China is trying to break away from American chips

Local companies receive serious state subsidies so that they can replace parts from the West.

Last fall, the Biden administration kicked the tech trade war into high gear, cutting China off from access to Western equipment and skilled labor needed to manufacture the most advanced semiconductors. American employees were forced to leave Chinese chip companies and American suppliers immediately stopped their services. With Europe and Japan expected to follow suit soon, Chinese chip companies are hastily restructuring their supply chains and rewriting their business plans. US trade barriers have accelerated China’s drive towards a more independent chip sector. Western technology and money have withdrawn, but government funds are flowing in to create domestic alternatives for producing less advanced but still profitable semiconductors. And China has not given up on the production of high-end chips either: manufacturers are trying to work with older, foreign components not blocked by US sanctions, as well as with less advanced domestic equipment.

Chinese President Xi Jinping has spoken openly about what he believes are Western countries seeking to enforce “all-out isolation” against China. China’s lack of access to world-class chip-making equipment could also hamper its long-term progress in many advanced industries, such as artificial intelligence and space exploration.

The reason for the strict US restrictions is the fear of the Chinese threat by Washington officials, who do not want to see the Asian giant’s military arsenal being modernized with their own equipment. According to the new consensus in Washington, decades of economic integration with China have not been successful, but the new restrictions still only affect the most modern semiconductors. Under the rules last October, US companies and citizens can no longer provide subsidies to Chinese companies that produce more than a certain level of sophistication in chip technology. This goes beyond the Trump administration’s trade restrictions, which have targeted specific companies such as telecom giant Huawei.

Amid past trade tensions, Beijing has mobilized huge sums to bolster domestic alternatives to Western chipmakers. However, foreign parts were easily available and of better quality, so many Chinese companies refused to switch. However, reservations regarding the use of local components are being eased. Chinese technology companies are already looking at all levels of the supply chain to replace Western chips and related components, even those not affected by US control. For example, state-owned electric vehicle manufacturer Guangzhou Automobile Group in February he announced, that it aims to buy about 1,000 chips used in its cars from Chinese suppliers. It currently sources 90 percent of its chips from the United States.

The Chinese president pays a lot of attention to the transition
Dozens of Chinese chip companies are looking to raise money through public stock offerings this year. It is among them China’s second-largest chip maker, Hua Hong Semiconductor, is also a chip industry toolmaker backed by Huawei. But American money will certainly not flow there, because the disputes between the world’s two largest economies show no signs of abating. The Biden administration has drawn up new rules, but has not yet released how they would limit venture capital investment in advanced Chinese chip companies. PitchBook, which tracks private funding according to your data foreign investment in China’s semiconductor sector fell to just under $600 million this year, the lowest since 2020. Regulatory bodies are already demanding tighter control of technologies such as quantum computing or chip manufacturing equipment are being considered.

But other international companies that previously invested in the Chinese semiconductor industry are now redirecting their investments elsewhere. The leading chip manufacturers of Korea and Taiwan, Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC, are investing billions of dollars in the United States. The US subsidies applied for the Arizona factory to be built by the Taiwanese chipmaker will force them to limit their investments in China for a decade.

Beijing is helping to fend off the impact of American restrictions with state capital, roughly $1.9 billion in February injected to YMTC (Yangtze Memory Technologies Corporation). A public fund has also recently given money to other suppliers of chip equipment and materials. The new subsidies are aimed at removing Western components from Chinese supply chains. The city of Guangzhou this year more than 29 billion dollars separated semiconductor and other technology projects, including those that seek to replace Western chip equipment suppliers. Orders for Chinese-made equipment have surged in recent months, according to company reports and press statements. Last August, YMTC set a goal of tripling its share of global chip production to 13 percent by 2027, challenging chipmakers such as US-based Micron Technology. This will certainly not happen now, because the Chinese memory chip maker cannot build its second factory, so by 2027 it will have only 3 percent of the market.

According to the estimates of the market research company Yole Group, less than 1 percent of the semiconductors manufactured in China are among the most advanced, i.e., only chips found in everyday entertainment electronics and cars are produced locally. These chips were not even affected by the October orders of the Biden administration. But China’s two biggest chipmakers, state-backed Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Semiconductor, are scrambling to switch to cutting-edge technology, with both publicly announcing they will spend billions of dollars this year to improve production.

At the same time, the weakening of foreign influence over the Chinese chip sector creates opportunities for domestic companies. Last month, a semiconductor equipment company went public in Shanghai. Shares of Crystal Growth & Energy Equipment are up 30 percent since its debut. Due to the sanctions, a gap in the market has emerged. Those who are in the right place now have a chance to make a big jump. The outflow of public money can mostly help the production of low-end chips, in the next decade China may account for roughly half of the world’s production capacity in this segment. This may also create new supply chain vulnerabilities for foreign companies, and China may even use this to its advantage over time.