The FDI angle:

• Semiconductors underpin all modern technologies and lie at the heart of competition between the US and China.
• Older-generation ‘legacy’ chips make up the majority of the semiconductor market in terms of units.
• Why does this matter? China has invested in enough capacity to oversupply legacy chips and disrupt chip industries in other countries.

Concern in Washington about the Chinese semiconductor sector is as alive today as it was October 2022, when the US imposed export controls on cutting-edge chips and equipment to China. These restrictions aimed to thwart China’s emerging domestic chip industry and use of advanced chips to boost its military capabilities.

Now there are calls for even more restrictions. A letter published this month by the US Select Committee on the Chinese Communist Party (SCCCP) called for “urgent action” on foundational chips, defined as those that are 28 nanometres (nm) or larger. 

“We are concerned that [China] is on track to flood the US and global markets with foundational semiconductors,” SCCCP lawmakers wrote in the January 5 letter to US commerce secretary Gina Raimondo and trade representative Katherine Tai. 

This risk is echoed by analysts and evidenced by data. A third of global semiconductor capital expenditure (capex) was in China last year, up 28% from a year earlier and about five times greater than in 2012, according to SEMI data explored by Future Horizons, an analytics firm. 

Despite of huge incentives offered to chipmakers in the US and EU, North America accounted for just 11.6% of global semiconductor capex in 2023, while Europe made up 5.9% of the total. The massive expansion in China is fuelling fears that foreign competition will be squeezed out, as it has in other products such as steel, aluminium and solar panels.

“We are seeing huge investment in China, way beyond what its internal market can sustainably consume,” says Malcolm Penn, the CEO of Future Horizons. If older-generation Chinese-made chips produced at its new foundries are oversupplied to the global market, analysts worry it could lead to price wars, undermine efforts to develop alternative semiconductor supply chains and lead to further trade restrictions.

“None of these [semiconductor] regulations or export control policies are absolute or complete,” said Arati Prabhakar, the director of the White House Office of Science and Technology Policy, at the World Economic Forum in Davos on January 17. 

More trends related to the semiconductor industry:

• The world's top semiconductor investors
• Taiwan's new president Lai to aid FDI beyond China
• Industrial policies are mostly motivated by protectionism, not geopolitics

Chinese firms can offer prices for some chip products that are more than 30% lower than non-Chinese competitors, allowing them to capture market share, according to an October 2023 report by Silverado Policy Accelerator, a US-based think tank. 

“There is widespread recognition in the industry that China’s vast subsidisation creates overcapacity risk that could impact existing companies in Europe, Japan, the US and Taiwan,” says Chris Miller, author of Chip War, a treatise on the modern semiconductor industry’s development. However, he notes that the overcapacity dynamics will vary due to different types of foundational chips and capabilities in China to produce them. 

A bifurcation of the semiconductor industry between China (and its blocs) and the rest of the world is plain to see. Capex as a share of total integrated circuit (IC) sales rose to an all-time high of 19.2% in China in the first quarter of 2023, compared to 15.2% in the rest of the world, according to SEMI figures analysed by Future Horizons.

The decline in capex as a share of IC sales (as shown in the chart above) is reflective of semiconductor companies pulling back on their investment plans after the market slowed in early 2023, according to Mr Penn. But while non-Chinese companies have reduced capex in line with the cyclical nature of the chip industry, China is taking a different approach.

In September 2023, Reuters reported that China was set to launch a new state-backed fund aimed at raising about $40bn to support its semiconductor industry. This is larger than both the two previous funds raised in 2014 and 2019 by China’s Integrated Circuit Investment Fund, commonly known as the ‘Big Fund’.

In the next three to five years, China is expected to add nearly as much 50–180nm wafer capacity as the rest of the world, according to a Rhodium Group report in April 2023. This ramp up in capacity will make it difficult for countries such as India, which is trying to develop its own domestic chip manufacturing industry focused on older-generation semiconductors.

Compared to the most advanced chips, there has been “far less attention given to the risk” of Chinese-made foundational chips to US economic security, according to the SCCCP lawmakers. They have requested a plan to “address this problem” within 60 days of their January 5 letter.

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