In April, U.S. Commerce Secretary Gina Raimondo warned reporters in Leuven, Belgium, that “about 60 percent of the new ‘legacy chips’ that will come onto the market over the next few years will be produced in China.”
The United States and its allies control China’s access to advanced chips used to power cutting-edge applications like AI, but much of the industry makes so-called mature chips, the less sophisticated products that power appliances, electric vehicles and other everyday items.
And China could dominate the market, despite growing U.S. policies trying to rein in the country’s semiconductor industry. Chinese semiconductor production grew 40% in the first quarter, according to government data. Market research firm TrendForce predicts that mainland Chinese companies will become the second-largest players in the traditional semiconductor market after Taiwanese companies, and could control 33% of the market by 2027.
Western officials have consistently raised concerns in recent months about “excess capacity” in China, arguing that China is using state subsidies to support industries such as electric cars and solar panels, stifling foreign competitors.
But unlike electric vehicles and renewable energy, industries that Beijing and private companies identified as strategic opportunities early on, analysts suggest that China’s dominance in mature semiconductors is more a by-product of other policies. And, ironically, they say, U.S. pressure likely played a major role in facilitating China’s potential success in legacy semiconductors.
China’s goal is to eventually produce the advanced chips that power AI and 5G mobile technology, but Washington’s export controls are preventing Chinese chipmakers from getting the tools they need, which means they’re turning to the less advanced chips they can still produce.
“You have to start somewhere,” said Tim Lee, senior Asia analyst at the Economist Intelligence Unit. “You have to start in a mature location… and then expand your market gradually.”
Why is China investing in legacy chips?
Legacy chips, also known as mature chips or mature nodes, are less advanced semiconductors used in a wide range of electronics, from consumer electronics to electric vehicles. U.S. export regulations define legacy chips as larger than the “16-14 nanometer” generation. Chips of that size are a little over a decade old. In contrast, TSMC, the world’s leading contract chip manufacturer, plans to mass-produce 2-nanometer chips next year for high-end electronics such as Apple smartphones and Nvidia processors.
Linhao Bao, a senior analyst at consulting firm Trivium China, suggested China’s rise in legacy chip production was a byproduct of Beijing’s support for “areas that are strategic to China.”
“They’re trying to secure the industrial supply chain,” he said.
China is investing heavily in industries like clean energy and electric vehicles as it seeks to become a global leader in those fields, which require semiconductors but don’t need the cutting-edge chips used in high-end consumer electronics or AI.
According to U.S. industry group SEMI, Chinese chipmakers are set to start operations on 18 projects this year.
Those new projects will almost certainly focus on mature chip manufacturing: Export controls by the U.S. and its allies prevent companies like ASML from selling cutting-edge chip-making tools to China.
But the sanctions haven’t (yet) prevented Chinese companies from buying older equipment: Indeed, Chinese semiconductor companies went on a buying spree last year for semiconductor-making equipment amid fears that the U.S. might tighten its grip even further, explains Marco Metzger, chief operating officer at Neumann, a European memory-component company.
Those concerns may not be unfounded: Bloomberg reported in January, citing anonymous sources, that ASML canceled some shipments to China late last year due to political pressure.
“The main goal is to replace U.S.-made equipment in the semiconductor supply chain,” Bao said.
What is China’s semiconductor policy?
Still, Beijing has strong opinions about where Chinese companies should source their semiconductors.
China in May announced a $47.5 billion fund to further bolster its domestic semiconductor industry. The “Big Fund III,” as it’s colloquially called, is roughly the same size as Beijing’s two previous semiconductor funds combined.
Big funds have aimed to insulate China’s semiconductor industry from foreign technology, and Beijing has had mixed success. The programs have led to the creation of semiconductor giants like Semiconductor Manufacturing International Corp., but they have also led to high-profile bankruptcies and corruption scandals.
Beijing is also reportedly telling Chinese companies not to use foreign chips in their products, which could close access to foreign chipmakers. A confidential European Commission report seen by Bloomberg said Beijing could use its huge EV market to promote domestic chips “to the detriment of European and Japanese suppliers.”
What happens next?
Companies outside China may struggle to compete with traditional Chinese chipmakers: Chinese companies still lag behind the best traditional chipmakers in terms of technology, but “in terms of price, there are already local competitors,” said the EIU’s Mr. Li.
The threat of “oversupply” has left foundries scrambling for customers, with some worried about price wars and calls for tougher U.S. regulations to limit the use of Chinese chips.
But new sanctions on mature semiconductors may go too far for U.S. allies that still sell to China’s semiconductor industry.
Netherlands-based ASML still shipped one piece of semiconductor manufacturing equipment a day to China last year, despite U.S. restrictions, Metzger said. ASML’s sales to China surged last year, making the market the company’s second-largest, accounting for a quarter of its 2023 sales.
Japan, another U.S. ally in the chip trade, also exports semiconductor equipment to China. Neither Tokyo Electron nor Canon makes highly advanced semiconductor equipment, but both expect China to account for 40% of their sales this year.
Meanwhile, governments in the U.S. and elsewhere are also encouraging chipmakers to invest in domestic manufacturing. Earlier this year, the Biden administration allocated $1.5 billion in funding under the CHIPS Act to GlobalFoundries as part of a push to expand production of mature chips.
Metzger isn’t convinced these programs are enough to make domestic older chip manufacturing sustainable. Margins are already thin in the mature chip sector, and competition from China will make them even smaller. Without subsidies, other regions will not be as economically competitive as China, he says.
“This would have dire consequences,” he said. “No business can survive on subsidies alone.”
