A reappraisal of China's semiconductor strategy


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ZeEa5KPul

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I've been thinking further about the subject of China's retaliation, and one of the options that immediately suggests itself is a comprehensive rare earths embargo. Despite its superficial appeal, and my initial instinct to wield it, on deeper consideration I believe it shouldn't be used at the present time.

Although it would do enormous damage to America's (and other countries') semiconductor industry, its primary weakness is that it can only be used once. China doesn't yet have the mature industry to capitalize on the disruption it would cause. But, once China's semiconductor industry is ready - which can happen more quickly than one would initially think if China adopts the acceleratory measures I outlined - the picture changes entirely.

The embargo would not just deal a mortal wound to every competitor simultaneously, Chinese fabs would be in a position to completely fill the ensuing vacuum. China could just saunter into the treasure vault and take everything in it.
 

s002wjh

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rare earth and treasury is the nuke option, and should not be used unless sino-US is almost at the brink of war. furthermore, US/aussies also have rare earth, once china use the card, US/Aussies will reopen its mining etc at any cost.
 

chlosy

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rare earth and treasury is the nuke option, and should not be used unless sino-US is almost at the brink of war. furthermore, US/aussies also have rare earth, once china use the card, US/Aussies will reopen its mining etc at any cost.
Agree
 

Max Demian

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The point of a suit isn't to compel the US, it's to provide legal and PR cover for the actions (primarily the patent invalidation) that I advocate.


Well, that's very nice, but Huawei is just one company and HiSilicon doesn't fabricate any chips (it uses TSMC). Even if SMIC could produce at 7nm, current plans call for it doing so using ASML's etchers. This is simply unacceptable.
What I believe China must do is identify a complete set of strategically critical technologies, where by "complete" I mean the technologies themselves, the inputs used to produce them, the inputs used to produce the inputs, ad infinitum. For those technologies, China should do absolutely everything in its means to obtain them - both short-term, emergency measures like espionage, using foreign patents as recipe books (the main thrust of my strategy), offering foreign experts outrageous sums, etc. and long-term measures like research grants for developing these technologies and scholarships for students entering critical fields, etc.
This war (I refuse to call it just a "trade war") with the US provides excellent justification for this very vigorous push to indigenize critical foreign technologies like extreme ultraviolet photolithography, which would be untenable in ordinary circumstances.
Check your facts. ASML doesn't sell etchers.Their main business are photolitography systems. But they are not a monopolist. There's also Nikon and Canon selling outstanding systems.

Think about it. Some of things you're proposing would turn China into a pariah state and massively help the US in its efforts to contain China.They could only wish for that to happen.
 

Weaasel

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Check your facts. ASML doesn't sell etchers.Their main business are photolitography systems. But they are not a monopolist. There's also Nikon and Canon selling outstanding systems.

Think about it. Some of things you're proposing would turn China into a pariah state and massively help the US in its efforts to contain China.They could only wish for that to happen.
What is the alternative? That China become a vassal state and meekly subject to the United States. That's completely unacceptable and it is not in the interests of the wider world for there to be just one domineering and increasingly petulant Super Power. The person that you responded to is absolutely right. If recent stories are to go by, China does possess significant indigenous capability of producing sophisticated chip manufacturing equipment, for example the CAS 10 nm UV lithography breakthrough. It is just now that instead of purchasing from existing mostly non Chinese vendors, Chinese tech companies have to begin replacing outside sources with domestically made ones.

It will take time for China to mass produce its equipment to make them in quantities that are commercially viable, but being that it is clear that the United States absolutely wants to prevent China from getting access to ANY sophisticated tech from abroad, threatening sanctions against foreign companies and countries that will do so, China is left with little choice than to do so.

