Semiconductors, also known as microchips or integrated circuits, are critical components of electronic devices ranging from computers to home appliances, medical equipment, and military systems.

As the world’s second-largest economy, China has recently experienced a global shortage of semiconductor computer chips and price increases. China is particularly hard hit right now.

IC Insights released its 2021 edition of The McClean Report. According to the report, the nation is not necessarily a major producer of integrated circuits now or in the future.

Only 15.9%, or roughly $22.7 billion, of the $143.4 billion worth of ICs sold in China in 2020 were exported. Moreover, only $8.3 billion was created by businesses with their headquarters in China, making up just 5.9% of the nation’s whole IC sector in 2016. 

TSMC, SK Hynix, Samsung, UMC, and other foreign businesses with wafer fab operations in China continue to produce most of the country’s integrated circuits.

Chip shortages in China

Several automotive firms around the world are complaining about chip shortages.

Citing sources from China Business News, Sina reports that Great Wall Motors did not even take a holiday break and has been in contact with vendors about chip availability. Many popular models, including the Haval H6, Great Wall Cannon, and Tank 300, were affected by the production halt in May and June last year.

Other companies’ sales and production were also affected. These include Volkswagen, GM, Honda, and Volvo. 

Car sales in China and elsewhere have remained low this year as chip shortages, and anti-epidemic efforts weigh on global auto markets. 

Trading Economics cites information from the China Association of Automobile Manufacturers. The figure dropped 12.6% in May and 47.6% in April. The association estimated over 12 million units were sold in the first six months of this year, a 6.6% decrease from the similar period in 2021.

Local automakers are increasing their investment in the domestic semiconductor sector to deal with a prolonged global chip shortage.

In June, Technode reported that state-owned automaker FAW Group would start a new round of funding for Chinese auto chip startup Horizon Robotics. 

Toyota’s manufacturing partner in China, GAC, has also invested in local chip foundry CanSemi to develop microchips for future vehicle models on 12-inch wafers. The Guangzhou-based automaker expects chip shortages to continue into 2024, and thus, it is looking for home-produced substitutes to ensure supply. 

Bosch China’s president, Chen Yudong, has called for increased investment in the country’s semiconductor production. He expects China’s production to fall by 1 million vehicles in the first six months of 2022 due to supply issues.

China’s measures indicate difficulties in producing their own semiconductors

China’s technology behemoths have been pushing for the development of their own semiconductors or chips. It’s seen as progress toward China’s goal of becoming self-sufficient in critical technology.

However, there are some obstacles that prevent them from achieving the self-sufficient goal. 

Heavy reliance on component and tool imports

According to a 2021 report from CISION media outlet, China claimed the largest market for semiconductor equipment for the second time. Sales increased 58% to $29.6 billion, marking the fourth consecutive year of increase. 

CNBC cites an expert that the country is still heavily reliant on foreign technology and lags in the so-called cutting-edge segment of the chip market.

For example, last year, Baidu released the second generation chip. Alibaba and smartphone maker Oppo also released their chip designs. 

According to CNBC, these companies may still need to use foreign tools to design their chips. Peter Hanbury, a partner at Bain & Company, told CNBC by email.

He wrote, [quote] “This is a step in becoming more self-sufficient in semiconductors, but a small one.” Specifically, these are examples of locally designed chips, but a lot of the IP [intellectual property], manufacturing, equipment, and materials are still sourced internationally.” [end quote]

Taking trade secrets

According to a May research report by the U.S.-China Economic and Security Review Commission, China  has shown significant interest in the U.S. agricultural assets. 

Seeds’ are the most valuable and easily transferable property according to the regime. China’s state media referred to seeds as “agricultural chips.”

Some Chinese scientists have taken a shortcut by outright stealing U.S. agricultural trade secrets.

After pleading guilty to stealing trade secrets from his former employer, on April 7, Chinese national Xiang Haitao was sentenced to 29 months in prison by a U.S. federal court in Missouri. Moreover, this scientist will be under  a three-year supervision after release and was issued a $150,000 fine. 

According to court filings, Xiang planned to steal a trade secret from The Climate Corporation  for the advantage of a foreign government, particularly China. This company is a subsidiary of Monsanto, an internationally headquartered company doing business in St. Louis, Missouri.

