US sanctions help China boost its chipmaking industry
(Bloomberg) — China’s chip industry is growing faster than anywhere else in the world, after U.S. sanctions on local champions Huawei Technologies Co. at Hikvision spurred appetite for local components.
According to data compiled by Bloomberg, 19 of the world’s 20 fastest-growing chip companies over the past four quarters are on average from the world’s second-largest economy. This compared to only 8 at the same time last year. These China-based suppliers of design software, processors and essential chip-making equipment are increasing their revenue multiple times, such as global leaders Taiwan Semiconductor Manufacturing Co. or ASML Holding NV.
This supercharged growth underscores how tensions between Washington and Beijing are transforming the $550 billion global semiconductor industry – a sector that plays an outsized role in everything from defense to the advent of future technologies like the AI and self-driving cars. In 2020, the United States began restricting sales of American technology to companies like Semiconductor Manufacturing International Corp. and Hangzhou Hikvision Digital Technology Co., successfully containing their growth – but also fueling a boom in Chinese chip manufacturing and supply.
While stocks of companies like Cambricon Technologies Corp. have more than doubled from lows this year, analysts believe there may still be room for growth. Beijing is expected to orchestrate billions of dollars of investment in the sector through ambitious programs such as its “Little Giants” plan to endorse and fund national tech champions, and encourage “buy China” tactics to circumvent US sanctions. The rise of indigenous names has caught the attention of some of the most picky customers: Apple Inc. reportedly considered Yangtze Memory Technologies Co. as its latest supplier of iPhone flash memory.
“The biggest underlying trend is China’s quest for self-sufficiency in the supply chain, catalyzed by Covid-related lockdowns,” Morningstar analyst Phelix Lee wrote in an email responding to inquiries. from Bloomberg News. “Amid the shutdowns, Chinese customers who mainly use imported semiconductors need to find local alternatives to ensure smooth operation.”
The FactSet China Semiconductor Index, which tracks some of the country’s biggest industry players, has gained about 20% since late April, when Covid shutdowns pushed up local prices. But it remains down about a third from its July 2021 peak.
At the heart of Beijing’s ambitions is the push to wean itself off a geopolitical rival and more than $430 billion worth of imported chipsets in 2021. Orders for chipmaking equipment from foreign suppliers rose 58 % last year as local factories increased capacity, data provided by industry body Semi show.
This in turn stimulates local businesses. 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 continuing chip shortage that is cutting output from the world’s biggest car and consumer electronics makers is also working in favor of local chipmakers, helping Chinese suppliers gain easier access to the international market – sometimes with bonuses added to best-selling products, such as auto and PC chips.
SMIC and Hua Hong Semiconductor Ltd., the largest contract chipmakers, have kept their Shanghai-based factories running at nearly full capacity even as the worst Covid-19 outbreak since 2020 cripples factories and logistics across China. . With the help of local authorities, cargo flights from Japan delivered essential materials and equipment to chip factories as the city was locked down. SMIC recently reported a 67% increase in quarterly sales, outpacing much larger rivals GlobalFoundries Inc. and TSMC.
Shanghai Fullhan Microelectronics Co.’s revenue increased 37% on average due to 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 tool developer Primarius Technologies Co. has doubled its sales on average over the past four quarters, saying it has developed software that can be used in making 3-nanometer chips.
Putting long-term profitability concerns aside, Morningstar’s Lee said China’s aggressive capacity building will increase their presence globally. This makes Washington cringe.
“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 develops sustainable advantages in the semiconductor supply chain, it would generate breakthroughs in core technologies that the United States cannot match.”