China and Chinese companies did not believe that the US would be willing to engage in economic nationalism to the extent of endangering the profitability and access to the Chinese market of its own tech companies, and it believed that these companies would hold enough sway over American politicians for them not to make such a step, hence China's somewhat laid back attempts prior to the announcement of Made in China 2025 to indigenously develop and mass produce the technologies that would ensure much greater high tech self reliance and self suppliance. The Chinese believed that China's being the largest single market for semiconductors and China being firmly embedded and a major part of the global high tech supply chains would dissuade the United States and its Allies from resorting to the sort of actions that it has just done with Huawei.

BAD BAD call and in China currently I am sure that there are recriminations and a lot of finger pointing at globalist market liberals and policy makers during the Hu Jintao Administration for China not having much greater self reliance than of presently does.

However, while the situation is NOT GOOD, it is not dire, and it is much less a case of China being incapable of producing high tech goods comparable to leaders among the US Alliance, than it is now China needing to accelerate the domestic production of such goods and sourcing of materials necessary for the production of such goods to replace imports. Now, it is definitely going to happen, and I predict that within 5 years Chinese tech companies will have almost completely weaned themselves from American suppliers and would have replaced them with other suppliers from countries like South Korea, Japan, the Netherlands, Germany, and Sweden, while significantly boosting the output of its own domestic high tech companies with demonstrated technological capabilities. If China shows significant high tech capabilities of its own and boosts its productivity, there will be a much less incentive on the part of entities from those nations and their governments to cooperate with attempts by the United States to corral China.

With regards to the money required to build the factories and fabs for high tech goods, like high end semiconductors and the equipment to make them in China, China fully possesses the financial wherewithal to overcome the pecuniary necessities for market entry.
 

Weaasel

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Reading about US attempts to hamstring Chinese semiconductor advancement, especially the well-known cases of ZTE, FJIC, and now Huawei, has caused me to think that it's time for China to significantly readjust its development strategy. I believe that the old strategy - import as much foreign technology as possible and use it to manufacture chips, then swap them out for domestic technology later - is simply doomed to failure. If a fab manager ever has to pick up the phone and dial ASML, he might as well just put the phone down and quit because America can put a proverbial bullet in his business's skull whenever the whim strikes it.

This is especially true now that the US has finally figured out that the commie yellows can actually master technology and pose a competitive threat. I think that the present circumstances has shown everyone that the US president has enormous latitude for unilateral action, especially when "fuck China" is how Congressmen greet each other in the hallway now. Does any of this call for capitulation? Far from it. Even if you are a coward, capitulating is useless when the only thing your enemy wants is your blood. Fighting is the only chance you have.

What is needed to win this war is a rethinking of industrial policy. The old strategy I outlined above depends crucially on a friendly enough business environment to acquire the foreign components, and then a lengthy period of waiting while domestic input producers catch up. You can master certain parts of the process that way but never all of them. Worse, by buying foreign inputs you finance technological development in the foreign country and disadvantage your own.

China needs to turn this on its head: put the subsidized roll-out of chips on ice for now. Instead use the money to fund development of the components (photolithography machines, fibre-optic switches, etc.) that foreign firms have a stranglehold on. Crucially, this strategy calls for total invalidation of all patents held by foreigners in these crucial technologies. The primary reason China doesn't compete with ASML isn't because they have some sorcery that China doesn't, it's that they hold patents that block China's development down that path. Well, those patents should now become recipe books.

China can even make a preemptive case to the WTO that since the US is imposing arbitrary technological blockades and press-ganging its allies into its cause, China is justified in taking these measures. China can argue that it will return to full compliance when the US lifts its siege and respects WTO rulings - but for as long as the US remains a renegade, China will take what measures it must to defend itself, its industry, and its right to development.

This will not be an easy path, legalistically or practically. Reverse-engineering a complicated piece of technology - even with full access to its patents and whatever your spies can obtain - is never going to be as easy as paying its designer to show you how it works and how to build it. It's not going to be steak dinners every night for Huawei; some nights it will have to make do with lentil soup. But the rewards are well worth the struggle and hardship, for at the end of this path lies total self-reliance and technological mastery.

