China's Semiconductor Industry Faces Significant Challenges Despite Progress: A Detailed Analysis of Current Standing and Future Prospects

China's Semiconductor Industry Faces Significant Challenges Despite Progress: A Detailed Analysis of Current Standing and Future Prospects
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China remains five years behind global leaders in the commercial manufacturing of advanced logic chips, according to a new report by the Information Technology and Innovation Foundation (ITIF). Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading contract chipmaker, is noted to be technologically ahead of Semiconductor Manufacturing International Corporation (SMIC), mainland China’s largest foundry. While TSMC introduced its 3-nanometre process in 2022, SMIC is still testing its 5-nm process and has just started producing 7-nm chips for Huawei's Mate 60 smartphone series, in defiance of US sanctions.

Challenges in Semiconductor Manufacturing Equipment and Overcapacity

Chinese firms are also struggling in the production of semiconductor manufacturing equipment and semiconductor assembly, testing, and packaging (ATP). Despite significant investment and innovation, China is still several years behind global leaders in these areas. The ITIF report further highlights the issue of overcapacity in China’s legacy chip production, driven by substantial government subsidies. China’s share of global mature-node production is expected to grow from 31% in 2023 to 39% by 2027, raising concerns in Washington about potential Chinese dominance in the global supply of such chips.

Advances in Chip Design and Local Demand

On a more positive note, the ITIF report indicates that Chinese companies are only two years behind global leaders in the design of logic chips. Strong local demand, particularly for logic chips used in mobile devices and artificial intelligence applications, has fueled faster innovation in this area. However, the report also warns that despite these advancements, the complexity of the chip ecosystem may hinder China's ambition to create a self-reliant semiconductor industry.

Semiconductor manufacturing 
Image credit: Denton Vacuum 

Impact of Government Subsidies and "Go-It-Alone" Strategy

The growth of China’s semiconductor industry, particularly in older-generation chips, has largely been driven by massive government subsidies. Since 2014, investments from various levels of the Chinese government are likely equivalent to the $52 billion in subsidies earmarked by the US under the Chips and Science Act of 2022. While these subsidies have been crucial for supporting loss-making Chinese firms, the report cautions that China’s "go-it-alone" strategy to develop a closed-loop chip industry could face significant challenges.

Increasing Share in ATP Facilities and Concerns Over R&D Investment

China is placing high hopes on its ATP sector, with the country’s share of global ATP facilities rising to 38% in August 2023 from 27% in 2021. Chinese firms like JCET Group and Tongfu Microelectronics are among the world's largest outsourced assembly and test firms. However, despite China leading in global semiconductor patent applications in 2021 and 2022, Chinese firms have dedicated a smaller portion of their revenues to research and development (R&D) compared to their US, EU, and Taiwanese counterparts. In 2022, China’s semiconductor industry had an R&D intensity of 7.6%, significantly lower than the US (18.8%), EU (15%), and Taiwan (11%).