China is poised to dominate the market for legacy chips, and the US has only itself to blame
In April, US Commerce Secretary Gina Raimondo took the stage in the Belgian city of Leuven with a warning: “About 60% of all new chips coming to market in the next few years will be produced in China,” she said. he told reporters. The US and its allies are controlling China’s access to advanced chips used to power cutting-edge applications such as AI. But most of the industry makes so-called mature chips, less sophisticated products that power home appliances, electric vehicles and other everyday products.
And China — despite a growing set of U.S. policies aimed at curbing the country’s chip industry — could be set to dominate that market. Chinese chip production rose 40% in the first quarter, according to government data. Mainland Chinese firms could be the leading players in the legacy chip market, behind Taiwan-based firms, and account for 33% of the market by 2027, predicts TrendForce, a market research firm.
Western officials in recent months have voiced a steady chorus of concern about Chinese “overcapacity,” alleging that China uses state subsidies to help industries such as electric vehicles and solar panels undercut their foreign competition.
But unlike EVs or renewable energy — industries that Beijing and private companies recognized as strategic opportunities early on — analysts suggest that China’s dominance of mature chips is instead a byproduct of other policies. And they note that US pressure likely (and ironically) played a large role in driving China’s potential success in legacy chips.
China’s goal is to eventually produce the advanced chips that can power mobile AI or 5G technology. However, Washington’s export restrictions are preventing Chinese chipmakers from getting the tools they need. This means that Chinese chipmakers are reverting to the least advanced chips they can still produce.
“They have to start somewhere,” says Chim Lee, a senior Asia analyst at the Economist Intelligence Unit. “You have to start with mature nodes … then grow the market gradually.”
Why is China investing in old chips?
Legacy chips, also referred to as baked chips or baked nodes, are less advanced semiconductors used in a wide range of electronic devices, ranging from home appliances to electric vehicles. US export controls define older chips as those larger than the “16- to 14-nanometer” generation. Chips of that size are just over a decade old. By comparison, TSMC, the world’s leading contract chipmaker, is set to mass-produce two-nanometer chips intended for high-end electronics such as Apple smartphones or Nvidia processors next year.
Linghao Bao, a senior analyst at consulting firm Trivium China, suggests that the rise in China’s legacy chip production is a byproduct of Beijing’s support for “sectors that are strategic to China.” China invested heavily in industries such as clean energy and electric vehicles in an effort to become a world leader in these sectors. These industries require semiconductors, but not the most advanced ones used in high-end consumer electronics and AI.
Chinese chipmakers are starting operations on 18 projects this year, according to US trade group SEMI.
These incoming projects will almost certainly focus on mature chip manufacturing. Export controls from the US and its allies prevent companies like ASML from selling their most advanced chip-making tools to China.
However, the sanctions (for now) do not prevent Chinese companies from buying some older equipment. In fact, Chinese chip companies jumped on chipmaking machinery last year because of fears that the U.S. could tighten the screws even further, explains Marco Mezger, chief operating officer of Neumonda, a European components firm. of memory.
These concerns may not be unfounded. Bloomberg in January, citing unnamed sources, reported that ASML canceled some shipments destined for China late last year amid political pressure.
“The main goal is to replace American equipment” in the chip supply chain, Bao says.
What is China’s semiconductor policy?
However, Beijing has strong opinions about where Chinese companies should source their chips.
In May, China unveiled a $47.5 billion fund to further strengthen the local semiconductor industry. “Big Fund III” (as it’s colloquially called) is almost as big as Beijing’s two previous chip funds combined.
Big Fund hopes to wean China’s chip industry away from foreign technology, and Beijing has had mixed success. While these programs led to some chip champions such as Semiconductor Manufacturing International Corp. (SMIC), it also led to several high-profile corporate failures and corruption scandals.
Beijing is also reportedly telling Chinese companies to stop using foreign-made chips in their products, which could cut off access to foreign chipmakers. Beijing could also use its large EV market to promote local chips “to the detriment of European and Japanese suppliers,” according to a non-public European Commission report uncovered by Bloomberg.
What happens next?
Non-Chinese companies may struggle to compete with older Chinese chip makers. Chinese companies still lag behind the best legacy chipmakers when it comes to technological capabilities, but “in terms of price, domestic competitors are already there,” EIU’s Lee notes.
The threat of “over-supply” has some companies worried about price wars as smelters become desperate for customers. And some in the US want controls to go even further to limit the use of Chinese chips.
But the new sanctions on mature chips could be a step too far for US allies who still sell to China’s chip industry.
According to Mezger, Netherlands-based ASML, despite the US controls, still shipped one chip-making machine per day to China last year. ASML’s sales in China increased last year and the Chinese market was the second largest for the Dutch firm, accounting for a quarter of its sales in 2023.
Japan, another US ally that has joined its chip controls, also exports chip-making tools to China. Both Tokyo Electron and Canon, which both make less advanced chip-making tools, expect China to contribute 40% of their sales this year.
Meanwhile, governments such as the US are also wooing chip makers to invest in domestic production. Earlier this year, the Biden administration allocated $1.5 billion in CHIPS Act money to GlobalFoundries, in part to expand its production of baked chips.
Mezger is not convinced that these programs will be enough to make legacy chip production sustainable on Earth. Margins are already low in the mature chip space—and Chinese competition will squeeze those margins even further. Without subsidies, other regions will not be as economically competitive as China, he says.