U.S. Sanctions Are Supercharging China’s Chipmaking Industry

China’s chip industry is growing faster than anywhere else in the world, after US sanctions on local champions from Huawei Technologies Co. to Hikvision spurred appetite for home-grown components.

Nineteen of the world’s 20 fastest-growing chip industry firms over the past four quarters, on average, hail from the world’s No. According to Bloomberg data, the 2nd largest economy in the world. This is compared to just eight at the same time last year. These China-based suppliers for design software, processors, and other gear essential to chipmaking are increasing their revenue several times as fast as global leaders Taiwan Semiconductor Manufacturing Co. (ASML Holding NV).

That supercharged growth underscores how tensions between Washington and Beijing are transforming the global $550 billion semiconductor industry — a sector that plays an outsized role in everything from defense to the advent of future technologies like AI and autonomous cars. In 2020, the US began restricting sales of American technology to companies like Semiconductor Manufacturing International Corp. and Hangzhou Hikvision Digital Technology Co., successfully containing their growth — but also fueling a boom in Chinese chip-making and supply.

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Cambricon Technologies Corp.’s shares are up more than twice this year from their lowest point, but analysts believe that there could still be growth. Beijing is expected to orchestrate billions of dollars of investment in the sector under ambitious programs such as its “Little Giants” blueprint to endorse and bankroll national tech champions, and encourage “buy China” tactics to sidestep US sanctions. Some of Apple’s most discerning clients have been captivated by the rise of indigenous companies: Apple Inc. is said to be considering Yangtze Memory Technologies Co. for its latest source of iPhone flash storage.

“The biggest underlying trend is China’s quest for self-sufficiency in the supply chain, catalyzed by Covid-related lockdowns,” Morningstar analyst Phelix Lee wrote in an email responding to inquiries from Bloomberg News. “Amid lockdowns, Chinese customers who mostly use imported semiconductors need to source homegrown alternatives to ensure smooth operations.”

An employee watches over the operation of testing equipment at Chongqing Pingwei Industrial Co. LTD, Liangping High-tech Zone in Chongqing. March 30, 2022.

Costfoto/Future Publishing via Getty Images

At the heart of Beijing’s ambitions is the impetus to wean itself off a geopolitical rival and more than $430 billion worth of imported chipsets in 2021. According to data from Semi show, chip manufacturing equipment orders rose by 58% in 2017 as more local factories increased their capacity.

This is driving local businesses. According to China Semiconductor Industry Association, total sales of Chinese-based designers and chipmakers jumped 18% to more than 1 trillion Yuan ($150 billion) in 2021.

A persistent chip shortage that’s curtailing output at the world’s largest makers of cars and consumer electronics is also working in local chipmakers’ favor, helping Chinese suppliers more easily access the international market — sometimes with premiums tacked onto the best-selling products, such as auto and PC chips.

SMIC (Hua Hong Semiconductor Ltd.) and Hua Hong Semiconductor Ltd. have maintained their Shanghai-based plants at full capacity, despite the worsening Covid-19 crisis that has struck China since 2020. This is despite China having a crippling effect on logistics and manufacturing. With local authorities’ help, cargo flights from Japan delivered essential materials and gear to chip plants as the city went under lockdown. SMIC reported a 67% increase in quarterly sales last quarter, surpassing rivals GlobalFoundries Inc. (TSMC) and TSMC.

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Shanghai Fullhan Microelectronics Co.’s revenue grew 37% on average because of high demand for surveillance products. The video chip designer has pledged to expand into electric vehicles and AI after winning its “Little Giant” designation. And design tool developer Primarius Technologies Co. doubled sales on average over the past four quarters, saying it’s developed software that can be used in making 3-nanometer chips.

Putting aside long-term profitability concerns, Morningstar’s Lee said the aggressive capacity build-up from Chinese players will elevate their presence globally.

“There’s little doubt Chinese chipmakers can achieve revenue growth over the next few years from cars, consumer electronics and other devices,” he said.

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