Taiwan companies will invest more in the mainland Chinese market to counterbalance moves by mainland competitors. The world’s third-biggest chip maker, Taiwan Semiconductor Manufacturing Company (TSMC), with sales of more than US$45 billion in 2020, 17 percent of which was to Chinese mainland, announced in April 2021 the expansion of its 28 nm Nanjing foundry with an investment of nearly US$3 billion to meet the growing demands of the local market. This is TSMC’s answer to the investment of US$7.6 billion for new 28 nm chip production capacity in Beijing in 2020 and US$2.3 billion in Shenzhen this year by rival Shanghai-based Semiconductor Manufacturing International Corporation (SMIC), which is partially state-owned.
Mainland China is clearly aware that it needs to boost innovation to build a semiconductor supply chain to match that of the US. The overarching obstacle to developing its domestic semiconductor industry is the lack of basic scientific talent. In most practical technology and engineering fields of higher education such as communications, transportation, energy and machinery, China leads the world. But higher education in mathematics, physics, chemistry, electrical engineering, computers and materials science, China still lags behind the US.
But mainland China is focused on remedying these knowledge deficiencies. A key part of its efforts to drive innovation are smart-city projects planned in Beijing, Shanghai and Shenzhen which will open up opportunities for solution developers across a wide range are sectors including energy, health and culture. This will accelerate the development of new technologies, materials and equipment including 6G, edge servers, satellite internet, vehicles powered with new sources of energy, and wearable devices – the meshing of digital technologies with green tech that will accelerate progress towards a low-carbon future. This is part of Beijing’s unrelenting efforts to raise per-capita national income and promote rural prosperity to increase total social consumption power. The aim is to provide high-quality public-service products for citizens and respond more quickly to social and natural crises at home and around the world.
Decoupling – and then a recoupling?
Manufacturing plants that supply wafers for logic and memory chips typically require US$20 billion in capital expenditure. Relying on the US market is not enough to make an acceptable return on investments. If lithography system manufacturers such as ASML halt exports to China, they will lose their competitive edge over the next decade due to lower R&D investing and the emergence of alternatives. Local businesses as well as companies in Europe or Asia will rush to meet the market opportunities left by companies exiting China.
Geopolitically, China has no desire to replace the US in global leadership. Beijing will engage modestly in global governance as a complement to the US-led global system. Economically, China will continue to innovate, open up and reform to benefit its own economy and the world. With China accelerating the expansion of its domestic production and a parallel supply chain gradually forming, the global semiconductor industry will reach the stage where two choices are on offer, two bets can be made. This would essentially be a decoupling. By around 2028, the size of the Chinese economy will surpass that of the US and more and more global enterprises will bet on China. The capital-rich semiconductor industry chain will once again link and merge with China’s – and the global supply chain will gradually stabilize.
That at least is the hope: that decades from now, this period of strategic competition between the US and China especially their decoupling in the technology sector including semiconductors was but a temporary phase in a reordering of the world. Eventually, the major powers will come to realize that global challenges such as climate and ecosystem change, public health, and inequality are the real issues – and that a chip war, supply-chain competition, and other trade spats were mere money- and time-wasting distractions.