The Silverado Policy Accelerator is out with an excellent new report on how the Chinese government is using subsidies to grow China’s semiconductor industry, put Western firms out of business, and make the world dependent on Chinese legacy (or “foundational”) chips.
Foundational Fabs: China’s Use of Non-Market Policies to Expand Its Role in the Semiconductor Supply Chain hits on many of the same notes which China Tech Threat’s Every Chip Matters did earlier this year. As Foundational Fabs’ executive summary states:
The Chinese industry is already impacting the global industry by putting downward pressure on prices for some products and capturing market share. This is critical as foundational semiconductors account for three-quarters of global foundry capacity, are essential to applications from defense to medical devices to phones, and feature advanced technologies that allow them to be fit for purpose, such as applications requiring reliable functioning in high-heat and high-pressure environments. Ceding the foundational market to China would have significant national and economic security implications.
To date, the U.S. government’s strategy for stopping China from gaining the global edge in semiconductors has only concentrated on leading edge chips. This strategy itself hasn’t been effective, since SMIC has apparently been able to use U.S. semiconductor technology to manufacture a new 7nm chip for Huawei (read CTT Advisor Steve Coonen’s analysis of the SMIC-Huawei breakthrough here). It’s not just SMIC: YMTC quickly followed suit with the “world’s most advanced memory chip.”
But neglecting to stop China’s grasp for dominance in legacy chips will lead to even worse consequences. Specifically, it could put the U.S. and its allies at the mercy of an American adversary for the chips that go into practically everything. Foundational Fab notes, “[China] is on track to have the most fabs of any country in the world come online during 2022–2026, giving it the lead in both 200 mm and 300 mm wafer capacity and making it an indispensable global supplier of foundational semiconductors.”
Among the report’s many good recommendations for preventing China from seizing the commanding heights of legacy chips is one China Tech Threat has promoted many times:
The United States should use its ongoing engagement with Japan, the Netherlands, and other European Union countries like Germany to explore options that would prevent or at least delay China from obtaining the SME necessary to support its expansion of foundational semiconductor capacity.
Options could include an agreement among these countries (and possibly others) to expand export controls on SME at certain foundational node sizes where China is investing the most heavily. This is a national security issue given more Chinese dominance in foundational semiconductors will increase the chances of these semiconductors making their way into U.S. defense applications and agencies.
Right now American semiconductor equipment manufacturers continue to make billions from China (read CTT’s Cash Over Country report for more), enhancing the Chinese military and dangerous companies like Huawei in the process. The U.S. must lead the world on tightening the international regime of export controls targeting legacy chips. Otherwise, China’s subsidies of the semiconductor sector will be a windfall investment for enemies of American security, prosperity, and freedom.