US Sanctions Help China Supercharge Its Chipmaking Industry

US Sanctions Help China Supercharge Its Chipmaking Industry

US Sanctions Help China Supercharge Its Chipmaking Industry: After the United States imposed sanctions on local champions such as Huawei Technologies Co. and Hikvision, domestic demand for Chinese-made components increased. As a result, China’s chip sector is expanding at a rate that is quicker than anywhere else in the world.

According to data provided by Bloomberg, the world’s second-largest economy is home to nineteen of the twenty chip sector companies that have experienced the highest growth over the course of the past four quarters, on average. This is in contrast to the total of just 8 at the same stage in the previous year. These China-based suppliers of design software, processors, and equipment that are essential to the production of chips are boosting their income at a rate that is several times faster than that of global giants such as Taiwan Semiconductor Manufacturing Co. or ASML Holding NV.

This hyperbolic growth highlights how tensions between Washington and Beijing are transforming the global semiconductor industry, which is currently valued at $550 billion. The semiconductor industry is a sector that plays an outsized role in everything from defense to the advent of future technologies such as artificial intelligence and autonomous cars. The United States of America started placing restrictions on the sale of American technology to companies such as Semiconductor Manufacturing International Corp. and Hangzhou Hikvision Digital Technology Co. in the year 2020. These restrictions were successful in containing the growth of these companies, but they also fueled a boom in the production and supply of chips in China.

Analysts believe that there is potentially more room for growth in the market, despite the fact that shares of companies such as Cambricon Technologies Corp. have more than quadrupled from their lows this year. Under ambitious schemes including its “Little Giants” blueprint to support and bankroll national tech heroes, and push “buy China” strategies to evade US sanctions, it is believed that Beijing will coordinate billions of dollars of investment in the sector. The increasing popularity of indigenous names has attracted the attention of some of the most discerning customers: It was reported that Apple Inc. was looking into Yangtze Memory Technologies Co. as a potential new supplier of flash memory for the iPhone.

Phelix Lee, an analyst at Morningstar, stated in an email response to inquiries from Bloomberg News that “the strongest underlying trend is China’s ambition for self-sufficiency in the supply chain, catalyzed by Covid-related lockdowns.” “Chinese customers who primarily utilize imported chips need to locate alternatives that are made in China to ensure that their operations run smoothly amid the lockdowns,”

Since late April, when Covid lockdowns pushed local prices upward, the FactSet China Semiconductor Index, which measures some of the country’s biggest industry businesses, has risen almost 20 percent. However, this is still roughly a third lower than its all-time high in July of 2021.

The incentive for Beijing’s aspirations is to wean itself off a geopolitical rival and more than $430 billion worth of imported chipsets in 2021. This is at the core of Beijing’s ambitions. According to data published by the industry association Semi, the number of orders placed for chip-manufacturing equipment from overseas vendors increased by 58 percent in the previous year as local companies expanded capacity.

In turn, this is helping to drive local business. According to the China Semiconductor Industry Association, the total sales of Chinese-based chipmakers and designers reached a record of more than 1 trillion yuan ($150 billion) in 2021, representing an increase of 18 percent from the previous year.

The ongoing chip shortage that is causing production to decrease at the world’s largest manufacturers of automobiles and consumer electronics is also working in favor of local chipmakers, making it easier for Chinese suppliers to access the international market — sometimes with premiums added onto the best-selling products, such as auto and PC chips. This is one of the many ways that the chip shortage is helping Chinese suppliers.

Even though the deadliest Covid-19 epidemic since 2020 has paralyzed factories and logistics across China, the two largest contract chip producers, SMIC and Hua Hong Semiconductor Ltd., have kept their plants in Shanghai functioning at almost full capacity. Both companies are located in Shanghai. During the time that the city was under lockdown, necessary materials and equipment were brought to chip manufacturers by cargo aircraft from Japan. These planes received assistance from the local government. SMIC recently claimed a quarterly revenue increase of 67 percent, which was far higher than its much larger competitors GlobalFoundries Inc. and TSMC.

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As a result of the increased demand for surveillance goods, Shanghai Fullhan Microelectronics Co.’s income increased by an average of 37 percent. After receiving the “Little Giant” title, the video chip creator has stated that they intend to grow their business into the artificial intelligence and electric car industries. And software that can be utilized in the manufacturing of 3-nanometer chips was developed by Primarius Technologies Co., a provider of design tools, which contributed to the company’s average doubling of revenue over the past four quarters.

Putting aside concerns about long-term profitability, Lee of Morningstar said that the aggressive capacity build-up from Chinese businesses will increase their presence everywhere else in the world. That is causing eyebrows to be raised in Washington.

Graham Allison, an expert on international politics, and Eric Schmidt, a former chief executive officer of Google, cautioned in a commentary for the Wall Street Journal that the United States is “on the verge of losing the chip competition.” If Beijing were to develop long-term advantages across the semiconductor supply chain, it would produce advances in core technologies that the United States would be unable to compete with.

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