Despite being a rising power and a competing superpower on the global stage, why is China losing the microchip war? Is it because the country lacks resources, or is it because the USA is implementing policies like October 7 to limit US progress? It is a little bit of both.

The Chinese government’s efforts to promote and enhance its microchip industry have garnered mixed results. The 2014 Guidelines to Promote a National Integrated Circuit Industry and Made in China 2025 announced in 2015 represent the latest attempts by the Chinese government to realize this goal. 

To know more about why China is losing the microchip war, read ahead. 

An Overview of Why China is Losing the Microchip War

China has been facing challenges in acquiring extreme ultraviolet (EUV) lithography machines, a technology exclusively manufactured by the Dutch firm ASML. The unavailability of EUV machines has hindered the Chinese tech giant’s ability to efficiently mass-produce advanced semiconductors at a reduced cost. 

This limitation has posed significant obstacles to their semiconductor production endeavors. But there is more to the story. 

How Is The Evolution of the Chip Industry Making China Lose?

There are several factors as to why China is losing the microchip war. The USA is giving China a hard time, but the evolution of the microchip industry is another big reason. Here are all the reasons why. 

1. Changing Chip Design and Manufacturing

The chip industry is evolving. It’s moving toward a fabless model, where companies like Apple design their own chips but outsource production to foundries like Taiwan’s TSMC. Big cloud-computing companies like Amazon, Microsoft, and Google are also making their custom chips for cost savings and efficiency. Intel, which used to design its chips, missed out on industry shifts, including an opportunity with Apple.

2. Shrinking Chip Size and Moore’s Law

Chips are getting smaller, already down to the size of DNA molecules. Moore’s Law, which used to double the number of transistors on chips every two years, is getting harder to follow. Instead, the focus is shifting to creative chip design as customers demand new capabilities. A challenge is how to package chips for new and innovative arrangements.

3. Global Competition and Supply Chain

The competition in the chip industry centers around a global supply chain. The US excels in chip design, Japan specializes in ultra-purified chemicals for chip manufacturing, the Netherlands leads in lithography machines, and Taiwan dominates advanced processor chip fabrication. TSMC, a Taiwanese company, makes 90% of the world’s advanced processor chips.

4. China’s Reliance and Vulnerability

Chinese chipmakers depend on imported manufacturing equipment from the US and the Netherlands, making them vulnerable to import restrictions. China consumes 25% of the world’s chips, but only produces 8%. This reliance on imports is costly, with semiconductors costing as much as imported oil.

5. US Strategy and Leadership

The US aims to maintain its semiconductor leadership. It focuses on research and advanced chip design, with 20% of the CHIPS Act dedicated to research. Additionally, the US seeks to have advanced processor production within its borders. Currently, only three companies worldwide—Samsung, TSMC, and Intel—can manufacture the most advanced logic semiconductors.

Also Read: Why China is Dominating the Solar Industry?

The US October 7 Policy and Its Impact on China’s Microchip Industry

The October 7 policy was a turning point in the USA-China Relations. On October 7, 2022, the US government enacted strict export controls, thus limiting China’s semiconductor industry. This was a shocking move, as it gave rise to new US-China trade tensions and had a huge impact on international politics. 

Commenting on the policy, Anthony Blinken said: “We are at an inflection point,” Blinken said. “The post-Cold War world has come to an end, and there is an intense competition underway to shape what comes next. And at the heart of that competition is technology.”

Impacts of the Policy

A bird’s eye view would tell you that the policy only restricted exports of certain types of AI applications and computer chips. However, the impact it left on the relations between the two countries is massive. Here are the three impacts of the new policy.

1. The policy restricted exports of Microchips to China as a whole. Rather than restricting it to just military areas or prohibited areas, the USA made a strategic move by limiting the overall use of the chips. 
2. Unlike previous U.S. export controls, which allowed China to advance technologically at a controlled pace, the new policy deliberately weakens China’s semiconductor industry. This has led to major delays for key Chinese semiconductor companies like Biren, YMTC, SMIC, and SMEE, setting them back by several years.
3. The policy also prevents China from ever expanding (beyond a certain point). Unlike before when China could easily revise its performance thresholds every year and expand, the US now restricts China from revising its performance. So while the rest of the world advances, this policy limits advancement in the Chinese microchip industry. 

