Contents
Introduction
Semiconductors represent one of the world’s most important industries, the core technology that powers the modern digital world.[1] Recognizing this vital role, China’s government has prioritized the sector, investing hundreds of billions of dollars to catalyze the development of an indigenous semiconductor ecosystem and to ideally cultivate globally competitive semiconductor firms across virtually all segments of the semiconductor value chain, from semiconductor design and fabrication to assembly, test, and packaging (ATP).
Thus far, those efforts have met with uneven success. With regard to the fabrication of leading-edge logic semiconductor chips, China’s flagship competitor, the Semiconductor Manufacturing International Corporation (SMIC), likely stands about five years behind global leaders such as the Taiwan Semiconductor Manufacturing Company (TSMC). Chinese companies As G. Dan Hutcheson, vice chair of research firm TechInsights, explained, “Ten years ago, [Chinese companies] were two generations behind. Five years ago, they were two generations behind, and now they’re still two generations behind.” Chinese firms Chinese competitors are even further behind with regard to semiconductor manufacturing equipment (SME), such as the lithography tools that make semiconductors: One commentator noted that Chinese firms might be as many as five generations behind in this field. The best machinery a Chinese company can produce makes chips that are 28 nanometers wide; the industry’s cutting-edge equipment can make 2-nanometer chips. As one analyst explained, “The best machinery a Chinese company can produce makes chips that are 28 nanometers wide; the industry’s cutting-edge equipment can make 2-nanometer chips.”
That said, Chinese semiconductor firms appear to be catching up in certain pockets: for instance, industry analysts view the design attributes and features of Huawei’s Mate 60 Pro smartphone as within 18 to 24 months of competitors’ versions. China has also made inroads in the production of legacy semiconductors (those greater than 28 nanometers), although Chinese firms appear to be competing in this sector on a more price- than innovation-intensive basis. In total, China continues to lag behind global leaders in most facets of semiconductor design and fabrication, but its firms’ intellectual property (IP) and innovation capabilities are accelerating rapidly as China pursues an aggressive whole-of-society strategy in an intense state-directed effort to achieve domestic semiconductor self-sufficiency.
A Brief Overview of the Global Semiconductor Industry
Modern semiconductors contain billions of transistors on a chip the size of a square centimeter, with circuits measured at the nanoscale (“nm,” a unit of length equal to one billionth of a meter). The very newest semiconductor fabrication facilities, which can cost over $30 billion to construct, produce semiconductors at 3 or 2nm (and even sub-2 nm) scales.6
The semiconductor sector is a $527 billion global industry that’s expected to become a trillion-dollar one by 2030.[7] Over 70 new semiconductor fabs are expected to be constructed worldwide by 2030 to satisfy this growing demand.[8] In short, semiconductors represent the commanding heights of the modern global digital economy, and this explains why leadership in the sector is so fiercely contested among nations, not least the People’s Republic of China (PRC), the European Union nations, Japan, South Korea, Taiwan, and the United States.
Computer circuit board technology (with processor), close up. Modern semiconductors contain billions of transistors on a chip the size of a square centimeter, with circuits measured at the nanoscale.
The semiconductor production process represents perhaps the most complex engineering task humanity undertakes. When all production phases are considered, the entire semiconductor production process extends from raw material procurement to end-product manufacturing.9 (See figure 1.) The core (or “narrow”) steps of the semiconductor production process include chip design, chip fabrication, and back-end ATP, with these steps supported by key inputs such as electronic design automation (EDA) software and SME such as lithography, deposition, and etch tooling.
Semiconductors represent one of the world’s most important industries, the core technology powering the modern digital world and empowering innovation and productivity growth across every industry.
Lithography, wherein a chip wafer gets inserted into a lithography machine and exposed to deep ultraviolet (DUV) or extreme ultraviolet (EUV) light and a pattern is printed onto a chip’s resist layer through a photomask, in particular represents a crucial step in the chipmaking process. EUV represents the latest and most sophisticated lithography technology, which Dutch firm ASML having invested €6 billion ($6.5 billion) to innovate over the past 17 years.10 The October 2022 export controls the United States placed on China included restrictions on equipment that can manufacture chips below 20 nm (impacting both DUV and EUV).11 In June 2023, the United States brokered a deal with the Netherlands to restrict exports of leading-edge EUV equipment to China.12
Figure 1: Facets of the semiconductor value chain[13]
The four most prevalent types of semiconductors are logic chips, memory chips (usually dynamic random-access memory (DRAM) or NAND “flash”), analog chips (those which generate a signal or transform signal characteristics, and are especially prevalent in automotive and audio applications), and power chips (those used as a switch in power electronics). “Advanced” or leading-edge logic chips are generally viewed as being sub-14 nm, while “legacy” (often called “mature-node”) chips refer to those manufactured using 28 nm or larger technology processes. Legacy chips are especially common in automobiles, medical devices, household appliances, energy, infrastructure, and aerospace products.