Chinese chip production Analysts: US chip boycotts are "backfiring", China is conquering the legacy world market.

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The American chip boycotts against China have an unintended side effect. They are causing domestic production, primarily of legacy chips above 28 nanometers, to explode, according to recent statistics in the People's Republic.

The "Chip War" and the rapidly increasing demand for auto chips are together ensuring that China is growing into a global market leader for semiconductors at a record pace.

Production of integrated circuits (IC) soared in the first quarter of this year, up 40 percent to 98.1 billion units, reports the National Bureau of Statistics in Beijing. The statisticians attribute this to "high-tech manufacturing having grown faster".

In the first quarter of 2024, production of electric cars and hybrids, counted together in China as "New Energy Vehicles", again grew by 29.2% to more than two million units. Smartphone manufacturing also picked up strongly during the same period after a longer slump, up 16.7% compared to the previous quarter.

Domestic production secures market shares

Since the onset of the US sanctions, the Chinese government has been making every effort to ramp up domestic production and free itself from its strong dependence on advanced semiconductors from the US (we reported). At the same time, Washington has started to also prevent the export of advanced lithography machines for the production of powerful chips to China.

As a result of both trade restrictions - and combined with market demand - investments within China are heavily focused on new foundries for older generations of semiconductors, the so-called "Legacy Chips" in the 28 nanometer or larger range.

Therefore, an "unintended consequence" is now emerging as a whole "wave" of government-supported investments which could lead to "overproduction and, potentially, to Chinese dominance of the global manufacture of Legacy Chips", the South China Morning Post quotes from an analysis by the Centre for Strategic and International Studies (CSIS) in Washington.

In other words: The US sanctions on chips and semiconductor equipment are actually making the Chinese semiconductor industry really big. It is definitely growing much faster than any analysts expected a year ago. By 2027, China's global market share for mature chips could rise to 39%, estimates Trendforce. Last year it was still 31%. This will likely also have an impact on German manufacturers, such as Infineon, which is particularly strong in the field of automotive chips.

"With this pace, China is heading towards global dominance in the production of Legacy Chips," also writes the specialist portal Tom's Hardware. "US sanctions are turning China into an industrial giant in Legacy Chip manufacturing," reads the headline. The sanctions from Washington are "backfiring," the authors judge.

Historical high

In March of this year, chip production above 28 nm in China reached a new historic high with 36.2 billion units, the statistics from Beijing show. The explosive growth in manufacturing capacity in the People's Republic can also be seen in the financial reports from ASML, the world's leading manufacturer of lithography machines from the Netherlands.

In the first quarter of this year, China was already the largest sales market for ASML on the global market for the third quarter in a row, with respectively 46, 39 and now 49 percent. Because particularly advanced EUV and DUV machines may not be sold to China from Holland under pressure from Washington, the Chinese are mainly ordering less advanced models for the production of legacy chips (we reported). For some applications, for example in data centers or electric cars, advanced AI chips can also be replaced by a combination of several legacy chips.

"In the wake of US control measures for semiconductor equipment, China has bought a large amount of lithography machines for legacy chips for mature semiconductor processes from ASML," summarizes the Chinese specialist portal Guoji Dianzi Shangqing.

This is good news for ASML, as the demand for its equipment has recently declined worldwide outside of China. And even more pleasing is that the foundry boom in China is predicted to continue unchanged in 2024. Chinese chip manufacturers are expected to build 18 new fabs by the end of this year, increasing the total annual wafer production capacity from 7.6 million units to 8.6 million, says the "Semiconductor Industry Association" (SEMI). (sb)

* Henrik Bork, long-time China correspondent for the German Süddeutsche Zeitung and the Frankfurter Rundschau, is Managing Director at Asia Waypoint, a Beijing-based consultancy firm specialized in China.