China’s “Made in China 2025” strategy aims to vastly increase domestic semiconductor production, but the plan has struggled to meet its targets and the chipmaking industry has come under increased scrutiny in recent months. LSE IDEAS China Foresight asked several experts to answer the question “Is China’s semiconductor strategy working?”. Nigel Inkster, Emily S. Weinstein and John Lee have responded below.
Emily S. Weinstein
Over the past decade, the Chinese government has doubled down on its efforts to develop and indigenise its semiconductor industry. This emphasis stems from a concern among People’s Republic of China (PRC) leadership that China has been too reliant on foreign firms for access to advanced commercial semiconductors and semiconductor manufacturing equipment (SME). Beijing’s push for chip dominance has indeed yielded some success in recent years; however, due to lack of access to critical intangible expertise, China is likely to remain behind the United States and other key allies in this supply chain.
Several national-level policies have emphasised a need to improve China’s domestic chip capacity to remedy the country’s overreliance on foreign technology. The infamous “Made in China 2025” strategy, released in 2015, laid out an ambitious set of goals for China’s SME localisation, including achieving 70 percent self-sufficiency in semiconductors by 2025. In August 2020, the PRC released the “Notice on Several Policies to Promote the High-quality Development of the Integrated Circuit Industry and Software Industry in the New Era.” This seminal document outlines important government incentives—financial and otherwise—at the local and national levels to improve semiconductor R&D, talent, education, and more.
Has all this effort paid off? To some extent, yes. According to the Semiconductor Industry Association (SIA), while China held only 7.6 percent of the market for global chip sales in 2020, that number is growing fast, and the PRC is making significant progress thanks to its growing domestic market. Semiconductor device sales in China jumped from $13 billion in 2015 to $39.8 billion in 2020. Furthermore, the size of China’s homegrown chip industry has grown exponentially. In 2011, China had just under 1,300 registered chip companies; by 2020, this number grew to 22,800.
Despite these gains, China’s semiconductor industry still lags behind. Similar to Japan in the 1980s, China maintains a growing semiconductor industry and a large domestic market. However, where Japan had the advantage of a younger industry, China has found itself in the position of having to break into a difficult industry and catch up to the leading edge chips at or below 14nm, and rumors indicate that the U.S. government is considering broader export controls targeting capabilities at 14nm and below. China also lacks the “decades, if not centuries” of experience and tacit knowledge needed to replicate extreme ultraviolet (EUV) photolithography machines necessary for developing chips at or below 5nm, presenting a critical obstacle for China in progressing its chips to the most advanced nodes.
Despite these impediments, Chinese domestic chip companies are still pushing forward, albeit with limited success. Last month, Bloomberg News reported that China’s SMIC had allegedly produced a 7nm chip using a manufacturing process similar to that of Taiwan’s TSMC—the firm with the most advanced chip manufacturing capabilities. However, experts are sceptical that SMIC can produce these 7nm chips at scale to compete globally. In addition, if the U.S. and other allies relevant in the chip supply chain decide to enact further export controls, China will likely face more challenges in bolstering its domestic chip industry.
What China lacks in terms of logic chips it appears to have made up for in the memory chip industry. Manufacturing NAND flash memory chips is less technologically difficult than manufacturing logic chips and also does not require EUV photolithography equipment. As such, China’s chipmakers like YMTC who specialise in this industry face fewer hurdles than China’s logic chipmakers.
In sum, Beijing’s semiconductor push has clearly proven productive. However, China’s domestic industry still has a long way to go in competing with long-standing globally dominant players.