Introduction

A Brief Overview of The Global Semiconductor Industry

Innovation Dynamics in the Global Semiconductor Industry

China’s Innovation Mercantilism in Semiconductors

Impacts on Semiconductor Industry Production and Competition

Impacts on Semiconductor Industry Innovation

Policy Recommendations

Conclusion

Endnotes

Introduction

Semiconductors represent perhaps the world’s most-important industry, as they are the foundation of a wide array of products and services.[1] Moreover, they play a key enabling role in emerging technologies such as artificial intelligence (AI), high-performance computing (HPC), 5G, the Internet of Things, and autonomous systems, among others.

Unlike industries in which China has already gained significant global market share—including high-speed rail, solar panels, and telecom equipment—China’s global market share and competitiveness in semiconductors, especially with regard to Chinese-headquartered firms, is still quite modest, with the global leaders largely based in Europe, Japan, South Korea, Taiwan, and the United States.

It is because of this that China has targeted the industry for global competitive advantage, as detailed in a number of government plans, including “Made in China 2025.” China has taken a wide range of steps to propel itself into becoming a major global semiconductor competitor. However, while some of these policy actions are fair and legitimate, most are not and are “innovation mercantilist” in nature, seeking to unfairly benefit Chinse firms at the expense of more-innovative foreign firms.

Competition can drive innovation, but only if it is market-based. When Apple came out with the iPhone and helped drive Blackberry from the market, this spurred innovation, because it was based on consumer demand for a better product, with innovation driving the change. In contrast, Chinese semiconductor firms lag significantly behind the global leaders, usually by two generations of chip development, and Chinese firms patent less than the global leaders. As such, Chinese chip sales largely depend on unfair support from the Chinese government; and each sale reduces the pace of global semiconductor innovation by taking market share and revenue away from more-innovative non-Chinese firms. In fact, this report estimates that without Chinese innovation mercantilist policies in the semiconductor industry, there would be more than 5,000 additional U.S. patents in the industry annually than there are now.

This report provides an overview of the semiconductor industry and the innovation dynamics driving it, including an explication of why innovation mercantilist policies harm innovation. It then describes Chinese innovation mercantilism in the sector and examines the deleterious effect of China’s policies on global innovation in the sector. Finally, it provides policy recommendations for how policymakers can address these challenges.

A Brief Overview of The Global Semiconductor Industry

The term “semiconductor” refers to a solid substance—such as silicon or geranium—which has electrical conductivity properties allowing it to be used either as a conductor or an insulator. Semiconductors, also referred to as integrated circuits (ICs), constitute the brains powering electronic equipment, providing the computational and storage capacity underpinning digital computing. Semiconductors pack as many as 30 billion transistors onto a chip as small as the size of a square centimeter, with circuits measured at the nanoscale (“nm,” a unit of length equal to one-millionth of a meter) level, with the very-newest semiconductor fabrication facilities producing semiconductors at 5 nm and 3 nm scales.[2] Leading-edge semiconductors contain transistors that are 10,000 times thinner than a human hair, operating at tolerances smaller even than the size of the coronavirus. In 2019, the global semiconductor industry generated $412 billion in revenues and shipped over 1 trillion semiconductors.[3] Analysts expect the industry to grow to $730 billion by 2026.[4]

In 2019, U.S.-headquartered semiconductor enterprises held a 47 percent market share of global semiconductor industry sales (down about 5 percent from the 51.8 percent share they held in 2012), followed by South Korean firms with 19 percent, Japanese and European firms with 10 percent each, Taiwanese firms with 6 percent, and Chinese enterprises with 5 percent. (See figure 1.)

However, production shares are different, as many U.S. semiconductors are produced in places such as Taiwan and China. In fact, as of 2019, the United States possessed just 11 percent of global semiconductor fabrication capacity, whereas South Korea held 28 percent, Taiwan 22 percent, Japan 16 percent, China 12 percent, and Europe 3 percent. (See figure 2.) China’s share of global semiconductor fabrication capacity doubled from 2015 to 2019. As of year-end 2020, there were just 20 semiconductor fabrication facilities (“fabs”) operating in the United States.[5]

Figure 1: 2019 Global semiconductor industry sales market share by nationally headquartered company[6]