introduction
China’s overcapacity for basic semiconductors continues to be debated among policymakers in the United States and its allies. The answer to this question is complex, and experts have reached different conclusions when estimating supply and demand. Rather than waiting for a clear answer, which may not be available for years, policymakers should be prepared to answer three questions:
Is it the right question to discuss future “overcapacity”? Or should we rather focus on long-term strategic overdependence and the economic damage caused by non-market practices in the short term? Long term Once both short-term and short-term policy objectives have been defined, does the government have sufficient market transparency tools and expertise to monitor risks and act in a timely manner? Are policy instruments available to address non-market practices?
Basic chips are the backbone of the modern economy
Fundamental semiconductors, also known as “legacy chips” or “mature chips,” are generally defined as semiconductors manufactured at 22 nanometer (nm) or higher manufacturing nodes. Although advanced semiconductors are primarily used in cutting-edge computer applications in data centers and consumer devices, basic semiconductors are the backbone of the modern economy.
Modern cars contain hundreds of basic chips that control everything from engine electronics and seat adjustments to infotainment systems. Hospitals and industrial facilities cannot function without them. In fact, all electrical devices with on/off switches rely on basic semiconductors.
The supply chain for basic semiconductors is more diverse than that for advanced semiconductors. Design and wafer manufacturing takes place in the United States and allied countries including Europe, Japan, South Korea, Taiwan, and Singapore. China is rapidly expanding its industry as technology, design and manufacturing expertise is more widely available than ever before. Basic semiconductors (excluding dual-use technologies and products) have not been subject to more recent export controls than advanced semiconductor technologies.
Some types of basic chips have been available on the market for many years, and major providers continue to invest heavily in research and development (R&D) for further innovations. Meeting the growing demand for basic chips throughout this decade will require significant R&D spending, as well as a long-term commitment to capacity expansion. The U.S. Chip Science Act of 2022, the European Chips Act of 2023, and similar initiatives in Japan and South Korea recognized this and provided government support to strengthen and expand high-tech industry ecosystems.
Ten years ago, China put semiconductors at the center of its industrial policy as part of its Made in China 2025 agenda. Since then, huge investments and subsidies have been provided and China has made remarkable progress towards its goal of self-reliance.
As China’s industrial overcapacity is debated at the highest levels, the U.S. and its allied governments are now deciding whether basic semiconductors will follow the same path as the solar power and electric vehicle industries, and if so, what to do. need to be evaluated.
No expert consensus on the threat of overcapacity
Several think tanks and analysts published their findings in the spring of 2024. Analytical approaches varied widely, with some using more quantitative arguments and others using primarily qualitative arguments. Although not all authors took a clear position, they generally acknowledged the complexity of the issue. There was no consensus on the issue of excess capacity.
For example, a report by the Institute of International French Relations (April 2024) examines Semiconductor Manufacturing International Corporation (SMIC), one of China’s major semiconductor manufacturers, and its regional end market segmentation on China’s basis. is used as a proxy for semiconductor supply. Demand analysis focuses on three applications: smartphones, automobiles, and the Internet of Things. The report’s title suggests that fears of overcapacity are “unfounded,” but that “as China increasingly meets its own demand, the excess Western chips squeezed out of China will drive down world prices. may decline,” he warned. The author admits: . . China’s continued expansion will determine whether it will push into the world’s mature node chip market. ”
Analysis by Rhodium Group (May 2024) takes a different methodological approach and looks at China’s domestic supply more broadly. Examining current and planned wafer manufacturing capacity by process node, it highlights the dominance of Chinese semiconductor manufacturers in global capacity investment during the critical 20s-40s period. nm node. Demand estimation is not the focus of this analysis. According to market research firm TechInsights, the self-sufficiency rate of China’s semiconductor industry as a whole in 2023 is only 12%. This figure also does not suggest a significant risk of overcapacity in the coming years.
The CSIS Commentary (April 2024) uses primarily qualitative arguments. Although the authors are generally skeptical of claims about the risks of overcapacity, they ultimately conclude that: Contributing to the industry on both the supply and demand sides. ”
Among the reports pointing to the risks of oversupply, the one by Bernstein Research (May 2024) is the most analytical. Using sophisticated investment, supply chain, and productivity models for supply and Chinese original equipment manufacturer (OEM) sourcing power projections for demand, the study concludes that: I am. If China’s annual spending remains as high as it was in 2023, it will take four years for China to “fully” meet its needs in a mature logic. ”
Author and academic Chris Miller also takes a clear position. Congressional testimony and an American Enterprise Institute report (June 2024) state that “China’s rate of new factory construction threatens the profitability of Western companies.” Fully one-third of the fabs under construction around the world (measured by wafer production capacity) are in China. He added, “Current trends, particularly China’s massive subsidy campaign and non-market practices, suggest that without policy changes, the U.S. manufacturing base will become increasingly dependent on Chinese chips.” warns.