Technology Transfer Requirements: A hindrance for China’s Markets

Semiconductor firms have long-faced implicit and explicit requirements to engage in joint ventures with Chinese counterparts and transfer technology in exchange for access to the Chinese market. These demands are integral to China’s current strategic objectives in the semiconductor sector. 

Although technology transfer requests imposed on U.S. semiconductor companies are typically kept confidential due to their sensitivity, a 2017 survey by the U.S.-China Business Council revealed that 19 percent of surveyed companies had received technology transfer requests to China in the previous year. One-third of these came from a central government authority. 

Furthermore, a U.S. Department of Commerce survey in 2017 identified 25 prominent U.S. industry players, accounting for significant market share and revenue. They were expected to create joint ventures with Chinese entities and transfer intellectual property (IP) to maintain their market presence.

A striking example of the challenges faced by U.S. semiconductor companies in China involves Micron, a prominent Idaho-based memory chip manufacturer holding 20–25 percent market share in dynamic random access memory chips. In 2015, Micron rejected a $23 billion takeover bid from China’s Tsinghua Unigroup. 

Subsequently, Tsinghua Unigroup recruited the head of Micron’s Taiwan-based joint venture, and Micron’s Taiwan employees were accused of stealing $8.75 billion worth of Micron’s intellectual property, sharing it with Chinese entities like Tsinghua Unigroup and Fujian Jinhua Integrated Circuit Company.

 Legal disputes ensued, including a Chinese court ruling against Micron. Concurrently, an antitrust investigation into memory chip market price-fixing involving Micron was initiated by China’s National Development and Reform Commission. Similar challenges involving technology transfer requirements have created problems for the China microchip industry. 

A Brief Overview of the Microchip Industry’s Significance

The computing power is accessed through microchips. Cars, data centers, and smartphones, all use semiconductor chips. Anything that has an on or off switch has microchips embedded into them. A decade ago, the usage of these chips was limited to just a few cars and mobile phones; today, semiconductors run the global economy. 

Here is why countries like the USA and China are obsessed with developing their microchip industry. 

1. Technological Advancement

Advancements in microchip technology help drive innovation across all industries. Since they are the building blocks of all modern electronics, they enable the production of smaller, yet efficient devices. 

2. Economic Impact

The microchip industry is massive. According to GlobalNewsWire, the industry size was around $580 billion in 2022 and will reach around $634 dollar in 2023. Moreover, it is expected to reach a global value of 1,124 billion in 2032. It is hence no wonder that China is concerned about losing the microchip war. 

3. National Security

Microchips are integral to military systems and communication networks, and are hence crucial for increasing a country’s hard power. Having a consistent and reliable supply of microchips can improve a country’s defense and reduce its reliance on other countries. Since China is in a cold war with the USA, it wants to leave no stone unturned in its fight against the superpower. 

4. Global Connectivity

Microchips are needed for the development of smart cities, but more importantly, they are important for digitizing the urban sector. They power the internet and ensure smooth data transfer. Smooth channels of communication help interconnectivity. China needs to develop this sector if it wants to see its Belt and Road Initiative successful. 

5. Innovation and Competitive Advantage

The microchip industry fosters innovation in various fields, including healthcare, transportation, and energy. New applications and technologies emerge as microchips become more powerful and versatile. Countries and companies that excel in microchip manufacturing gain a competitive edge in the global market. 

Historical Context of China’s Microchip Industry

Semiconductors drive all information technology sectors. They are also referred to as the integrated circuits or chips. The global semiconductor industry is heavily influenced by the US. Ever since Jack Kelby developed the first rudimentary IC for Texas instruments in 1958, Silicon Valley of the US has dominated the microchip industry.  

The fabrication process for the industry is very complicated and research-intensive. Multinational corporations actively spend 20% of their annual profits in R and D. This cost amounts to almost $10 billion globally. The Chinese Semiconductor industry began in 1956 with the creation of its first IC. The development of the industry can be divided into four phases. 