It's also not without relevant precedent. It was precisely how the Chinese military modernized after the technological embargo imposed on it by all advanced countries after the fall of the Soviet Union, when China's strategic utility was spent. Although this modernization is still incomplete, it has already yielded a bountiful harvest. As an example, witness the Type 055 destroyer - the most fearsome warship to ever sail the seas. It stands head and shoulders above any foreign rival, and every nut and bolt on it, every transmit/receive element in its radars is Chinese. The PLA has much to teach civilian SOEs and private industry about how to thrive in the face of a technological blockade.
Then it should be a matter of utmost national priority for China to recruit the PLA to serve private Chinese tech companies in the interest of the state and wider society.
 

Weaasel

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It will take several years for achieving limited self-sufficiency. Without targeted state subsidies (import substitution industrialization head-on) directed toward R&D and manufacturing, many high-tech industries in Shenzhen could die without American chips.
And China is obviously left absolutely with no such option than to revert to this. In the interim period there will be a significant share in the loss of global markets, but it is absolutely imperative that China possesses the capability of making high tech goods in the full spectrum from microprocessor semiconductors, high specs lithography and etching equipment, to single crystal aerojet turbine blades etc.

That is because the United States wants to completely deny China access to such goods from external sources, not only from itself, but from foreign countries. Almost every single foreign country that sells such high tech goods to China is a US ally or a vassal. They can be persuaded or forced by the US, while whining and protesting, to cut off their own noses to spite their faces.

What will likely dissuade them from doing so is a demonstration by China of significant indigenous capabilities of producing a large part or the majority of the full spectrum of high tech goods. Implicit in this demonstration is that if such countries cooperate with the United States, they will later face severe restrictions from the Chinese domestic market when Chinese high tech capabilities fully mature.

The good thing for China is that China is not lacking in significant high tech capabilities. It just has to advance them even further and ramp up production to greatly replace foreign, and especially US sources.

Within a decade, China's high tech capabilities in the majority of the spectrum will be very comparable to those of the US and its allies. The United States will then regret trying to keep China in technological bondage, especially when its allies will have much less incentive, and the US will have little leverage with regards to punishment, to cooperate with it against China.
 

Weaasel

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China is going all in now:



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Why did they not do so like 5 years ago, at least? If they believed that with China so well imbedded in global tech supply chains and being a major importer of high tech products from across the globe and with major US companies as major suppliers, that the US would not be willing to hurt the profitability of its own companies, boy were they wrong.
 

ZeEa5KPul

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Some of things you're proposing would turn China into a pariah state and massively help the US in its efforts to contain China.
Perhaps it's you who should think about it. If what you're threatening me with is no worse than what you're going to do anyway, your threat isn't much of one at all. The US is telling China "come to the negotiating table and discuss how I'm going to murder you or else I'm going to murder you"; how could anyone expect anything but Chinese resistance to that? What you're threatening China with if it adopts the strategy I proposed is a technological blockade - guess what, it's already under one anyway and it's about to get worse no matter what. This shifts the calculus and makes my strategy optimal.

For all the resentment strategic patent invalidation would cause, China is too big, too powerful, too alluring, and too integrated to be made into a pariah. The US invaded Iraq without any provocation and what did that get it? Was it turned into a pariah? Did the world sanction and isolate it? No. And just like they did with America, everyone harmed by China's actions will just have to shut their mouths and chew on the resentment.
 

Max Demian

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What is the alternative? That China become a vassal state and meekly subject to the United States. That's completely unacceptable and it is not in the interests of the wider world for there to be just one domineering and increasingly petulant Super Power
If China aims to be a respectable member of the global order, it will have to be integrated both economically and politically. That means being dependent on others. The "strategies" promulgated in this thread are in contradiction with that. Following them through would do great damage to the Chinese people in China. Opening up, instead of closing down is the way forward.
 
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