In the past there were several other cases. 

In 2011 and 2012, Mo Hailong, director of international business at a Beijing-based agribusiness with ties to the Chinese regime, conspired to steal corn seeds from testing fields at Monsanto and another U.S. seed producer, Dupont Pioneer. 

In 2013, two Chinese agricultural specialists have been charged with conspiring to steal seeds from a Kansas research center and pass them on to a Chinese group visiting the US.

As reported by the FBI, the victim company invested around $75 million in patented technology used to create a variety of seeds containing recombinant proteins. However, seeds were found in the luggage of a group of Chinese visitors boarding to return home. 

According to Ross Kennedy, a logistics and supply chain analyst at Fortis Analysis in the United States, China is making a “gray zone asymmetric warfare” by stealing and developing U.S. agricultural technologies. The nation would be able to meet its basic needs more quickly while economically and diplomatically undermining America accordingly. 

Kennedy said, “If you’re able to ‘crack the code’ of a genetically modified organism, then you would be able to steal hundreds of millions or even billions of dollars of intellectual property.”

Recruit employees from TSMC, the  world’s leading semiconductor foundry.

Another move China has made to achieve self-sufficiency in chip production is to hire workers from international manufacturers with attractive packages. This action highlights China’s shortage of chip talent.

Quanxin Integrated Circuit Manufacturing in Jinan, better known as QXIC, and Wuhan Hongxin Semiconductor Manufacturing, or HSMC, are two Chinese government-backed semiconductor projects . They hired more than 100 veteran engineers and management from Taiwan Semiconductor Manufacturing (TSMC).

Nikkei Asia cites a source familiar with the matter that HSMC offers 2 to 2.5 times TSMC’s total annual salary and bonuses for those people.

Meanwhile, China’s chip champion SMIC offers senior executives up to $3.5 million in shares at a 66% discount. This is a part of a talent retention strategy that will cover a fifth of the company’s staff.

Roger Sheng, a semiconductor analyst with research company Gartner said, [quote] “China’s chip talent is still extremely insufficient, as it is building many big projects at the same time. Not having enough talent is also a bottleneck for semiconductor development. These Chinese chip projects have to fight against each other to recruit talent and cultivating that talent, especially in microelectronics, really takes time. It’s not that easy just to hire some leaders and then suddenly you can build and run such advanced chip facilities.” [end quote]

All of these actions show that chip shortage is imposing challenges on China, even when they want to produce chips by themselves.. The Chinese regime is trying to cut imports on chip production using various ways. 

However, the question is if China can produce chips on their own when they still rely on many external factors.

Is it possible for China to produce their own chips? 

An expert told CNBC that, in reality, China is still a long way from self-sufficiency.  For some sizes, China still relies on other producers such as Alibaba’s 5 nanometer chip, Baidu’s Kunlun 2 7 nanometer chip and Oppo’s 3 nanometer chip. 

As reported by CNBC, China does not have a corporation capable of producing these cutting-edge semiconductors in these sizes. They will have to rely on only three companies: Intel from the United States, TSMC from Taiwan, and Samsung from South Korea.

Furthermore, in May 2020, the U.S. Department of Commerce amended the foreign direct rule to prohibit chip makers from selling chips with the U.S. technology and equipment to Huawei without the government’s license. This ban covers almost all high-end chip makers including TSMC. 

To produce chips, lithography machines are crucial in the production. A giant in this field is ASML Holding from the Netherlands. However, according to Bloomberg, the U.S. is pushing the Netherlands government to ban ASML from selling key chip making technology to China. 

So far, ASML is still restricted from selling the latest machines to China. As a result, the nation could only get the older generation of machines.

Will Hunt, a research analyst at Georgetown University’s Center for Security and Emerging Technology, said that China’s chip makers would not be able to make leading-edge chips without the system. He added that China would need at least a decade to build its own similar requirement.

In addition, Arthur Herman, a senior fellow and director of the Quantum Alliance Initiative at Hudson Institute, said that China was so far behind compared with other countries in an interview with China in Focus

He said, [quote] “ China is so far behind in developing their own microchip industry in general. It’s really just a beginning process  trying to build the domestic microchip industry. They’re way behind countries like the United States, like Japan, like Taiwan.” [end quote]

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