Industry Analysts See China’s Legacy Chip Sector Booming – What Will the U.S. Government Do?

Last year’s export controls on China’s advanced chip sector have been effective in denying China tools for making the most advanced semiconductors. But there has also been a negative consequence: China has ramped up efforts to dominate the legacy chip market.

CNBC recently featured several analysts commenting on China’s prowess in producing legacy chips (those at 16 nanometers or above, depending on your definition, which appear in everything from cars to household devices):

  • China is showing good progress in making chips based on mature technology,” said Charles Shi, a principal and senior semiconductor analyst at asset management firm Needham & Company.
  • I certainly think that big Chinese chip makers will be able to survive building legacy chips and there’s a very healthy market for legacy, older model chips,” said Paul Scharre, vice president and director of studies at the think tank the Center for a New American Security.

China’s plan is to dominate the legacy market by undercutting other firms on price and eventually put them out of business. At that point the world (and potentially the U.S. military) will be dependent on a communist dictatorship for its chip needs, and one that has already shown a willingness to use economic coercion against other nations. (Read more about how Chinese control of the legacy chip market threatens American national and economic security in CTT’s April 2023 report Every Chip Matters).

China sees the opportunity, and the pivot to legacy chips is already evident. According to CNBC, “U.K.-based analysis provider Total Telecom said that China has acquired competency in 28-nanometer and 14-nanometer chip manufacturing back in 2021.”

But China is not stopping there. The South China Morning Post reported in May of this year that China doled out some $1.75 billion in subsidies to its semiconductor industry in 2022, including $282 million for SMIC, its flagship legacy chipmaker. Despite being on the Entity List for its ties to the Chinese military, SMIC is still allowed to acquire American technologies for its legacy chip business.

More evidence keeps emerging that the Biden Administration is preparing an executive order to limit certain kinds of American investment in Chinese technology sectors, including semiconductors. But as China Tech Threat illustrated in Every Chip Matters, the Biden Administration doesn’t need to wait to protect American national and economic security. It can do that now by doing the following:

1. Close export control loopholes on SMIC and other Chinese legacy chipmakers

2. Strengthen Section 5949 of the NDAA

3. Leverage Tariffs to Protect U.S. Capacity

4. Award CHIPS Act money fairly

“I don’t underestimate China’s ability and resolve to find a way to build next generation technologies and to also utilize some lagging technologies to still build really important products,” Daniel Newman, CEO and principal analyst at research firm Futurum Group, told CNBC.

Neither should the U.S. government.

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