Why making high-end semiconductors by China is not easy

Every year importing more than $300 billion worth of semiconductors, China has been unsparing in its attempt to acquire high-end microchips, considered to be the key to powering wide range transformative technologies in the world. For China, semiconductors represent life and death for its economy, already battered by Covid lockdowns and weakening global demand.

But while facing rough edges of the US-led dogfight against its attempt to acquire high-end microchips, China is finding it tough to train artificial intelligence systems and power advanced applications in the military and surveillance fields. China aims to develop hypersonic missiles but without advanced microchips, it will take time for the People’s Liberation Army to have such missiles. Already it is fast losing access to advanced military technologies from the West due to its poor record to protect intellectual property rights and weak enforceability of contracts, China is facing difficulty in building powerful jets, which need high-end microchips to enhance their capabilities.

In fact, the more China tries to secure advanced microchips from different offshore developers, the more the US is putting up barriers in Beijing’s way to lay hands on integrated circuits, which semiconductors are referred to in general terms. The Japan Times, while quoting sources, said that on December 10, US Commerce Secretary Gina Raimondo gave a ring to Japanese Industry Minister Yasutoshi Nishimura and “directly” asked Tokyo for “cooperation in stymieing China’s efforts to develop high-end semiconductors.”

This was the first ministerial request from the US to Japan on the issue and it came at the time when China is trying its best to exploit loopholes in the business deal and export control of European countries, Japan, South Korea, and others to acquire advanced microchips for use in its defence, space, and surveillance systems.

But the Netherlands, where ASML Holdings is a global leader in the manufacture of semiconductor production equipment and had sold more than $2.1 billion worth of products to China last year, is now planning to restrict exports of chip-making equipment to the East Asian country. After Germany and Belgium, the Netherlands is China’s third-largest trade partner, states the Dutch statistics office.

In November, Germany blocked takeover of chip making factory Elmos by the Chinese firm, Si Microelectronics and Chinese investment in the Bavaria-based ERS Electronic. Interestingly, Germany resorted to this move, close on the heels of Chancellor Olaf Scholz’s visit to China on November 4 this year. In the same month, the UK government barred the takeover of the country’s largest microchip factory Nexperia by the Chinese-owned firm, Wingtech which is listed at the Shanghai stock exchange. According to CNBC, Nexperia produces some 32,000 silicon wafers each month. The UK government blocked the chip making factory’s takeover by the Chinese company, citing national security concern.

In 2021, South Korea, whose semiconductor production capacity is second only to Taiwan, supplied around $76.8 billion, or 60% of its total microchips export to China, said Nikkei Asia in its recent report. But one year after its usual semiconductor business with Beijing, Seoul, according to South China Morning Post, is under pressure to side with the US-led alliance in stopping China from getting high quality chips. However, South Korean semiconductor manufacturers Samsung and SK Hynix that have factories in China have been granted a year-long exception from US export restrictions. Yet there is no clarity as to what will happen once the year ends, said South China Morning Post.

Since October 10 when the Joe Biden administration unveiled a sweeping set of export controls which included measures to deprive China from getting certain semiconductor chips made anywhere in the world with US equipment, there has been a rush, especially from Europe and its’ allies to deny Beijing of procuring high-end microchips from the world.

As per the data, China on its own manufactures roughly around 12% of its total semiconductors ‘consumption. Semiconductor Manufacturing International Corporation (SMIC) is the largest chipmaker in China. Chinese chips are not considered to be of high quality. In fact, making semiconductors is not a child’s play. According to experts, chip making rests on hundreds of different inputs—from raw wafer to commodity chemicals and speciality chemicals and bulk gases. Then they are processed and analysed by more than 50 different types of processing and testing tools. Further, most of the equipment used in the chip making, such as lithography and metrology machines, rely on varied and complex supply chains that incorporate hundreds of different companies delivering lasers, modules, mechatronics, control chips, optics, power supplies and more.

In the past 30 years, as per Brookings, China spent billions of dollars to build a domestic semiconductor industry. Despite such a massive investment, Chinese semiconductor companies make up a relatively small part of the international market. And that too, the Chinese semiconductor manufacturing companies do not produce high-end chip technologies. Although, a Canadian tech media outlet, TechInsight recently claimed that Chinese semiconductor company SMIC has acquired the knowhow to produce advanced microchip, but it has not been officially confirmed by the company. For China, it has become a matter of prestige to have high-performing semiconductors for high computing performance. It wants to achieve self-sufficiency by 2030 in the manufacture of semiconductors. However, given the fact that no advanced country is willing to share knowhow of chip technology with China, will Beijing be able to fulfil its goal of achieving self-sufficiency in high-end semiconductors by 2030, is a million-dollar question. IPCSC