China’s chip industry is gaining momentum – it could alter the worldwide economic and security landscape

China’s national champions for computer chip – or semiconductor – design and manufacturing, HiSilicon and Semiconductor Manufacturing International Corporation (SMIC), are making waves in Washington.

SMIC was long considered a laggard. Despite being the recipient of billions of dollars from the Chinese government since its founding in 2000, it remained removed from the technological frontier. But that perception — and the self-assurance it gave the US — is changing.

In August 2023, Huawei launched its high-end Huawei Mate 60 smartphone. According to the Center for Strategic and International Studies (an American think tank based in Washington DC), the launch “surprised the US” because the chip powering it showed that Chinese self-sufficiency in HiSilicon’s semiconductor design and SMIC’s manufacturing capabilities were catching up at an alarming pace.

More recent news that Huawei and SMIC are scheming to mass-produce so-called 5-nanometre processor chips in recent Shanghai production facilities has only stoked further fears about leaps of their next-generation prowess. These chips remain a generation behind the present cutting-edge ones, but they show that China’s move to create more advanced chips is well on target, despite US export controls.

The US has long managed to take care of its clear position because the frontrunner in chip design, and has ensured it was close allies who were supplying the manufacturing of cutting-edge chips. But now it faces formidable competition from China, who’s technological advance carries profound economic, geopolitical and security implications.

Semiconductors are a giant business

For a long time, chipmakers have sought to make ever more compact products. Smaller transistors lead to lower energy consumption and faster processing speeds, so massively improve the performance of a microchip.

Moore’s Law — the expectation that the variety of transistors on a microchip doubles every two years — has remained valid in chips designed within the Netherlands and the US, and manufactured in Korea and Taiwan. Chinese technology has subsequently remained years behind. While the world’s frontier has moved to 3-nanometre chips, Huawei’s homemade chip is at 7 nanometres.

Maintaining this distance has been essential for economic and security reasons. Semiconductors are the backbone of the fashionable economy. They are critical to telecommunications, defence and artificial intelligence.

The US push for “made within the USA” semiconductors has to do with this systemic importance. Chip shortages wreak havoc on global production since they power so lots of the products that outline contemporary life.

Today’s military prowess even directly relies on chips. In fact, in accordance with the Center for Strategic and International Studies, “all major US defence systems and platforms depend on semiconductors.”

The prospect of counting on Chinese-made chips — and the backdoors, Trojan horses and control over supply that will pose — are unacceptable to Washington and its allies.

Stifling China’s chip industry

Since the Eighties, the US has helped establish and maintain a distribution of chip manufacturing that’s dominated by South Korea and Taiwan. But the US has recently sought to safeguard its technological supremacy and independence by bolstering its own manufacturing ability.

Through large-scale industrial policy, billions of dollars are being poured into US chip manufacturing facilities, including a multi-billion dollar plant in Arizona.

The second major tack is exclusion. The Committee on Foreign Investment within the United States has subjected quite a few investment and acquisition deals to review, ultimately even blocking some within the name of US national security. This includes the high-profile case of Broadcom’s try to buy Qualcomm in 2018 on account of its China links.

In 2023, the US government issued an executive order inhibiting the export of advanced semiconductor manufacturing equipment and technologies to China. By imposing stringent export controls, the US goals to impede China’s access to critical components.

The hypothesis has been that HiSilicon and SMIC would proceed to stumble as they attempt self-sufficiency on the frontier. The US government has called on its friends to adopt a unified stance around excluding chip exports to China. Notably, ASML, a number one Dutch designer, has halted shipments of its hi-tech chips to China on account of US policy.

Washington has also limited talent flows to the Chinese semiconductor industry. The regulations to limit the movements of talent are motivated by the statement that even “godfathers” of semiconductor manufacturing in Japan, Korea and Taiwan went on to work for Chinese chipmakers — taking their know-how and connections with them.

This, and the recurring headlines concerning the need for more semiconductor talent within the US, has fuelled the clampdown on the outflow of American talent.

Finally, the US government has explicitly targeted China’s national champion firms: Huawei and SMIC. It banned the sale and import of kit from Huawei in 2019 and has imposed sanctions on SMIC since 2020.

What’s at stake?

The “chip war” is about economic and security dominance. Beijing’s ascent to the technological frontier would mean an economic boom for China and bust for the US. And it will have profound security implications.

Economically, China’s emergence as a serious semiconductor player could disrupt existing supply chains, reshape the division of labour and distribution of human capital in the worldwide electronics industry. From a security perspective, China’s rise poses a heightened risk of vulnerabilities in Chinese-made chips being exploited to compromise critical infrastructure or conduct cyber espionage.

Chinese self-sufficiency in semiconductor design and manufacturing would also undermine Taiwan’s “silicon shield”. Taiwan’s status because the leading manufacturer of semiconductors has to date deterred China from using force to attack the island.

China is advancing its semiconductor capabilities. The economic, geopolitical and security implications will probably be profound and far-reaching. Given the stakes that each superpowers face, what we are able to ensure about is that Washington won’t easily acquiesce, nor will Beijing quit.