Why China's post pandemic semiconductor rise is essential to watch out for

Just around a couple of weeks back, Bloomberg came out with a report focusing on the growth of China’s chipmaking prowess and its stature in the global semiconductor ecosystem. As per the data presented by Bloomberg, over 95 per cent (19 out of the top 20) of the fastest-growing semiconductor firms over the last four quarters have been from China alone. Apart from this, as per the data provided by the industry body Semi, import orders for semiconductor manufacturing equipment from the country have risen by over 58 per cent in the last year. This has made China the biggest market for all semiconductor manufacturing equipment firms in the last two years. It was evident that the Chinese state’s rise in the semiconductor industry would be inevitable considering the dedicated capital towards the sector of the state. Massive financial support by the State, backed by the ever-growing domestic private sector, China’s semiconductor industry growth has been inevitable. Coincidentally, their industrial policies and massive investments into the sector have actually not yielded them the results that they might have wanted to see. However, the growth is clearly visible, and this is something that other technological powers should keep a watch on. But what were the factors that supported the country’s growth, and how much influence will they actually have on the global semiconductor ecosystem in the near future? Sanctions: An Accelerator for Growth? Semiconductors came to the forefront of geopolitical and geoeconomic conversations with the onset of the COVID-19 pandemic. Considering the volatility and bottlenecks present in the existing supply chain, the shock of the pandemic was too much to bear for the industry. This resulted in the global chip shortage, which is still ongoing. The aggressive behaviour of China in the South China Sea also prompted talks on whether a military operation on the island of Taiwan, the global semiconductor manufacturing leader, was incoming. With both the international supply chain and Taiwan’s industry under threat, the United States (US) decided to impose sanctions on China and its domestic semiconductor firms. It was in late 2020 when the US government started preventing the export of American semiconductor technology to Chinese companies like Semiconductor Manufacturing International Corporation (SMIC). This kickstarted China’s quest for achieving self-sufficiency in the semiconductor domain and reducing reliance on semiconductor imports. Homegrown alternatives started cropping up in response to the sanctions. The ‘Little Giants’ programme was initiated by the Chinese government to support domestic firms and build tech giants within the country which could compete at the international level. It was also a nationalistic and protectionist measure which encouraged ‘Make in China’ to reduce semiconductor imports and sidestep the US sanctions. This became a success, with Chinese domestic semiconductor companies becoming suppliers for even tech giants in the US. Hence, sanctions by the US might have prevented access to critical American technology but spurred China to reinvent and build its own semiconductor industry. Targeting the growing and established markets Within the semiconductor industry, there exist several products and devices that are more economically lucrative than the rest. There are also some products which are being developed and are on the rise in the global market. Chinese semiconductor companies have tapped into these niche markets within the semiconductor industry and helped sustain the growth of the ecosystem within the country. Apart from this, the efficiency at which the Chinese fabrication facilities functioned at the height of the pandemic has ensured that access to international markets was always within reach. SMIC’s Shanghai facility was operating at full capacity even when the city went into lockdown, thereby keeping the output at a constant rate. The chip shortage also helped Chinese manufacturers have more opportunities to export their products and maintain a presence in the global market. In terms of targeting growing markets, China is leading the way (just behind the US) in the development of Artificial Intelligence (AI) chips. AI chips include semiconductor chipsets enabled with AI training or inference algorithms. Applications of these devices include autonomous driving cars, crop monitoring and cancer detection. As per a Mckinsey report, the market for AI-related semiconductors is set to grow at a CAGR of 18 per cent, translating into 20 per cent of the total worldwide semiconductor market and $67 billion in revenue by 2025. A low-hanging fruit that China has successfully caught on to in the AI chips domain is the ability to use trailing edge nodes (such as 60 and 65nm) to manufacture AI-enabled chips. With AI applications on the rise, China’s dominance in the sector will yield both economic and geopolitical benefits. There have also been reports of how China is looking to tap into the Dynamic Random Access Memory (DRAM) market. As per a South China Moring Post (SCMP) news article, a Schenzhen-based startup SwaySure Technology recently appointed a Japanese businessman as its chief strategy officer. He was the former head of Japanese DRAM giant Elpida Memory. The global DRAM business is currently concentrated with Japanese and South Korean companies. China has, in the past, already tried to veer the business away from Japan and South Korea but failed. Considering the size of the market as well as the economic benefits that the DRAM market offers, it is no surprise the capital and investment that the Chinese state is putting into the sector. The recently announced Indo-Pacific Economic Framework (IPEF) looks to limit China’s presence and influence in global markets, including the very lucrative semiconductor supply chain. The response by the Chinese state has been aggressive rather than defensive. It has been actively trying to increase foreign investment in its domestic semiconductor industry, with the government advocating for partnerships and technology transfer agreements with international giants. The more the US and its allies try to corner China in the semiconductor domain, there is more pushback domestically. The sanctions clearly advanced the country’s growth in the industry rather than limiting it. The pandemic and the chip supply shortage have been utilised by the Chinese state to fill the supply void in the global markets. China’s semiconductor growth trajectory can be faster than anyone would have expected. Other technological powers must keep a keen watch in the near future. The author is a research analyst, The Takshashila Institution. Views are personal. Read all the Latest News , Trending News ,  Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.