July 20, 2021 | Insight

How to Stop China From Controlling the Global Semiconductor Industry

July 20, 2021 | Insight

How to Stop China From Controlling the Global Semiconductor Industry

The United States Innovation and Competition Act (USICA) of 2021, which passed the Senate in June, calls for $52 billion in appropriations over five years to support semiconductor manufacturing as well as research and development. As the White House explained back in March, U.S. leadership in key technologies is “critical to both our future economic competitiveness and our national security.” The White House and Congress are right to prioritize this issue, but investing tens of billions of dollars will be a waste if that investment is not part of a larger strategy to prevent China from stealing or buying its way to domination of advanced semiconductor manufacturing. If Beijing succeeds in this domain, it will likely try to force Western firms out of the market for advanced semiconductors while enabling Chinese intelligence to compromise key technology supply chains.

Semiconductors are the insulated materials that make possible the fabrication of the nano-scale microchips that inhabit all modern electronics. The most advanced manufacturing equipment uses increasingly small yet more powerful chips to store and process information. Microchips also enable computation-heavy tasks such as on-device artificial intelligence (AI), calculating missile trajectories for advanced weapons systems, and processing financial transactions for global trade.

Recognizing that leadership in semiconductors confers not only economic but also strategic advantages, China seeks to transform its economy so it can displace the United States and its allies as the market leaders in semiconductors and other critical technologies. To that end, since 2000, China has increasingly subsidized its semiconductor manufacturing sector with a reported $15 billion per year, growing its stake in the global market to over 20 percent in 2020.

While this investment is significant, the technology undergirding China’s domestic production capability still remains five to 10 years behind that of its democratic competitors, specifically in terms of the size of the microchips produced. The most advanced semiconductors are manufactured in the United States, Taiwan, Japan, South Korea, the United Kingdom, Germany, and the Netherlands. Three companies — America’s Intel Corporation, Taiwan Semiconductor Manufacturing Corporation (TSMC), and South Korea’s Samsung Group — manufacture the finished product, but firms in the other countries on that list have significant stakes in the supply chain or manufacturing processes. China aims to reduce its dependence on imported chips by developing a robust domestic manufacturing capability.

Right now, China lacks chip manufacturing facilities capable of fabricating the kind of advanced semiconductors necessary for the demanding computational tasks of next-generation technologies. Beijing must obtain the necessary equipment from the West if China wants to catapult its semiconductor industry to the next level.

If China were to establish a microchip production capability on par with that of Western companies, one could expect Beijing to pursue unfair business practices, as it did in the telecommunications industry after Huawei established technological parity with foreign competitors. Such practices include controlling exports of raw materials, undercutting market prices, and otherwise undermining Western counterparts and driving them from the field. If this happened in the semiconductor industry, it would leave a vital supply chain open to compromise by Chinese intelligence officials, resulting in vulnerabilities that would have disastrous, cascading impacts for U.S. national security and the U.S. economy. Additionally, given the role that advanced semiconductor manufacturing has played in building China’s AI-enabled domestic surveillance system, greater Chinese control of the semiconductor market will only accelerate Beijing’s development of technology that it can use to facilitate human rights abuses.

In 2010, the world witnessed the danger of supply chain dependence on China: Beijing blocked rare earth exports to Japan to pressure Tokyo to back down from a territorial dispute with China in the East China Sea. Japan suffered the economic damage but then partnered with an Australian producer to develop a non-China-based supply chain. The United States and its allies cannot afford to allow China to dominate and manipulate the global semiconductor market in a similar manner.

Today, Beijing needs advanced semiconductor manufacturing equipment such as extreme ultraviolet (EUV) lithography and argon fluoride immersion photolithography; access to advanced materials such as photomasks and photoresists; manufacturing software such as electronic design automation software; and licenses related to the intellectual property of chips designed by competing manufacturers. If unable to purchase this state-of-the-art manufacturing equipment, China would likely need over a decade to produce that equipment on its own, by which time the United States and its allies will likely have moved on to even more advanced production capabilities. Rather than develop its own products, China appears determined to buy its way to parity with Western manufacturers by making deals with Western companies.

In 2019, Advanced Semiconductor Material Lithography (ASML), a Dutch technology company specializing in EUV lithography tools, announced that it had reached a deal to sell equipment to the Chinese firm Semiconductor Manufacturing International Corporation (SMIC). However, Washington intervened and pressured the Dutch government to shut the deal down.

Relying on an ad-hoc approach to identifying and disrupting impending deals that might transfer sensitive technology to China could easily fail. Instead, the United States and relevant allies and partners should forge a robust, formal agreement to identify the key technologies they need to protect and to restrict China’s efforts to import the equipment required for advanced semiconductor manufacturing. The Dutch government’s actions to block AMSL’s sale of EUV tools was an important first step. Tokyo provided critical help by assuring Washington that Japanese firms would not attempt to sell EUV tools to SMIC if the Dutch blocked the sale by ASML. There is a precedent for formalizing such cooperation through an official trade agreement, which the United States achieved in the field of nonproliferation via the Proliferation Security Initiative.

Additionally, the United States should increase funding for domestic production of semiconductors, as originally authorized by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, which Congress passed as part of the fiscal year 2021 National Defense Authorization Act, and which is now being funded in USICA and in the Biden administration’s infrastructure bill.

Domestic manufacturing, whether by U.S. firms or partner firms operating in the United States, is an important component of building trusted global supply chains. The other component is establishing agreements with allies and partners to boost their domestic production as well. Washington’s efforts to secure the rare earth supply chain through agreements with Japan, Australia, and Canada could serve as a useful model. The recent agreement by TSMC, the Taiwanese chip manufacturer, to build a foundry in Arizona is another good example.

Collectively, coordinated export restrictions and greater domestic and allied production not only would counter China’s strategy to influence companies and dominate key industries, but would also help address ongoing market shortages of semiconductors and graphics cards. Beijing’s efforts to dominate the global semiconductor industry through the acquisition of advanced manufacturing equipment pose a threat to U.S. economic prosperity and national security. If China can penetrate and dominate the sensitive semiconductor ecosystem, Beijing can hold parts of the semiconductor supply chain hostage to advance other strategic objectives that damage Western interests.

Mark Montgomery serves as senior director of the Center on Cyber and Technology Innovation (CCTI) at the Foundation for Defense of Democracies (FDD) and as senior advisor to the chairmen of the Cyberspace Solarium Commission. Trevor Logan is a cyber research analyst at CCTI. They both contribute to FDD’s China Program. For more analysis from the authors, CCTI, and the China Program, please subscribe HERE. Follow Mark and Trevor on Twitter @MarkCMontgomery and @TrevorLoganFDD. Follow FDD on Twitter @FDD and @FDD_CCTI. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.


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