China’s Semiconductor Strategy Produces Uneven Results, New Report Finds

WASHINGTON—China still lags two to five years behind the United States and its allies in most facets of semiconductor design and fabrication, despite the Chinese government’s massive strategic investments in the industry, but its firms’ intellectual property (IP) and innovation capabilities are accelerating rapidly, according to a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

“China is investing hundreds of billions of dollars to become a leader in semiconductors, so it is making impressive strides, but its progress so far has been limited to certain aspects of chip development and production,” said Stephen Ezell, ITIF’s vice president of global innovation, who authored the report. “Chinese firms are about two years behind the global leaders when it comes to designing logic chips, whereas they’re several more years behind in memory chips. But the United States and its allies better not rest on their laurels, because China is investing as much as the CHIPS and Science Act every year.”

China designated semiconductors as its “top industrial innovation priority” in 2013 and has since poured hundreds of billions of dollars in subsidies into the industry in an attempt to become self-sufficient by simultaneously reducing its reliance on foreign competitors and building its own competitive enterprises. However, the highly complex nature of semiconductor manufacturing, combined with Western export controls that limit access to new tools, has resulted in mixed returns on China’s investments.

Key findings in ITIF’s new report include:

• Chinese entities surpassed the United States and Japan in patents granted in 2022 and submitted 55 percent of global patent applications in 2021 and 2022.
• Chinese firms are several years behind global innovation leaders in memory chips; semiconductor manufacturing equipment (SME); and assembly, test, and packaging (ATP); despite ongoing investments.
• China’s semiconductor firms were investing less than half as much of their revenues in R&D as U.S. firms as of 2022—7.6 percent, versus 18.8 percent for U.S. firms and an average of 15 percent for European firms.

After decades of allowing semiconductor fabrication to move offshore, the United States boosted its semiconductor industry with the 2022 CHIPS and Science Act, so far funding significant investments like $8.5 billion for Intel to construct new facilities in four states, and $6.6 billion for TSMC to construct three in Arizona. On the research side, the CHIPS legislation also invests $5 billion in America’s semiconductor industrial commons through the National Semiconductor Technology Consortium (NSTC). The U.S. Department of Commerce also has announced a $200 million investment in a CHIPS Manufacturing USA Institute to create a first-of-its-kind semiconductor manufacturing digital twin institute.

To build on these investments, ITIF offers a series of recommendations for U.S. policymakers:

1. Congress should eliminate the automatic five- to seven-year federal funding sunset for the Manufacturing USA institutes, and replace it with a five-year, metrics-based review program with minimum standards of performance focused on advancement of technology and manufacturing readiness.
2. Congress should extend the CHIPS Act’s 25 percent investment tax credit (ITC) through the end of this decade and allow it to apply to firms designing semiconductor chips, not just building semiconductor fabs.
3. The United States should work with like-minded nations to update WTO rules to impose much stiffer conditions and penalties for aggressive industrial subsidies like China’s.
4. The United States needs to dramatically expand and deepen its domestic STEM pipeline.
5. The United States should narrowly tailor its semiconductor export controls to focus on true “chokepoint technologies” like semiconductor manufacturing equipment—and instead of applying export controls unilaterally, it should pursue them in coordination with like-minded nations that have indigenous semiconductor production capacity.
6. The United States should continue to make strong use of the Entity Listing, particularly in instances where Chinese companies are found responsible for egregious cases of IP theft.
7. The United States and its allies should develop new trade tools permitting them to exclude Chinese firms from accessing their markets when China denies them reciprocal market access.

“China’s goal is to become a leading competitor in the global semiconductor industry, partly to reduce its foreign dependency and establish a fully ‘closed loop’ semiconductor ecosystem of its own. If it succeeds, it will damage foreign competitors by locking them out of the world’s biggest market,” said Ezell. “Despite making some notable advances in AI and mobile chips, Chinese firms remain about 2 generations of technology behind the West in producing cutting-edge semiconductors. But if the United States and its allies rest on their laurels, they risk suffering significant losses.”

Contact: Austin Slater, [email protected]