions (65
of integrated circuits in the world. percent). 33
In 2018 its imports of microchip
technology were valued at $300 billion At home, China’s domestic production
and exceeded even the cost of its only accounts for 9 percent of
imported oil. 32 consumption – leaving 91 percent
of China’s demand to be satisfied by
China’s Technology Gaps in imports, including 56.2 percent from
Semiconductors the United States. 34
Semiconductor technology is vital to
Domestically, China produces 16
China’s economy and its manufacturing
percent of its semiconductors
base, particularly as it feeds the supply
– yet only half of this amount is
chains of China’s top exports, including
manufactured by Chinese companies. 35
smartphones (90 percent of global
production); personal computers (65
Graph XII – China’s National Champions vs. Global Leaders36
China’s major IC manufacturer sales China’s IC market and domestic production
in 2018
Billion USD Market Domestic production
Total: 250 Billion USD
$23.8 billion $91
SK Hynix (S. Korea)
200
150
Samsung (S. Korea) $4.6
100
SMIC (China) $3.2
50
Intel (U.S.) $2.7
Huanghong Grp. (China) $1.5
TSMC (Taiwan) $1.0 0
Other $1.8 ‘09 ’11 ‘13 ’15 ‘17 ’19 ‘21 ’23
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact,SCMP Stratford 2019
HINRICH FOUNDATION REPORT – SEMICONDUCTORS AT THE HEART OF THE US-CHINA TECH WAR
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233. CHINA’S SEMICONDUCTOR INDUSTRY
Can China Produce Semiconductors? Chinese Fabless Companies: Slow but
Steady Design Progress
The Chinese Communist Party’s Made
in China 2025 plan calls for Chinese In the fabless semiconductor space, for
semiconductor companies to produce example, Chinese fabless companies
80 percent of chips domestically but have been making progress and have
this goal is far from being realized. clawed their way to 11 percent of
Chinese semiconductor companies market share37.
accounted for only $4.7 billion out of
$23.8 billion worth of local production The area of fabless design has seen
in 2018. a surge in the numbers of mainland
Chinese firms. According to PWC,
China’s dependence on US and foreign between 2010 and 2015 alone, the
semiconductor technology has been number of Chinese IC design firms
a catalyst for Beijing’s doubling down went from 485 to 715, with the largest
on its Made in China 2025 industrial 20 percent of these firms producing
policies for the promotion of its own revenues of between $2.3 billion and
homegrown companies. $16 million. 39
Graph XIII – Market Share of China’s Semiconductor Firms38
MAKING PROGRESS China’s semiconductor firms have slowly but steadily increased their market share
Top Chinese mainland fabless suppliers by revenue Fabless semiconductor industry market share by sales, 2017
Company Background Revenue
HiSilicon Subsidiary of telecom $3.87
giant Huawei billion US Taiwan
Chinese mainland Europe
Tsinghua Government-backed $1.86
Unigroup group that acquired billion
1% 17% Japan Other
Spreadtrun and RDA 2%
Omnivision Founded in California $893
and sold to Chinese million
11% 2010 market share
Investors in 2015 53% US 69%
ZTE Micro- Subsidiary of leading $506
electronics telecom firm ZTE million Taiwan 17%
16% Chinese mainland 5%
CEC Huada Subsidiary of central $506
Europe 4%
government-controlled milliom
enterprise Japan 1%
Other 4%
Nari Smart Chip Main supplier to govern- $478
ment-controlled utility million
firm State Grid
Source: IC Insights, Electronic Design
Source: http://knowledge.ckgsb.edu.cnu/2018/11/29/technology/china-semiconductor-industry/
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243. CHINA’S SEMICONDUCTOR INDUSTRY
Table II – 2017 China’s IC Design Industry’s Top Ten Company Ranking
RANKING COMPANY NAME SALE (MILLION RMB)
1 HiSilicon 361
2 UNIS Spreadtrum 110
3 ZTE Microelectronics 76
4 Huada Semiconductor 52.1
5 IPCore Microelectronics 44.9
6 Goodix 38.9
7 Hangzhou Silan 31.8
8 Focaltech 28
9 Galaxycore 25.2
10 Vimicro 20.5
Source: PWC
These Chinese tech companies have production of critical 7 nm and 5 nm
been able to grow and innovate microchips, and the next generation
because of unfettered access to of integrated circuits, which are
collaborative relationships and currently in the R&D phase. To meet
partnerships with foreign research growing demand, in October of 2019,
and academic institutions, as well as TSMC announced additional capital
access to foreign companies through expenditures of $4 billion to bolster the
acquisitions and other mergers. company’s 2019 overall expenditures to
between $14-$15 billion.42
The US China trade war and tech war
has changed this, however, as will be In the wider context of US-China tech
discussed in the subsequent sections war, Taiwan’s relations with both the
on US export controls and restrictions US and China could tilt the tech war
on acquisitions. significantly one way or the other. The
geopolitical significance of Taiwan is
The HiSilicon scenario underscores discussed in section 8.
