Opinion | China Hit Some Bumps on Its Road to Semiconductor Dominance

Opinion | China Hit Some Bumps on Its Road to Semiconductor Dominance


Don’t be lulled into thinking China is failing in its goal to become the world’s biggest semiconductor-chip producer. That’s the conclusion some are drawing from such troubles as the bankruptcy of national champion Tsinghua Unigroup and the high-profile arrests of several officials and executives. If China is failing, the argument goes, why is Washington launching an expensive industrial policy to subsidize domestic semiconductor manufacturing?

This analysis is emblematic of the Western habit to underestimate the strength and resilience of China’s economy, political system and industrial strategies. China’s statist approach suffers from endemic waste, misallocation of capital and corruption. China isn’t guaranteed to succeed simply because Beijing wants to. But the notion that these arrests and bankruptcy signal China’s failure lacks evidence.

Consider the solar and shipbuilding industries. Similar to semiconductors, solar technology was invented and first commercialized in the U.S., only to be targeted later by China’s state planners. In 2012, after years of massive subsidies and overinvestment, China’s largest solar firms began to suffer high-profile setbacks. Trina and others cut production to maintain profitability. LDK Solar and others were bailed out by local governments while defaulting on foreign bonds. Suntech, the Nasdaq-listed darling of China’s solar sector, went bankrupt in 2013.

Fast-forward to the present, however, and China’s solar industry is so dominant that U.S. and European green-energy goals depend on Chinese exports. China accounts for 80% of global solar production (across all segments of the supply chain) and nearly 95% of polysilicon crystal. To make matters worse, China’s solar sector exploits forced labor from Uyghur Muslims in Xinjiang and beyond, so importing more Chinese solar panels often means abetting slavery.

In shipbuilding, too, Beijing’s interests have been well-served by subsidies, market-bending policies, and a willingness to endure economic losses. In 2002 Premier

Zhu Rongji

gave a speech calling for China to be the world’s leading shipbuilder, and Beijing made 2015 the target year to achieve this goal. At the time, China accounted for only 5% of global shipbuilding output. In 2003 a national shipbuilding plan emerged, followed by massive subsidies and other accommodative industrial policies.

Between 2005 and 2009, China added 30 times as many new shipyards as global leaders Japan and South Korea. Reuters reported in 2011 that China’s shipyards were “in troubled waters as orders dry up.” But other countries’ shipyards suffered worse. By 2017 China’s immense increase in global capacity forced once-dominant firms such as South Korea’s Daewoo Shipbuilding and Japan’s Mitsubishi Heavy Industries to shrink significantly or seek government assistance to remain in business, while many other firms exited the industry.

Despite losing tens of billions in wasteful overinvestment, Beijing accomplished its goals. By purposely creating global overcapacity, driving profits out of the industry, and bankrupting foreign competitors, China became the world’s leading shipbuilder. It now controls some 50% of global shipbuilding sales. (U.S. shipbuilding is in such short supply that as recently as 2016 U.S. defense contractors considered joining with Chinese firms for dry-dock capacity.)

A recent Stanford study showed that industries targeted by China’s five-year plans see a surge in new Chinese firms and significant declines in U.S. firm creation, output, employment and earnings.

These lessons of history apply to semiconductors too. By certain measures Beijing’s policy is finding success. China now produces more chips than the U.S., accounting for about 15% of global output. Its chip-manufacturing giant, SMIC, recently produced a 7-nanometer chip. That is behind the global cutting edge, which is 3 nanometers and smaller, but it may rival U.S. leaders such as Intel.

Beijing’s industrial policies reflect inconvenient realities. Building semiconductor foundries (known as fabs) is now so expensive, close to $20 billion each at the cutting edge, that firms all but demand state backing before building one. Between 2012 and 2020 (when U.S. lawmakers began working on the subsidy plan enacted this summer), most new high-volume, leading-node fabs in the world were built in China, South Korea and Taiwan, where firms enjoy government subsidies and implicit guarantees.

Hence the case for the recently passed Chips+ Act, through which Washington will subsidize U.S. semiconductor manufacturing, which has fallen to 12% of global production from 37% in 1990. Subsidies can create distortions and feed corruption, so we need deft administration, transparency and limits. But ceding semiconductor manufacturing to others who subsidize it for strategic advantage has exposed the U.S. to a dangerous dependency on exports from overseas markets that are subject to Chinese coercion.

Policy makers can recognize the challenges of America implementing its own industrial policy without mischaracterizing China’s mission as failed or doomed. Whatever embarrassing failures are hurting China’s semiconductor industry these days, history and strategic prudence show that the U.S. should take Beijing’s ambitions seriously and spend to counter them before it’s too late.

Mr. Switzer is a senior fellow at the Special Competitive Strategies Project. Mr. Feith, an adjunct senior fellow at the Center for a New American Security, served on the State Department policy-planning staff and as deputy assistant secretary of state for East Asia, 2017-21.

Main Street: If Joe Biden intends to outcompete Beijing, surely Milton Friedman still offers a more compelling model than simply copying the government-directed approach of Xi Jinping (06/28/21). Images: AP/Getty Images Composite: Mark Kelly

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