Chinese Government Subsidies in the Semiconductor Industry: Bad for American Companies and Competitiveness

Last month, Stephen Ezell, Vice President for Global Innovation Policy at the Information Technology and Innovation Foundation, testified before the U.S.-China Economic and Security Review Commission. Much of his testimony addressed how Chinese government subsidies in its homegrown semiconductor industry has damaged American companies and the marketplace in general. 

The problem, according to Ezell, is that “Chinese subsidies (and other mercantilist practices) are propping up inferior, less innovative Chinese semiconductor enterprises at the expense of U.S. and other foreign competitors.” He continues: “In the semiconductor sector, perhaps China’s most pernicious mercantilist practice has been aggressively industrial subsidization, largely channeled through the country’s $170 billion National Integrated Circuit (IC) Fund.” Writes Ezell, “Such subsidies are an important part of the explanation why China’s share of global semiconductor manufacturing capacity, which was barely 1 percent in 2000, increased to 11 percent by 2010, 15 percent by 2020, and is forecast to increase to 24 percent by 2030.”

Part of that $170 billion includes $24 billion for YMTC, the semiconductor firm linked to the Chinese military which China hopes will become the world’s leading flash memory producer. YMTC and other Chinese semiconductor companies have quietly begun to grab more market share, but not because of superior, more innovative chips. Rather, Chinese state-backed companies flood the market with cheap, inferior chips. This drives down chip price and drives out more innovative suppliers.

Additionally, noted Ezell, Chinese subsidies have produced a glut of inferior Chinese enterprises and low-cost chips have reduced the industry’s overall chip patent intensity, costing the US firms about 5,100 patents which would have otherwise been issued. American companies are dis-incentivized to invest R&D if resulting profits are systematically reduced because through anti-competitive practices.

American policy makers have decided to fight fire with fire by attempting to pass legislation that appropriates taxpayer dollars to assist American companies with building chip fabs in the United States. That is a welcome step for ensuring American companies can sustain their position as the world’s leading chip designers. Even more important is for the Department of Commerce to seize on the growing momentum to add YMTC to the Entity List, which would have the effect of depriving it of essential American-made chipmaking equipment. It will also help protect American companies from China’s campaign to grab the mantle of international technological leadership through subsidies, theft, and forced technology transfers.

CTT’s forthcoming report examines reported deal between Apple and YMTC to ship the iPhone with the Chinese military fab’s chips.