A new report from the Information Technology & Innovation Foundation examines the progress China has made in its quest to become self-sufficient in semiconductor innovation and production.
China is still behind the pack when it comes to semiconductor innovation, but is making steady progress in playing catch-up, according to a new report released this week by the Information Technology & Innovation Foundation (ITIF).
China’s government has invested hundreds of billions of dollars in its semiconductor industry, with a goal of becoming self-sufficient and “ideally cultivate globally competitive semiconductor firms across virtually all segments of the semiconductor value chain.” China is now broadly five years behind its global competitors, making further progress in some areas and lagging behind in others. ITIF reports:
China is rapidly closing the gap across many facets of the semiconductor production process and is developing genuine IP and innovation capabilities across the board. In January 2024, Intel CEO Pat Gelsinger asserted that, despite China’s ongoing efforts to advance its semiconductor industry and design more sophisticated chip manufacturing tools, the country still lags behind the global semiconductor industry by approximately 10 years. While there’s no question that China’s behind, the real gap, as noted, is probably half that now, or about five years—at least for the design and fabrication of leading-edge logic chips. China continues to plough hundreds of billions of dollars into its semiconductor industry in an effort to close that gap. Moreover, over the long term, as one observer commented, “The likelihood of China developing advanced chip-making capabilities is almost certain.”
The United States is credited with inventing the semiconductor, and continues to lead the world in innovation. But the United States made a real strategic blunder when it opted to offshore most of its semiconductor manufacturing, ITIF argues. After all, the factory floor is a place where innovation happens, and sending production halfway around the world cuts off access to that innovation.
And countries like China seized the opportunity:
The common narrative is that China is a copier and the United States is an innovator. That narrative often supports a lackadaisical attitude toward U.S. technology and industrial policy. After all, America leads (almost by right) in innovation, so there is nothing to worry about. But, first, this assumption is misguided because it is possible for innovators to lose leadership to copiers with lower cost structures, as has been the case in many U.S. industries, including consumer electronics, solar panels, telecom equipment, and machine tools. Second, it’s not clear that China is a sluggish copier that’s always destined to be a follower.
Indeed, China is starting to make real progress across the board in semiconductor production, and is excelling in some specific areas. For example, China is making big progress when it comes to “logic chips,” which are used for mobile devices or artificial intelligence. ITIF estimates that China is only about two years behind global leaders.
But the gap is wider when it comes to other parts of semiconductor innovation, including memory chips, semiconductor manufacturing equipment (SME), and assembly, test, and packing (ATP). “Chinese enterprises are innovating but several years more behind global leaders,” ITIF reports.
Still, China’s share of global value is growing, jumping from 8% to 31% from 2001 to 2016. In that same period, the U.S. saw its value fall to 22%, while Japan’s fell over two-thirds to 8%. ITIF also reports that China submitted 55% of global semiconductor patent applications in 2021-2022, doubling that of the United States. China surpassed the U.S. and Japan for semiconductor patents granted in 2022.
The United States continues to lead in semiconductor research and development intensity, however. China’s rate is 7.6%, while the U.S. comes in at 18%.
“China is likely to only achieve 30 percent self-sufficiency by the end of 2025,” ITIF reports. “RAND’s Jimmy Goodrich has noted that China would probably need to invest at least an additional $1 trillion more to achieve true self-sufficiency in the industry. Nevertheless, these strategies make clear that China recognizes that semiconductors represent a foundational technology that underpins its economic and national security wherewithal, and that the country is willing to undertake the long-term investments necessary to reach its goal of achieving self-sufficiency and reducing dependence on foreign technologies in this critical sector.”
So, we know that China is determined to continue to grow its semiconductor industry. What does the United States do about it?
In its report, ITIF argues hat the passage of the CHIPS and Science Act was a huge step forward, as the U.S. made “a major commitment to revitalizing the competitiveness of its semiconductor industry” that has thus far led to investments of over $300 billion by companies toward “building and operating fabs in the United States.”
The challenge now is keeping the momentum going, and to ensure that the new law is properly implemented and executed. The United States also needs to “dramatically expand and deepen its domestic STEM (science, technology, engineering, and mathematics) pipeline,” including by doubling the number of STEM high schools across the country and rewarding universities that graduate students with STEM degrees to maintain both a pipeline of innovators and folks who can do the high-tech factory work at semiconductor fabs themselves.
But there’s also no doubt that as part of its strategy to dominate semiconductors, China is engaging in a number of unfair practices, which means domestic investment alone will not be enough.
“The rapid expansion of China’s semiconductor industry—as has been the case for many other Chinese industries, from electric vehicles and solar panels to high-speed rail—has been powered in part through massive industrial subsidization of a nature and on a scale that clearly violates the country’s World Trade Organization (WTO) commitments,” ITIF notes in its report.
As such, the United States cannot hesitate to respond. The ITIF recommends working within the WTO to update rules and impose stricter penalties for practices like these, but given the WTO’s ineffectiveness, far more will need to be done to take on China’s trade malfeasance. Additional trade action is critical.
In its report, the ITIF calls for narrowly targeted export controls on key technologies and developing a “more ambitious and effective plurilateral approach to promulgate export controls among like-minded nations.” At the same time, the organization urges the U.S. to “make strong use of the Entity Listing, particularly in instances where Chinese companies are found responsible for egregious cases of IP theft.” And given China’s routine blocking of U.S. tech companies from selling in China’s market, the ITIF says the “U.S. (and other allied nation) policymakers should develop new trade tools permitting the U.S. government to reciprocally exclude Chinese competitors from competing in U.S. markets in sectors where the Chinese are denying U.S. (and other foreign) firms market access.”
And above all, the United States must not congratulate itself on the passage of the CHIPS Act and call it a day. The semiconductor industry is among the most important on the planet, and the United States and its allies will lose their edge if they become complacent.
“Chinese enterprises are innovating as rapidly as they’re able to in this industry—and they have achieved some notable achievements and advancements—but overall, they remain behind global leaders in the semiconductor industry,” the ITIF says. “But if allied nations rest on their laurels, they risk seeing a significant diminution of their industries.”