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On Monday, we learned that China’s economy roared back to a pre-pandemic growth rate of 6.5% in the final quarter of last year, pushing expansion for the full year to 2.3%. That left China the only major economy in the world to avoid a contraction in 2020—and prompted many economists to move forward their predictions of the year China, now the world’s second-largest economy, will overtake the United States as No. 1. (The new consensus seems to be somewhere between 2028 and 2030.)
But for all that strength, China’s economy remains acutely vulnerable in one very specific way: it is utterly dependent on manufacturers in the U.S. and a handful of key allies for advanced technologies required to produce high-speed semiconductors. China imported $350 billion worth of semiconductors in 2020, an increase of 15% over 2019. As we’ve noted often in this space, China spends far more to import chips than it spends to import oil.
The Trump administration has exploited that weakness ruthlessly in its final year by ratcheting up restrictions on the ability of any company anywhere in the world using U.S. semiconductor technologies to do business with an ever-growing “blacklist” of Chinese firms. Trump’s Commerce Department imposed the latest restrictions just last week, notifying U.S. chipmaker Intel Corp and dozens of other suppliers that it would revoke their permission to sell to Huawei Technologies, the Chinese telecommunications equipment giant. President Joe Biden has signaled he’s unlikely to roll back Trump’s bans on technology sales to China any time soon.
For three decades, Beijing has struggled to break this American chokehold by developing a self-sufficient, world-class semiconductor manufacturing industry—with limited success. In 2014, China announced a plan to spend $150 billion to expand its homegrown semiconductor industry. President Xi Jinping has made semiconductors a centerpiece of his plan to invest $1.4 trillion in the six years to 2025 to build critical high-tech industries, from mobile networks to artificial intelligence. Beijing is expected to dramatically ramp up financial support for the chip industry as part of the 14th five-year plan set to be unveiled in March. Already tens of thousands of Chinese companies are scrambling to qualify for what is expected to be a multi-billion dollar subsidy bonanza. Chinese planners have set a goal of raising the share of domestically-produced chips it consumes to 70% by 2025, up from the current 16%.
And so I was fascinated to read the Financial Times‘ inside account of how Beijing’s national campaign for self-sufficiency is playing out in the nation’s largest—and by all accounts most advanced—chipmaker, Shanghai-based Semiconductor Manufacturing International Corp (SMIC). The story explores a board room battle between its two co-chief executives Liang Mong-song, who joined SMIC in 2017 after a storied career at its international rival Taiwan Semiconductor Manufacturing, and mainland co-chief Zhao Haijun. The drama revolves around Zhao’s decision to recruit Liang’s former boss at TSMC, Chiang Shang-yi, as SMIC’s deputy chairman. Liang threatened to resign, and in a letter to SMIC’s board last month, he blamed Zhao for failing to consult him. It’s a tale with much corporate intrigue; Liang appears to have changed his mind about quitting.
But what’s really remarkable about the FT account is that it highlights the extent to which mainland chipmakers depend on the expertise of semiconductor engineers poached from Taiwan. The story begs the question of whether U.S. efforts to block the sale of technology to China can be sufficient to impede the long-term rise of mainland chipmakers while it is so easy for industry’s most talented engineers to hop across the Taiwan Strait for higher pay.
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This edition of Eastworld was curated and produced by Grady McGregor. Reach him at email@example.com.
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