With some 300 companies on the Entity List now required to get approval from Washington in order to sell computer hardware to Chinese firms, Beijing is moving fast to make it easier for their semiconductor makers to grow despite U.S. restrictions.
This week, China said that chipmakers can now import machinery and raw materials tax-free through 2030. Processor chips and other semiconductors are perhaps more important to China’s growth than capital markets. They are China’s biggest single import, totaling more than $300 billion a year.
Under the latest measure, machinery and raw materials “that cannot be produced or whose performance cannot meet demand” will be exempt from import duties, the government said. The product lines that will benefit include photoresists, masks, polishing pads and liquids, silicon crystals and wafers, materials to build clean rooms and other production equipment, the AP reported today.
Two things stand out on the China tech front. First, Washington is convinced that China’s growing tech prowess is partially due to IP theft. Cisco Systems sued Huawei in 2003 over theft of software and other intellectual property, but that case was dropped in 2004 after Huawei agreed to stop using the disputed materials in its products. However, Huawei continued to grow in world markets and is now double the size of Cisco.
The other issue is that a lot of the chips China imports from U.S. designers like Intel end up being used for military purposes and for unreasonable surveillance of civilians, with the Uyghur detention facilities in Xinjiang being the most egregious examples.
Some say that China is five to 10 years behind the U.S. in terms of semiconductor technologies. And while that may be true, China is investing heavily in this sector and the U.S. is massively dependent on South Korea and Taiwan to make the chips that companies like Apple and AMD design. Moreover, these companies also want access to the China market, making these bans as much punishment on them as it is on the Chinese importers.
CPA’s position is that the U.S. should focus on building up our own semiconductor manufacturing industry, mainly through policies that make manufacturing chips here a priority rather than outsourcing the work to Taiwan Semiconductors and others.
The Asian Model is Winning
When it comes to semiconductor manufacturing, the Asian model of investment is winning while the U.S. model of focusing on design and sales is losing ground because it is too dependent on Asia to make its chips. Those companies then gain the know-how after years of continuous improvement of high-precision manufacturing of microchips and have made themselves indispensable. China sees South Korea and Taiwan’s success and that is the exact model they are pursuing, only at a much larger scale.
Over the last 20 years, the U.S. industry has been geared towards the “fabless chipmaker.” Almost every chipmaking company founded here since 2000 is fabless, meaning they don’t make when they create.
There has been a global bifurcation in the chip industry, writes CPA chief economist Jeff Ferry in his recent report, published today, titled “Absolutely Fabless: Of Chips, Cash and Supply Chains.” He says that the U.S. firms concentrate on being labor-light and asset-light, which means a small number of people get rich in a short period of time.
Asian companies saw this as an opportunity. They began manufacturing the chips that U.S. companies didn’t want to make, and now China is allowing for massive imports of the machines used to make those chips, at a never-before-seen discount.
“We have a division of labor where foreign chipmakers focus on the manufacturing side, generating healthy, moderate levels of wealth for a large number of people, including manufacturing workers and the many workers and companies that support them,” says Ferry.
In the 1980s, Taiwanese government officials saw that chip manufacturing could produce wealth on a national scale. South Korea, Singapore, and Israel made the same calculation and also supported chip manufacturing in their countries. China is doing it today. Chip making and chip design are part of China’s latest Five Year Plan. Their Greater Bay Area isn’t called “greater” as a regional description. It is called “greater” because it intends to be bigger and better than Silicon Valley. While Palo Alto has the venture capitalists to throw darts at the next tech unicorn, China has dozens of municipal, provincial, and Beijing-financed venture capital funds doing the same.
“If you speak to executives in Silicon Valley, they are proud of the products they’ve created, and they believe technology is changing the world. But many of them would not be surprised if their company gets acquired, or disappears, in the next five years,” says Ferry. “They have little or no interest in the state of the rest of the U.S., or even the rest of California. If we don’t change the economic time horizons in this country, we will increasingly become a nation focused on asset-light companies that make fewer and fewer people richer and richer, and ignore the 90% of the population that can’t share in producing leading-edge technologies.”
China is taking the broader view, like its Asian neighbors. Their latest duty-free import scheme may be a sign of desperation due to the Entity List and fears of a greater tech war. But it should serve as a reminder that China means business, and takes action fast on industries it deems essential and critical to their economic well-being and national interests. We need not look any further than those Asian countries as an example of a winning strategy that, once China gets fully involved, will one day undercut the U.S. even on the design side of the equation.