By Jacky Wong
In the continuing chip war between Washington and Beijing, the U.S. has the clear upper hand on the most cutting-edge technology. But on a more mundane front of the battle, China might be gaining an advantage.
Even as U.S. export restrictions have stymied China's progress in advanced chips, Beijing has been aggressively expanding production of more mature, so-called legacy chips. These aren't as sexy as the higher end ones -- such as artificial intelligence chips from Nvidia -- but they are needed for such essentials as automobiles and household appliances. In fact, disrupted supply of these chips caused havoc in the car market during the pandemic.
China spent $41 billion on wafer fabrication equipment in 2024, a 29% year-on-year rise, according to Morgan Stanley. That is roughly 40% of the global total, and compares with $24 billion in 2021.
Part of that was Chinese companies trying to stockpile tools they could still get their hands on before restrictions tightened further. But much also comes from Chinese companies such as Semiconductor Manufacturing International, or SMIC, and Hua Hong Semiconductor for making legacy chips. SMIC, China's largest chip foundry, spent $7.5 billion on capital investment in 2023, compared with around $2 billion a year before the pandemic.
The overall strategy has echoes of similar Chinese successes in sectors such as solar panels: massive state support, aggressive pricing and a willingness to play the long game that other players might not be willing to.
They haven't reached that level of dominance quite yet, though Chinese companies are certainly making inroads: Chinese foundries have increased their global market share in mature nodes from 14% in 2017 to 18% in 2023, according to Bernstein.
Chinese customers, in particular, have helped as they sourced 53% of their mature chip supply from Chinese foundries in 2023, a rise from 48% in 2017.
Intensifying geopolitical tensions will further push Chinese customers to find suppliers at home.
Chinese legacy chips aren't yet flooding the world, but this is a clear risk, especially to U.S. players -- including Texas Instruments and GlobalFoundries -- competing in these chips. That, in turn, could pose a headache for Washington and its goal of maintaining resilience in the chip supply chain.
It might not be practical to extend restrictions to lower-end chips, but companies producing those chips might need state aid to compete with China.
The U.S. has described its strategy on tech controls as a "small yard, high fence" approach with severe restrictions on a limited number of advanced technologies. But limiting the conflict in this way might not be so easy. In the global chip war, as in any conflict, clashes tend to spread.
Write to Jacky Wong at jacky.wong@wsj.com
(END) Dow Jones Newswires
December 21, 2024 07:00 ET (12:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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