China’s dependence on foreign
technology and has been a catalyst for New Fab Projects in China
Beijing’s massive funding campaigns to
According to SEMI’s World Fab Forecast
produce Chinese technology around
Report, China has the most new fab
critical technologies of the future.
projects – some 30 new facilities either
under construction or in the planning
China’s home-grown semiconductor
stages — of any country in the world43.
industry relies heavily on TSMC, a
Of these projects, 13 are said to be fabs
Taiwanese firm, to meet demand for
targeted at the foundry market.
HINRICH FOUNDATION REPORT – SEMICONDUCTORS AT THE HEART OF THE US-CHINA TECH WAR
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25SPOTLIGHT
Huawei’s Latest Microchip
Design Capabilities Multinational semiconductor
companies are involved in the most
noteworthy projects:
• TSMC (Taiwan) plans to produce
16 nm FinFets44 at a new fab in
Nanjing, in addition to the
production of 200 nm integrated
circuits that it has been producing
in commercial quantities at its site
in Shanghai. This is part of a phased
plan to eventually migrate to a
12 nm integrated circuits. This is a
development for China
semiconductor production.
• Global Foundries (US) is building a
300mm wafer fab in Chengdu, and
has announced that it intends to
use the fab for production of the
company’s 22 nm chip, which is
suited for 5G, IoT and specialized
One revealing insight into China’s HiSilicon cannot design its edge computing.45
semiconductor design progress microchips without licensing the
involves Huawei’s fully owned intellectual property from UK-based • Foxconn (Taiwan) and Sharp (Japan)
subsidiary HiSilicon. The company, chip designer Arm Holdings, which are said to be in talks to build fabs in
which is a fabless microchip maker, was recently bought by the investor Zhuhai that will produce specialized
has developed an advanced smart group Softbank of Japan. 300 nm chips.46
phone integrated circuit, which is on
par with those used by the iconic US In addition to not owning vital • UMC (Taiwan), which has been
brand Apple.40 design IP required to produce its producing 300 nm integrated circuits
chips, HiSilicon relies on Taiwan in a fab in Xiamen, has been looking
HiSilicon’s chips are vital for Semiconductor Manufacturing to raise funds to produce 40 nm
competing in the next phase of Company (TSMC) for its production. and 28 nm chips. In order to
wireless broadband, 5G, which Huawei could be vulnerable to US capacity expansion, UMC has slated
means it could compete head-to- technology controls, since TSMC an initial public (IPO) of its
head with American Qualcomm, may still rely on US manufacturing Chinese unit, Hejian Technology
the world leader in designing 5G technology for its high-volume (Suzhou) Co Ltd (although the IPO is
compatible processors. HiSilicon’s commercial production lines. on hold at time of writing).47
new microchip has a state-of-the
art line width of 7 nanometers, Thus, as the tech war Meanwhile, as of 2019, there is
which has been by Tokyo- Washington could exert pressure on overcapacity in the 28 nm
based technology “tear-down” the Taiwan political establishment to niche of integrated circuits in China.48
TechanaLye.41 restrict the sale of semiconductors SMIC, China’s most advanced domestic
to Chinese buyers, such as ZTE and foundry, has been stuck at the 28 nm
However, looking more closely at Huawei. threshold as it continues to grapple
HiSilicon’s latest accomplishment to produce high yield commercial
reveals a high level of dependence quantities. SMIC currently does not
on foreign technology. have the IP, processes or know-how to
improve its yields.
