Chinese chips will keep powering your everyday life

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What’s better to do at this time than to indulge in some predictions for 2023? This morning, I published a story in MIT Technology Review’s “What’s Next in Tech” series, looking at what will happen in the global semiconductor industry this year.

To give you a brief overview, I was told by many experts that the already-stressed global chips supply chain will be challenged even more by geopolitics in 2023.

Over much of 2022, the US started to take steps to freeze China out of the industry–even forming an alliance with the Netherlands and Japan to restrict chip exports to the country. These measures have forced once-market-driven businesses to develop contingency plans to withstand the cold-war-like climate. They include diversifying from China’s supply chain and building factories elsewhere. In the coming year, we may see similar plans. The US government will also enforce its punitive restrictions and provide industrial subsidies to domestic chip manufacturers. This could lead to new companies being able to make it big while others might be penalized for selling to China.

To learn more about how the US, China, Taiwan, and Europe may navigate the industry this year, read the full article here.

But I also want to highlight something that didn’t make it into the story–a rather unintended outcome of the chip tech blockade. The country may play a larger role in the production of older-generation chips that are still widely utilized in everyday life, despite the chip industry’s decline in the high-end segment.

This may seem counterintuitive. Aren’t the US restrictions that were placed on China’s semiconductor industry last year intended to severely harm it?

Yes, but the US government has been intentional about limiting the impact to advanced chips. For example, in the realm of logic chips–those that perform tasks, as opposed to storing data–the US rules only limit China’s ability to produce chips with 14-nanometer nodes or better, which is basically the chip-making technology introduced in the last eight years. These restrictions do not apply to older technologies.

The reason for this is that older chips are used in electronics, cars and other everyday objects. The US could impose a restriction that would completely shut down China’s electronic manufacturing industry. This would likely anger China enough to take action that would be detrimental to the US. “If you want someone to get pissed off, push them into the corner and give them no escape. Woz Ahmed, a UK-based consultant who was once an executive in the chip industry, says that they will then come after you and punch you really hard.

Instead, the idea is to inflict only pain in select areas, such as the most advanced technologies that could power China’s supercomputers and artificial intelligence.

“[US] policies have a very limited immediate impact on the Chinese domestic chip industry because very few Chinese companies have achieved advanced processes, except HiSilicon,” says He Hui, a research director at consulting firm Omdia who focuses on China’s semiconductor market. “But HiSilicon had been [placed on a blacklist] three year ago.”

And lower-end legacy chips are also subsectors where China has a significant advantage. This does not refer to chips that power the artificial intelligence of a self driving car. It is about chips that control a particular part, such as airbags. The Internet of Things technology is rapidly evolving, but it still requires many small chips that aren’t so advanced. That stuff will still be made in China, at the very least according to the current settings that have been communicated by the Biden administration. According to John Lee, director of East West Futures Consulting, who studies the global impact of China’s tech industry, this clearly leaves a huge incentive and a large market for foreign companies, including European, Japanese and South Korean.

Part of the reason China maintains an advantage here is that in a market of mature, lower-end technologies, price is the most important thing. China is a great country for low-cost mass production due to its low labor costs and generous government subsidies.

A future where China fully dominates in low-end chips has already spooked some Western observers. A report published by Lawfare describes this possibility as “a huge supply chain vulnerability.” The Chinese could “just flood the market with these technologies.” Normal companies can’t compete, because they can’t make money at those levels,” Dan Hutcheson, an economist at research firm TechInsights, told Reuters.

Other countries, including the United States will still try to grab a piece of the legacy chip market. The $2 billion set aside by the US CHIPS Act last year specifically for encouraging domestic production of these technologies was made law. Experts believe that the European Union will introduce its own chip legislation within the next two-years. But this industry takes a notoriously long time to see capital investments turn into actual products. And even as foreign companies like Taiwan-based TSMC announce investment plans for US-based factories, they likely won’t shift more capacity to the US without consistent government support, which is hard to guarantee in America’s polarized and volatile political environment. He Hui says, “I think we still have to wait and see if [these companies] are willing and able to keep and fulfill their promises.”

Lee considers this dynamic one the most interesting trends that could emerge from the current fight for chip controls. ” A lot of this capacity is already located in China. The majority of these new [mature] nodes are being built in China. There’s also a limited supply [of chipmaking equipment supply], even though the money and political will are there to develop it in the US and EU Lee. The footprint of China in “supplying the more mundane, high-volume, lower-margin, lower-sophistication, but still indispensable chips,” he adds, “is becoming bigger rather than smaller.”

So looking ahead, we’re left with two key questions: Will China’s legacy chip industry prosper while the country struggles to build the high-end sector? Or will the US government put more restrictions on China? As much as I love predictions, I don’t think we will get definitive answers to these questions in 2023. These are important to remember as the semiconductor industry navigates a new era in geopolitical volatility.

What impact will China’s dominance in low-end chip manufacturing have on the industry? Let me know your thoughts at [email protected]

Catch up with China

1. The Chinese state media was once the primary force behind patriotic sentiment and engineering rage on social media. However, individual pro-government accounts have taken over the baton in recent times. (Nikkei Asia $)

2. Officials and researchers from China have started uploading genome sequence data from recent covid cases to a global academic repository. This shows that sub-variants such as XBB, which are widely distributed around the globe, are also circulating in China. (Financial Times $)

3.

Here’s the heartbreaking story of one mother who died in Wuhan. (The Atlantic $)

4. In an attempt to stop leaks from occurring, ByteDance employees improperly accessed data of two Western journalists as well as several other US users. This was revealed by the company in an internal investigation. (New York Times $)

5. Tencent finally won state approval to release three of its most successful international games domestically–including the Pokemon franchise game it co-developed with Nintendo. (Bloomberg $)

6. Hacked emails from a Russian state broadcaster reveal how Russian and Chinese state media collaborate to share news and social content. (The Intercept)

7. The European Union offered to send free covid vaccines for China. China rejected it. (Financial Times $)

8. Concerned individuals are stocking up in oximeters to monitor their blood oxygen levels at home, as hospitals become more crowded in China. (Pandaily)

Lost in translation

As Beijing positions itself as a global climate leader, local governments are capitalizing on the business of environmental protection and becoming important players. In the last five years, according to a recent analysis from Chinese think tank Qingshan Research, 17 out of China’s 34 provincial governments have formed state-owned “super companies” that focus on getting government contracts in the environmental sector. Although they may differ in size and expertise these companies all offer services in the areas of wastewater treatment, garbage disposal, climate investment management, and environmental monitoring.

As state-owned businesses, they are often eligible for preferential treatment in the procurement process. They also have to compete against private companies and with each other. Some leaders have been able to get contracts worth hundreds of millions of dollars each year while others have struggled to secure enough deals, or are on the brink.

One more thing

Did you have any difficult conversations about politics with your family last week? You are not the only one. Many young Chinese people are doing this. It happened a lot during the protests against zero covid last year, when young people went to the streets or voiced support for the protesters on their WeChat timelines and in their family group chats. Some people find it as difficult to speak out about their nonconformist political beliefs than it does to speak out about their sexuality.