How China converted US sanctions into Chip advantage?

China used US sanctions to boost chip manufacturing

by 5paisa Research Team Last Updated: 2022-06-21T17:32:18+05:30

This remains one of the fascinating stories of how China turned the US sanctions on its head. Even as the US tried to squeeze China with sanctions, over quality and plagiarism concerns, the actual impact has been something totally different. The net result is that the microchip industry in China is now growing faster than anywhere else in the world. It may be recollected that the US had heavily sanctioned Huawei Technologies of China and refused to do any kind of business with them, over national security concerns. 

Now for the numerical evidence that China is growing the fastest in microchips. As per the latest chip industry data, 19 of the world’s 20 fastest-growing chip industry companies over the last four quarters, hail from China according to a detailed note by Bloomberg. Previously, only 8 of the top 20 companies were Chinese in the field of microchips. China-based suppliers of design software, processors and chipmaking gear are expanding revenues at several times the speed of global leaders like Taiwan Semiconductors or ASML NV.

The global semiconductor industry is worth $550 billion and that has transformed largely in favour of China in the last few years. Microchips or semiconductors play a critical role in everything from defence to futuristic technologies like artificial intelligence, machine learning, Internet of Things, autonomous cars etc. The transformation began in 2020, when the US began restricting sales of American technology to Chinese semiconductor companies. While this did contain their growth, it also resulted in a boom in Chinese chip-making.

Beijing is orchestrating investments to the tune of billions of dollars in the sector. There are ambitious programs like the “Little Giants” blueprint which support and bankroll national tech champions and encourage tactics to sidestep US sanctions. Not that the US companies are complaining and the first off the block is Apple. Just recently, Apple Inc was closely considering Yangtze Memory Technologies to become its latest supplier of iPhone flash memory. Apple has a long and fruitful relationship with China since the days of the iPhone.

 

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One big factor was the lockdowns. Now, amid the lockdowns, Chinese customers using imported semiconductors have to mandatorily source homegrown alternatives to ensure smooth operations. China has a bigger plan in place. It wants to extricate itself from the $430 billion worth of imported chipsets in 2021. Also, Chinese chip-manufacturing equipment are heavily in demand from overseas suppliers and these are up 58% yoy. This is, in turn, driving local businesses in a big way and that story is not being told.

Sales from Chinese chipmakers and designers jumped 18% in 2021 to a record of $150 billion. One more thing that is working in favour of the Chinese microchip industry is the fact that there is a persistent chip shortage that’s curtailing output. Today, since chips go into everything, the shortage of chips can rub off on products ranging from cars to consumer electronics. This makes Chinese markets easily accessible to the Chinese chip makers as no country wants to sanction a reliable chip making partner in these conditions.

Making cups is called the business of Fabs or fabrication units. In China, SMIC and Hua Hong Semiconductors are the biggest contract chip makers. Both the companies have kept their chip making factories running at 100% capacity. SMIC reported a 67% surge in quarterly sales, outpacing most of the global fab makers by a huge margin. Now Chinese chip makers are getting aggressive and ambitious. For instance, Shanghai Fullhan Microelectronics makes chips for surveillance products and will also expand into electric vehicles and AI.

For now, the Chinese chipmakers are buying scale and market share at the cost of profits. In other words, they have put aside long-term profitability concerns. For now, the focus is purely on aggressive capacity build-up from Chinese players in order to elevate their presence globally. The China response to the American challenge may have just begun.


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