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263. CHINA’S SEMICONDUCTOR INDUSTRY
By contrast, TSMC, Samsung, Global Semiconductor Demand by Chip Size
Foundries and UMC remain two or even Beyond the specialized and lucrative
three generations ahead of Chinese microchip niches below 14 nm, foreign
firms in the 28nm to 14nm range, and in firms still control a large swathe of
the R&D phases of 12 nm and 7 nm. the Chinese market in such niches
Within China, for example, Intel is as microchip packaging and testing,
increasing 14 nm production and is in semiconductor equipment, memory
the R&D stages of 10 nm microchip, and AI chips, as well as contract
which is well ahead of SMIC, China’s microchip making.
national champion.
An analysis of China’s semiconductor
Overall, China’s semiconductor development capabilities in 2018 shows
companies still have a long way to the degree of dominance by American
go before they are able to capture semiconductor companies and other
significant domestic market share, foreign firms, throughout all phases of
particularly in the critical space of the global value chain.
microchips below 14 nm.
Graph XIV – Semiconductor Demand by Microchip Size
100 Billion USD
0.25
0.8/0.15
0.13
65 nm
Older
75 40/45 nm
28 nm
20 nm
Newer Technology
50
16/14 nm
25
10/7 nm
0
2015 2020* 2025*
Source: Strat for 2019
HINRICH FOUNDATION REPORT – SEMICONDUCTORS AT THE HEART OF THE US-CHINA TECH WAR
Copyright © by Alex Capri and Hinrich Foundation. All Rights Reserved.
273. CHINA’S SEMICONDUCTOR INDUSTRY
Graph XV – Dominance of Foreign Firms in China’s Semiconductor Market49
(by revenue, in billions of dollars)
Mobile chips Chip packaging, testing Contract chipmaker
2.05 Unigroup Spreadtrum & RDA 3.79 Jiangsu Changjiang Semiconductor
Electronics Technology Manufacturing
Chinese HiSilicon 3.1 International Corp.
company 4.71 Technologies Up 24.5% year-on-year
Foreign
company 22.29
Qualcomm (U.S.) 9.54
6.6 Advanced Semiconductor
32.1
*Memory chip sales only
Apple’s chip unit (U.S.) Engineering (Taiwan) **Data for FY2018
Taiwan Semiconductor Sources: Company filing,
Manufacturing Co. (Taiwan) IC Insights
AI chip Cryptocurrency Semiconductor Memory chips
mining chip equipment
Tsinghua Unigroup’s Yangtze
1 Cambricon
Technologies
2.5 Bitmain
Technologies
0.354 Naura Memory Technologies Innotron Memory
N/A N/A
56.4*
9.71 14.53 Samsung Electronics
Nvidia** (U.S.) (South Korea)
Applied Materials (U.S.)
28.1 SK Hynix (South
Korea)
Source: https://asia.nikkei.com/Business/China-tech/Chinese-companies-rush-to-make-own-chips-as-trade-war-bites/
HINRICH FOUNDATION REPORT – SEMICONDUCTORS AT THE HEART OF THE US-CHINA TECH WAR
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28SPOTLIGHT
China’s State-backed
Production of Memory Chips
Could Lead to Overcapacity
For 2020, China’s state-backed Despite a steady accumulation of
companies have announced major financial losses at Yangtze Memory
production increases in both NAND Technologies, the state-backed
and DRAM — critical memory company continues to operate
technology for a broad range normally, has not defaulted on its
of devices, from computers to debts, and continues to receive large
smartphones. amounts of cash as well as the support
of key shareholders. 52
Yangtze Memory Technologies Co.
(which is owned by the state-backed Losses at the group were reported
Tsinghua Unigroup), expects to triple to be $460 million in the first half of
production to 60,000 wafers a month, 2018. 53
or 5 percent of world output, by the
end of 2020 at a new $24 billion plant As China’s memory chip production is
in Wuhan. 50 based on government output targets
and other strategic, non-market
ChangXin Memory Technologies, driven goals, then the possibility of
another state-funded company, an over-supply of NAND and DRAM
has announced that in 2020, it will chips would seem likely, at some point,
quadruple production of DRAM chips which would drive down global market
to 40,000 wafers a month (or 3 percent prices. None of this bodes well for the
of world DRAM output) at its $8 billion world’s existing players in this space.
facility in Hefei. 51
A recent OECD trade policy paper
China’s rapid progress in NAND and measured and highlighted the
DRAM production is noteworthy. But distortions caused by government
it is the business model behind this activities in semiconductor value
expanding output that should be chains. 54
getting increased attention from the
world’s dominant manufacturers in this
space.
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