Chip war: China is five years behind global leading-edge production, report says

“China is investing hundreds of billions of dollars to become a leader in semiconductors, so it is making impressive strides, but its progress so far has been limited to certain aspects of chip development and production,” said Stephen Ezell, ITIF’s vice-president of global innovation, who wrote the report.

Chinese firms are even weaker in the production of semiconductor-manufacturing equipment, as well as semiconductor assembly, testing and packaging (ATP). Despite innovative efforts, Chinese companies stand “several years more behind global leaders”, the ITIF said.

The future looks brighter in the design of logic chips, where Chinese companies have come closer to global leaders, falling by only two years behind, according to the ITIF. Strong local demand for the design of logic chips used in mobile devices or artificial intelligence applications has fuelled faster innovation, the report said.

The growth of China’s semiconductor industry, particularly in older-generation chips, has been driven largely by massive subsidies, according to the report, as President Xi Jinping calls on all levels of the government to support the nation’s chip self-reliance drive.

Chinese chip companies have benefited not only from state subsidies, but also tax or tariff reduction and exemption for equipment and materials, as well as land sales at reduced prices, according to ITIF.

While analysts have said that government subsidies are vital to support loss-making Chinese firms playing the long game, the report warned that China’s “go-it-alone” strategy to create a “closed-loop” chip industry could prove highly difficult, given the complexity of the chip ecosystem.

Substantial government subsidies have also led to an overcapacity in Chinese legacy chip production. The country’s share of global mature-node production is expected to grow from 31 per cent in 2023 to 39 per cent in 2027.

The development has triggered concerns in Washington that China may dominate global supply of such chips. The US has announced it would double tariffs on semiconductor imports from China to 50 per cent next year.

China now pins high hopes on ATP, as the country’s share of global ATP facilities rose to 38 per cent in August 2023 from 27 per cent in 2021, according to ITIF. The world’s five largest outsourced assembly and test firms, such as JCET Group and Tongfu Microelectronics, are Chinese.

While over half of global semiconductor patent applications filed in 2021 and 2022 came from Chinese companies, twice those from US companies, Chinese firms dedicated less of their revenues to research and development (R&D).

In 2022, the R&D intensity in China’s semiconductor industry was 7.6 per cent, compared with 18.8 per cent in the US, 15 per cent in the EU and 11 per cent in Taiwan, the report showed.