In the current Sino-US chip war, the United States has a clear upper hand in the most cutting-edge technology. But in the mature process chip track, China may be gaining an advantage.
Although US export restrictions have hampered China’s progress in advanced process chips, China has been actively expanding the production of more mature so-called traditional process chips. These chips are not as attractive as Nvidia’s artificial intelligence chips, but they are needed for necessities such as cars and home appliances. In fact, supply disruptions of these chips have caused a severe impact on the automotive market during the epidemic.
According to Morgan Stanley, China’s spending on wafer manufacturing equipment will increase by 29% year-on-year to US$41 billion in 2024, accounting for about 40% of the global total, compared with US$24 billion in 2021.
The increase is partly because Chinese companies are trying to stockpile the tools they can still buy before restrictions are further tightened. But there are also many orders from Chinese companies such as SMIC and Hua Hong Semiconductor for the manufacture of traditional process chips. China’s largest chip foundry, SMIC, is on pace for $7.5 billion in capital expenditures in 2023, up from about $2 billion a year before the pandemic.
China’s overall strategy here mirrors its success in areas such as solar panels: massive state support, aggressive pricing and a willingness to play the long game that other players may not like.
Though not yet dominant, Chinese companies are certainly making progress: Chinese foundries have increased their global market share at mature nodes from 14% to 18% between 2017 and 2023, according to Bernstein.
Chinese customers, in particular, sourced 53% of their mature process chips from Chinese foundries in 2023, up from 48% in 2017.
Heightened geopolitical tensions will further push Chinese customers to look for suppliers at home.
China’s traditional process chips haven’t flooded the global market yet, but that’s clearly a risk, especially for U.S. companies competing in that arena, including Texas Instruments and GlobalFoundries. That could pose a challenge to Washington and its goal of maintaining chip supply chain resilience.
Extending restrictions to low-end chips may be impractical, but companies that make them may need state aid to compete with China.
The United States calls its technology control strategy “small courtyard high wall”, that is, strict restrictions on a limited number of advanced technologies. But limiting conflict in this way may not be easy. In the global chip war, as in any conflict, the fighting tends to spread.