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Can China establish leadership in semiconductor sector?

China imported more semiconductor chips than oil for the first time in 2013. According to BCG, China imported US$350 billion worth of semiconductor chips in 2020, which represented about 60% of the global semiconductor market. The amount was twice as much as China’s oil imports. Self-sufficiency therefore has become the most critical part of China’s national development strategies. Backed by strong state support, YMTC raised its goal of attaining a 3-4% share of the global market in 2022 to 7%. SMIC also has plans to build four new fabs. However, there have been reports that Chinese corporations including YMTC and SMIC are having difficulty acquiring production equipment from abroad. The US has China’s semiconductor sector in a stranglehold amid intensifying conflicts. Uncertainties are lying ahead for China’s semiconductor industry.

Most people put the blame on the US-China conflict. As a matter of fact, even without the US and China at each other’s throats, the risks and costs involved in developing the semiconductor industry are far higher than those for mobile phones and display panels, as it requires a delicate balance among process technology, customer relation and industry ecosystem. The process of building a semiconductor industry normally takes at least 10 years. SMIC was founded in 2000 and has only made limited progress in 20 years. I don’t think YMTC or CXMT will be an exception.

China has reportedly set aside US$1 trillion in government funding to be supervised by State Councilor Liu He, who accompanied Xi Jinping on recent visits to the above mentioned semiconductor companies. I think what Liu, as a high-ranking official trusted by Xi, can do will not be to stick to the rules and follow in other people’s footsteps. He will not have China’s semiconductor industry catch up with foreign firms’ IP achievements. Instead, what he is charged with should be to keep China strong enough to stay in the game and capture preemptive opportunities when the next technology shift or breakthrough in critical equipment and material comes. The Xi government’s strategic goal is to keep China’s economic growth momentum going and challenge the US to see which of them can come out ahead in economic development.

The Xi administration looks to break the US government’s stranglehold with its “dual circulation” strategy. In fact, China’s economic development has already taken a dual-path approach. In the past, foreign investment and the manufacturing sector drove domestic demand and now China looks to have high-quality domestic demand attract continuing foreign investment and keep fueling industrial growth.

Is China’s domestic demand really so appealing? Since its GDP outgrew Japan’s in 2009 to become the world’s second-largest economy, China has been progressing by leaps and bounds, with its status in global politics and economy rapidly on the rise. Businesses around the world have been flocking to China in fear of missing out on the opportunities China has to offer. The trend of using smartphones and apps that Apple had started has given rise to a slew of innovative Internet services burgeoning one after another, such as Alipay, DiDi Taxi, Meituan and TikTok after 2010. China now has its own Internet giants BAT, which are on par with America’s G-MAFIA.

Investors are therefore turning their attention away from the Western world to the promisong China. Getting a head start over Europe and America in electric vehicles (EV), IoV and automotive batteries, China is now ahead of the rest of the world in these areas. In view of these accomplishments, the world has finally awakened to the fact that China is no longer a production hub that takes advantage of cheap labor to earn meager profits but it fosters innovative applications and emerging industry sectors that do not pale in comparison to the Western world.

Businesses can hardly overlook how well developed and how tempting the China market is. This is China’s most powerful bargaining chip when it goes up against the US in confrontation in the next decade. The Chinese market may lack efficiency, but bold and determined investors can optimize and diversify the opportunities made available by China’s geographical differences and its 1.4 billion population. The Chinese market’s growth momentum is “rarely” seen in other parts of the world and it represents 25%-30% of the global market. How could businessmen turn a blind eye to this? The CEO of EUV equipment supplier ASML once stated that the sanction on EUV system exports to China is a big mistake in policy-making. Could Qualcomm or Intel be so reckless as to give up the Chinese market?

Although the government has the final say on everything in China, the massive domestic market does offer tremendous opportunities. For example, as of year-end 2020, 80% of the global 5G users are in China. The diversity of opportunities and creativity made possible by the China market is unparalleled. DigiTimes

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