The Chip war between the US and China appears to be long-lasting. Despite the COVID-19 pandemic disrupting chip supply internationally over the past three years, the industry is slowly coming back to fulfill the growing demand for chips.

It is not denied that China is a global player in the chips industry and that the US still manufactures a lot of its products in China. However, the ongoing sanctions charged by the US on China are now advancing toward a boiling point for the industry.

Why are chips significant?

Microchips are the lifeblood of the modern global economy: the tiny slices of silicon are located in all types of electronics — from LED light bulbs and washing machines to cars and smartphones.

However, they are also critical to core services such as healthcare, law and order, and utilities.

Globally, semiconductors are forecast to become a US$1 trillion industry by 2030, according to a McKinsey report published last year.

Nowhere is their essential nature more observable than in China, the world’s second-largest economy, which depends on a steady supply of foreign chips for its massive electronics manufacturing base.

In 2021, China imported semiconductors worth US$430 billion — more than it spent on oil.

Why target China?

Beyond iPhones, Teslas, and PlayStations, the most potent chips are significant to the development of advanced technology such as artificial intelligence, as well as cutting-edge weapons including hypersonic missiles and stealth fighter jets.

Washington imposed a series of export controls last year, saying they were meant to prevent “sensitive technologies with military applications” from being acquired by China’s armed forces and its intelligence and security services.

The Dutch government followed suit in March this year, citing national security while charging controls on foreign sales to prevent military use.

The limitations target the most state-of-the-art chips and chip-making technology that can be used for, among other applications, supercomputers, high-end military equipment, and AI development.

How has China reacted?

Beijing has responded with anger and defiance, vowing to increase its efforts to become self-dependent on semiconductors.

To transcend US curbs, two semiconductor researchers at the influential Chinese Academy of Sciences offered a blueprint in February that advised Beijing to more effectively funnel investments into high-quality talent and original research.

It indicated a powerful strategy rethink, and one of its main beneficiaries is YMTC.

Company records show the US-sanctioned firm has obtained an injection of US$7.1 billion since the new export controls took effect.

Is more investment the answer for China?

The tens of billions of dollars China has pumped into the development of domestic industry have yet to bear much fruit.

China had aimed by 2025 to reach 70% chip self-sufficiency, but some think tanks estimate it currently satisfies below 20% of demand.

“Money is not the problem,” said Qi Wang, co-founder of Hong Kong-based MegaTrust Investment, pointing instead at waste, fraud, and talent shortages.

“China has no good choices, except to double down on state support for the industry,” said John Lee, director of East-West Futures consulting.

Why is China concerned?

The production of chips is fiendishly tough and typically spans multiple countries.

But many states rely on US inputs, while the other major players are Japanese companies and the Netherlands’ ASML — which dominates the production of lithography machines that print patterns on silicon wafers.

This gives the trio an outsized influence on the global semiconductor industry.