Commentary on Political Economy

Monday 1 March 2021


Why China Can’t Fix the Global Microchip Shortage

The country has been the world’s vaunted factory floor but semiconductors require years of hard-won know-how and incredible amounts of money to design and create.

Where the chips fall short.
Where the chips fall short. Photographer: Bloomberg/Bloomberg

Why can’t China step in to fill the chip shortage? The vaunted factory floor of the world has flooded the global economy with goods, and has often had to deal with domestic oversupplies itself. Why then has it been largely on the sidelines of the debate over solving the worldwide semiconductor shortage?

The stark reality is that, when it comes to chips and chipmaking machinery, China just can’t produce what the world needs. Its self-sufficiency in semiconductors remains low: It exports about $100 billion worth of chips but imports more than $300 billion. Meanwhile, China makes 28% of the semiconductor production equipment required by chipmakers, according to HSBC Holdings Plc. estimates.

The chip foundries and production lines that have been set up in China require imported machinery. Last year, $13.7 billion of semiconductor equipment came in from overseas, up over 30% from the year before. The shortage of such machines is so severe that used ones from Japan are making their way to China, pushing prices up sharply.

Big Spender

China's spending on semiconductor equipment is rising, making it the world's second largest market following Taiwan

Source: HSBC Holdings Plc

Note: Figures for 2020 and 2021 are HSBC estimates as of Oct. 2020.

The country has been able to make some progress, especially in low-end processes of the multi-step chipmaking procedure, but it is still decades away from more complex operations. The likes of Shanghai-based Semiconductor Manufacturing International Corp. are a few generations behind global leaders like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. Up until 2015, the Chinese company produced much older technology and the country hasn't been able to break into the bleeding edge. And with the advances in chip design — and the global demand for higher end semiconductors — China is chasing moving targets. 

Take lithography, a critical step in chipmaking, where light is used to transfer circuit patterns to a film, which is then used to make individual microprocessors. It can take more than 10 years to develop the so-called extreme ultraviolet tools for lithography; and the exacting machinery has become increasingly expensive. The market has consolidated around just three players because it is so capital- and knowledge-intensive. China’s imports of lithography equipment rose 97% last year. The country does have one company that makes the machinery: Shanghai Micro Electronics Equipment Ltd. It expects to deliver equipment that uses an older lithography technology either this year or in 2022.

Beijing has tried relentlessly to gain semiconductor self-sufficiency, throwing subsidies and incentives like decades-long tax breaks to the chip industry. Self-reliance remains a national policy goal. Yet, large projects have gone belly-up. Chinese firms that make equipment for lower-end processes like chip cleaning, are crowding into a small market. In 2019, only 6.1% of entire chip market in China was supplied by companies headquartered in the People’s Republic. The rest were foreign firms. At one of the top Chinese fab equipment firms, Naura Technology Group Co., subsidies accounted for 87% of net profit in 2019.

What’s more, HSBC notes, China’s chip-making machines are substandard compared to market leaders elsewhere. They are also more expensive to service and not as precise. Apart from what’s paid for the equipment, the price of owning them becomes high over time.

Even if China made substantial progress on its chip designing and technology ambitions, it can’t make those chips for domestic use — or for export — without the machines to manufacture them. Its inability to make this equipment and a stranglehold on the machines by foreign players, means the country will remain reliant on the global supply chain for a while.  

For all the fears looming around China’s chipmaking ambitions, the country won’t be stepping in to fix the current supply shortfall anytime soon. China’s main role in the global semiconductor industry remains that of assembler and integrator — that is, putting chips on circuit boards.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Anjani Trivedi at

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