How Innovative Is China in Semiconductors?

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Chinese competitors stand about five years behind global leaders in high-volume manufacturing of leading-edge logic semiconductor chips and continue to trail in memory chips and semiconductor manufacturing equipment, although Chinese firms have made inroads in semiconductor design and production of legacy semiconductor chips.

itif.org, Aug. 19, 2024 – 

KEY TAKEAWAYS

• China seeks to achieve self-sufficiency in all facets of the semiconductor industry, simultaneously reducing its reliance on foreign competitors while attempting to build competitive enterprises.
• Chinese "catch up" across semiconductor subsectors is uneven: In the design of logic chips, such as for mobile devices or artificial intelligence (AI) applications, Chinese enterprises remain behind global leaders, though perhaps only by two years.
• However, in other subsectors of the semiconductor industry, notably in memory chips, semiconductor manufacturing equipment (SME), and assembly, test, and packing (ATP), Chinese enterprises are innovating but several years more behind global leaders.
• In 2021–2022, 55 percent of global semiconductor patent applications were Chinese in origin (and China's number of applications doubled America's) while Chinese entities surpassed U.S. and Japanese ones for semiconductor patents granted in 2022.
• However, in terms of semiconductor industry research and development (R&D) intensity, China's rate of 7.6 percent was just 40 percent of America's (18.8 percent), and below European Union firms' 15 percent.
• China's intense efforts to develop a fully fledged, indigenous, "closed loop" semiconductor industry have spurred a great deal of ingenuity and innovation, but a "go-it-alone" strategy will be very difficult in such an extremely complex tech ecosystem.

Introduction

Semiconductors represent one of the world's most important industries, the core technology that powers the modern digital world.1 Recognizing this vital role, China's government has prioritized the sector, investing hundreds of billions of dollars to catalyze the development of an indigenous semiconductor ecosystem and to ideally cultivate globally competitive semiconductor firms across virtually all segments of the semiconductor value chain, from semiconductor design and fabrication to assembly, test, and packaging (ATP).

Thus far, those efforts have met with uneven success. With regard to the fabrication of leading-edge logic semiconductor chips, China's flagship competitor, the Semiconductor Manufacturing International Corporation (SMIC), likely stands about five years behind global leaders such as the Taiwan Semiconductor Manufacturing Company (TSMC).2 As G. Dan Hutcheson, vice chair of research firm TechInsights, explained, "Ten years ago, [Chinese companies] were two generations behind. Five years ago, they were two generations behind, and now they're still two generations behind."3 Chinese competitors are even further behind with regard to semiconductor manufacturing equipment (SME), such as the lithography tools that make semiconductors: One commentator noted that Chinese firms might be as many as five generations behind in this field.4 As one analyst explained, "The best machinery a Chinese company can produce makes chips that are 28 nanometers wide; the industry's cutting-edge equipment can make 2-nanometer chips."5

That said, Chinese semiconductor firms appear to be catching up in certain pockets: for instance, industry analysts view the design attributes and features of Huawei's Mate 60 Pro smartphone as within 18 to 24 months of competitors' versions. China has also made inroads in the production of legacy semiconductors (those greater than 28 nanometers), although Chinese firms appear to be competing in this sector on a more price- than innovation-intensive basis. In total, China continues to lag behind global leaders in most facets of semiconductor design and fabrication, but its firms' intellectual property (IP) and innovation capabilities are accelerating rapidly as China pursues an aggressive whole-of-society strategy in an intense state-directed effort to achieve domestic semiconductor self-sufficiency.

A Brief Overview of the Global Semiconductor Industry

Modern semiconductors contain billions of transistors on a chip the size of a square centimeter, with circuits measured at the nanoscale ("nm," a unit of length equal to one millionth of a meter). The very newest semiconductor fabrication facilities, which can cost over $30 billion to construct, produce semiconductors at 3 or 2nm (and even sub-2 nm) scales.6

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