Why have experts been unable to reach a consensus? What does this mean for policymakers in Western capitals?
Complex issues on both the supply and demand sides
Focus on supply first – Semiconductor factories are large industrial facilities whose construction is typically announced by companies and local governments alike, and projections of future production capacity are readily available. However, supply forecasting is difficult for three reasons:
Even after new factories are announced, companies will adjust their capacity expansion to match short- and medium-term market prospects. The downturn in the semiconductor market in the second half of 2023 has led companies to extend or cancel their planned investments. This fact was acknowledged by SMIC’s CEO in a recent earnings conference with financial analysts. He suggested that SMIC would take the following measures due to the current oversupply situation. The productivity of basic semiconductor factories in China varies widely. One industry executive divides local production capacity into three categories: (1) have low or even conserved productivity; (2) are small and less efficient than Western European countries (although they may integrate in the future); and (3) are not globally competitive. be. For outside observers, it is difficult to even assess current aggregate productive capacity at the national level, let alone predict what the future will look like in 5-10 years. From microcontrollers to discrete power transistors, radio transceivers to memory, product and manufacturing diversity technology requires a detailed understanding of the market
The U.S. Department of Commerce’s Bureau of Industry and Security and the European Commission have both conducted industry surveys to assess the current state of the industry, requesting feedback by April and September 2024, respectively (required in the U.S.; mandatory in the European Union). any). Although the findings have not been made public, they should serve as a starting point for deeper understanding.
It is even more difficult to assess China’s semiconductor demand as a starting point for looking at overcapacity.
China is the world’s largest microelectronics manufacturer. Therefore, semiconductor shipments to China do not reflect domestic demand. As the CEO of a basic European semiconductor manufacturer publicly stated: “About half[of the products shipped to China]are processed and then re-exported to buyers in the West.”
Using Chinese microelectronics manufacturers’ demand as a proxy is similarly misleading for two reasons. Manufacturers from the United States and Europe are also expanding into China to meet local demand. But more importantly, when you look at Chinese OEM demand, the overcapacity debate only gets pushed one step down the value chain. A (hypothetical) OEM with 100 percent global market share in a particular application would also demand 100 percent of the semiconductors for that application. It accurately reflects “domestic” demand.
An informed and detailed demand analysis should be based on current and future end consumer demand for microelectronic devices. Given the ubiquity of semiconductors in microelectronics, a complete demand picture would require detailed analysis of approximately 80 applications, and to cover just 85 percent of the estimated domestic market for basic semiconductors, The authors estimate that they will need insights into 30 applications, including: 10-15 year demand forecast.
Focus on overdependence, non-market practices, and preparedness
Instead of, or at least in parallel with, studying basic semiconductor demand and supply models, U.S. and European policymakers need to focus on three issues: overdependence, market distortions, and preparedness. .
Overdependence: Overreliance on one country or region for products as critical as basic semiconductors can pose significant national and economic security risks. A better approach would be to establish a baseline of minimum U.S. and allied demand (and commensurate supply) for basic semiconductors and ensure transparent and resilient supply chains for critical applications. This is a challenge. The United States’ recently proposed rules on “securing the supply chain of information and communications technologies and services” provide an example of the latter.
Unfair practices by individual companies: One industry executive estimates that some Chinese basic semiconductors are sold for up to 30 percent less than prices offered by Western companies. This may be possible due to lower profit expectations of Chinese investors and WTO-compliant public funding, but it could also suggest unfair subsidies. The United States and its allied governments have trade tools at their disposal to address non-market practices, as the European Union’s targeted and nuanced tariffs on China’s unfair subsidies for electric vehicles demonstrate. .
Policymakers need to be prepared: Finally, European policymakers need to be particularly prepared to act. Trade restrictions and industrial policies will continue for the foreseeable future. Semiconductors will continue to be at the center of many countries’ industrial policies and trade restrictions. Developing appropriate and compatible toolsets for trade remedies among allies is as important as industrial policy alliances and coordination.
Andreas Schumacher is a Visiting Technical Fellow in the Department of Economic Security and Technology and the Scholl Professor of International Business at the Center for Strategic and International Studies in Washington, DC.
The authors would like to thank William A. Reinsch, Senior Advisor of International Business and Scholl Chair, for valuable discussions and suggestions regarding this paper.
