Americans are losing the strategic semiconductor war

China’s chip industry is growing faster than anywhere else in the world after US sanctions on local champions ranging from Huawei Technologies to Hikvision spurred an appetite for local components. Nineteen of the world’s twenty fastest-growing chip companies over the past four quarters were Chinese. They were only eight at the same time last year.

This growth underscores how tensions between Washington and Beijing are transforming the $550 billion global semiconductor industry, a sector that plays a strategic role in everything from defense to the advent of future technologies like AI and self-driving cars. In 2020, the United States began to restrict sales of American technology to companies like Semiconductor Manufacturing International or Hikvision, while successfully containing their growth, but also fueling a boom in chip manufacturing and supply in China.

While stocks like Cambricon Technologies have more than doubled from this year’s lows, Beijing will invest billions of dollars into the sector under ambitious programs such as its “Little Giants” plan to endorse and fund national champions. Even the American giants are not indifferent to this rise in power, Apple is considered Yangtze Memory Technologies as its latest supplier of flash memory for the iPhone.

The underlying idea is China’s quest for self-sufficiency in the supply chain, catalyzed by Covid-related lockdowns and US restrictions. At the heart of Beijing’s ambitions is also the will to cut the ambitions of a geopolitical rival, China imported more than $430 billion in chipsets in 2021. Orders for chipmaking equipment from foreign suppliers increased by 58% last year as local factories increased capacity. Total sales by China-based chipmakers and designers jumped 18% in 2021 to a record high of more than 1 trillion yuan ($150 billion), according to the China Semiconductor Industry Association. A lingering chip shortage that has curtailed production at the world’s biggest car and consumer electronics makers is also working in favor of local chipmakers, helping Chinese vendors gain easier access to the international market.

SMIC and Hua Hong Semiconductor, the largest contract chipmakers, kept their Shanghai-based factories running at full capacity even as the worst Covid-19 outbreak since 2020 crippled factories and logistics across China. With the help of local authorities, cargo flights from Japan were delivering essential materials and equipment to chip factories as the city went into lockdown. SMIC recently reported a 67% increase in quarterly sales, outpacing much larger rivals such as GlobalFoundries and TSMC.

And this benefits the whole sector of new technologies. Shanghai Fullhan Microelectronics’ revenue increased 37% on average due to the strong demand for surveillance products. The video chip designer has pledged to expand into electric vehicles and AI after winning its “Little Giant” designation. And design tools developer Primarius Technologies has doubled its sales on average over the past four quarters, saying it was developed software that will be used to make 3-nanometer chips.

“America is about to lose the chip competition,” international relations expert Graham Allison and former Google chief Eric Schmidt warned in a Wall Street Journal column. If Beijing continues to develop sustainable advantages in the semiconductor supply chain, it would generate breakthroughs in core technologies that the United States would not be able to match.

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