Years	Phases
1956-1990	The first phase of the development was inspired by a Soviet-style system of industrial organization that focused on indigenous development. It relied heavily on state planning and was heavily influenced by external development regimes.
1990-2002	This phase was characterized by Chinese leaders trying to catch up to global trends and learn from the developments made by world leaders. Moreover, they were inspired by global trends and ventures. However, this phase saw very limited success in terms of the advancement of technology.
2002-2014	This was a rather successful time in the development of the industry as it saw many large-scale firms and organizations investing in R and D. Moreover, the country’s domestic market also grew and China was able to become an important stakeholder in the global microchip debate.
2014-Present	The ongoing period has been riddled with ups and downs. China is pursuing a well-defined and ambitious plan to up its game. There are well-funded plans that will lead to long-term success. However, there is another question that everyone seems to be asking: Why is China losing the Global War?

Recent Changes in the Microchip Landscape

1. China’s efforts to boost Domestic Production and Innovation

China is trying to increase its domestic production. It is also trying to rely less on imports. The government has thus introduced policies like ‘Made in China 2025’ that aim to promote high-tech industries, including semiconductors, through investments in research and development.

Under this new initiative, China has made considerable investments in local manufacturing facilities like Semiconductor manufacturing facilities (SMIC). While China has made progress, it still faces challenges in catching up with the technological prowess of established semiconductor giants. This is one of the major reasons why China is losing the microchip war. 

2. Technological advancements and investments in semiconductor manufacturing

The semiconductor industry is characterized by relentless innovation. Companies are continually pushing the boundaries of chip design and manufacturing. One notable advancement is the development of smaller and more energy-efficient transistors. This allows for the creation of faster and more power-efficient microchips, paving the way for advancements in areas like AI and 5G technology.

Moreover, there is a growing trend of partnerships and collaborations between tech giants and semiconductor manufacturers. Companies like Apple, Google, and Amazon are investing heavily in custom chip design to optimize their devices’ performance. This trend is driving substantial investments in semiconductor manufacturing, as these companies seek to control their chip supply chains for greater efficiency and cost-effectiveness.

3. Trade Tensions and Geopolitical Factors Influencing the Microchip Market:

Trade tensions and geopolitical factors have cast a shadow over the microchip market. The U.S.-China trade conflict, in particular, has led to export restrictions and supply chain disruptions. This has affected semiconductor companies that rely on global supply chains, leading to increased uncertainty and volatility in the market.

Additionally, concerns about national security have prompted governments like China to scrutinize foreign investments in semiconductor companies and technology transfers. These factors have added complexity to the global microchip landscape, with companies and nations reevaluating their strategies and partnerships in response to evolving geopolitical dynamics.

Also Read: China’s Wolf Warrior Diplomacy & Its Core Foreign Policy

Made in China 2025: Can This Policy Undo the Damage?

The ‘Made in China 2025’ initiative is an ambitious project undertaken by the Chinese government to enhance its manufacturing prowess. This comprehensive plan identified ten key sectors, constituting a substantial 40 percent of China’s value-added manufacturing. 

The targeted areas ranged from next-generation information technology to medical devices, all with the common goal of transforming Chinese manufacturing into a force to be reckoned with on both domestic and international fronts. 

Here are some key features of the Made in China policy:

1. Fostering Industry Excellence

At the heart of “Made in China 2025” was the objective to nurture high-quality manufacturing sectors capable of producing cutting-edge products. The initiative aimed to achieve this by equipping modern facilities with advanced technology and facilitating cooperation with renowned brands. 

To facilitate this transformation, national and provincial funds were established to promote indigenous research and development. Technology acquisition from overseas, and the development of vital technology, intellectual property, and brand recognition is also part of the agenda. 

2. A Path to Technological Advancement

The State Council, building on the National IC Guidelines and the broader initiative, issued a Technical Area Roadmap that set ambitious yet non-binding targets for the sector. These objectives included the advancement of IC design, manufacturing, packaging, and testing industries. 

By 2020, the roadmap envisioned China’s semiconductor capabilities to be one to two generations behind global leaders, underpinned by a robust domestic supply chain.

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Conclusion

Setbacks and limitations: These are the words that dominate the debate around China and the Microchip industry. One of the main reasons why China is losing the microchip war is because it is unable to acquire the advanced and up-to-date technology needed for progress. 

Additionally, other countries like the USA and Taiwan are hindering China’s ability to move beyond the current technology. Only time will tell whether the Made in China policy will help change tides for the country. 

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