A new report from the Information Technology and Innovation Foundation examines the progress China has made toward self-sufficiency in semiconductor innovation and production.
China still lags when it comes to semiconductor innovation, but it is making steady progress to catch up. A new report released this week By the Information Technology and Innovation Foundation (ITIF).
In an effort to become self-sufficient, the Chinese government has invested hundreds of billions of dollars in the semiconductor industry with the goal of “developing globally competitive semiconductor companies in nearly all segments of the semiconductor value chain.” China is currently roughly five years behind its global competitors, and while it is making further progress in some areas, it is lagging behind in others. The ITIF reports:
China is rapidly closing the gap in many aspects of the semiconductor manufacturing process and is developing real intellectual property and innovation capabilities across the board. In January 2024, Intel CEO Pat Gelsinger argued that despite China’s ongoing efforts to develop its semiconductor industry and design more sophisticated chip manufacturing tools, the country is still about 10 years behind the global semiconductor industry. While there is no doubt that China is behind, the real gap is probably half that, or about five years, at least when it comes to designing and manufacturing cutting-edge logic chips. China continues to pump hundreds of billions of dollars into the semiconductor industry to close the gap. Moreover, as one observer commented, in the long term, “it is almost certain that China will develop advanced chip manufacturing capabilities.”
The United States is credited with inventing the semiconductor and continues to lead the world in innovation, but ITIF argues that the US’s choice to move most of its semiconductor manufacturing overseas was a huge strategic blunder: After all, the factory floor is where innovation happens, and sending production halfway across the globe cuts off access to that innovation.
And countries like China have seized the opportunity.
The prevailing view is that China is an imitator and the United States is an innovator. This view often supports an indifferent attitude towards US technology and industrial policy. After all, the US leads in innovation (almost by definition) and there is no need to worry. But first, this assumption is wrong, because innovators can lose their leadership to imitators with lower-cost structures, as has been the case in many US industries, including consumer electronics, solar panels, communications equipment, and machine tools. Second, it is not clear that China will always be a dull imitator destined to be a follower.
In fact, China is starting to make real progress in semiconductor production overall, and stands out in certain areas. For example, China has made great strides in “logic chips” used in mobile devices and artificial intelligence. The ITIF estimates that China is only two years behind the world leader.
But when it comes to other parts of semiconductor innovation, such as memory chips, semiconductor manufacturing equipment (SME) and assembly, test and packaging (ATP), the gap is even wider. “Chinese companies are innovating, but they are still several years behind global leaders,” ITIF reports.
Still, China’s share of global value has been expanding, jumping from 8% to 31% between 2001 and 2016. Over the same period, the U.S. value fell to 22%, while Japan’s value fell by more than two-thirds to 8%. ITIF also reports that China filed 55% of global semiconductor patent applications from 2021 to 2022, double the U.S. figure. China surpassed the U.S. and Japan in semiconductor patents granted in 2022.
However, the United States continues to lead in semiconductor R&D intensity, with China at 7.6% and the United States at 18%.
“China will likely only achieve 30 percent self-sufficiency by the end of 2025,” ITIF reports. “RAND’s Jimmy Goodrich notes that China would probably need at least $1 trillion in additional investments to achieve true self-sufficiency in the industry. But these strategies clearly demonstrate that China recognizes that semiconductors are a fundamental technology on which its economy and national security are based, and that it is prepared to make the long-term investments necessary to achieve its goal of achieving self-sufficiency and reducing its reliance on foreign technology in this critical sector.”
We know that China is determined to continue growing its semiconductor industry, so what will the United States do about it?
In its report, ITIF argues that the passage of CHIPS and the Science Act was a major step forward, saying the United States had made a “significant commitment to revitalize the competitiveness of the semiconductor industry,” which has led to companies investing more than $300 billion “to build and operate factories in the United States.”
The challenge now is to maintain this momentum and ensure that the new law is properly implemented and enforced. The US also needs to “dramatically widen and deepen” the nation’s STEM (science, technology, engineering, and mathematics) pipeline, including doubling the number of STEM high schools nationwide and rewarding colleges and universities that graduate students with STEM degrees, to maintain a pipeline of innovators and high-tech factory workers for semiconductor fabs.
But there is also no doubt that China is engaging in a number of unfair practices as part of its strategy to dominate semiconductors, and domestic investment alone will not be enough.
“The rapid expansion of China’s semiconductor industry, like many other Chinese industries from electric vehicles and solar panels to high-speed rail, has been driven in part by massive industrial subsidies of a nature and scale that are in clear violation of China’s World Trade Organization (WTO) commitments,” the ITIF said in the report.
The United States can therefore respond without hesitation. The ITIF has recommended updating rules within the WTO to impose tougher penalties on such conduct, but the WTO InvalidityMore needs to be done to address China’s trade abuses. Additional trade measures are crucial.
In its report, ITIF called for targeted export controls on key technologies and the development of “a more ambitious and effective multilateral approach to disseminating export controls among like-minded countries.” At the same time, the organization urges the U.S. to “vigorously use the Entity List, especially when Chinese companies are found to be responsible for significant intellectual property theft.” And given that China routinely blocks U.S. tech companies from selling in the Chinese market, ITIF said, “U.S. (and other allied) policymakers should develop new trade tools that would enable the U.S. government to mutually exclude Chinese competitors from competing in U.S. markets in areas where China denies market access to U.S. (and other foreign) companies.”
And above all, the United States should not be happy with the passage of the CHIPS Act and leave it at that: the semiconductor industry is one of the most important industries on the planet, and if the United States and its allies become complacent, they will lose their advantage.
“Chinese companies are innovating as quickly as possible in this industry and have achieved some notable achievements and advancements, but overall they are lagging behind global leaders in the semiconductor industry,” ITIF said. “However, if allies become complacent, they risk a significant decline in their own industries.”
