This article first appeared in Forum, The Edge Malaysia Weekly on December 2, 2024 - December 8, 2024

What is the outlook for China’s semiconductor industry under the second Trump administration, which begins on Jan 20 next year?

On Nov 18, 2024, some 500 chipmakers participated in the 21st Beijing Semiconductor Expo to showcase their latest products. The event featured a critical discussion on the impact of Taiwan Semiconductor Manufacturing Company’s (TSMC) decision to cut the supply of seven-nanometer (7nm) chips to selected mainland clients, in deference to US export controls that ban exports to China without US approval. TSMC was concerned that its chips would end up being used by Huawei.

In 2023, China imported a total of 479.5 billion integrated circuit (IC) units worth US$349.4 billion (RM1.55 trillion), down 10.8% by volume and 15.4% in value from 2022. That amount is larger than China’s 2023 imports of crude oil. As He Weiwei, co-founder of BASiC Semiconductor, an automotive power device producer, said: “This will be a huge burden. We used to buy US materials and have the chips manufactured in Taiwan, and then ship them back to mainland China for packaging.”

The importance of access to the China market cannot be underestimated. As the US Semiconductor Industry Association made clear in its 2021 review of the China market: “In 2020, China imported a whopping 

US$378 billion in semiconductors; assembled 35% of the world’s electronic devices; accounted for 30% to 70% (depending on the product) of the global TV, personal computer and mobile phone exports; and consumed one quarter of all semiconductor-enabled electronics. Access to this massive market is essential to the success of any globally competitive chip firm today and in the future.”

So far, the semiconductor industry maintains favourable growth, driven by the demand for artificial intelligence (AI)/data centre high bandwidth memory (HBM) chips. Global semiconductor sales increased 23.2% in 3Q2024 compared with 3Q2023 (World Semiconductor Trade Statistics, or WSTS, data). Regional year-on-year sales in September were up in the Americas (46.3%), China (22.9%), Asia-Pacific/All Other (18.4%) and Japan (7.7%), but down in Europe (-8.2%).

Such buoyancy prompted the outlook for the global semiconductor market for 2024 to be revised upwards, to grow 16% to US$611 billion. This comprises growth in logic chips with 10.7% and memory chips with 76.8%. WSTS thinks the 2025 outlook is continued solid growth of 12.5%, reaching an estimated valuation of US$687 billion.

However, president-elect Donald Trump’s threats of increased tariffs of 60% on China bring some uncertainty to the global trade outlook. In November, the Biden administration locked in CHIPS Act funding to Intel and TSMC, just in case these get cancelled by Trump when he assumes duty in January. Trump is on record that he prefers tariffs and does not like the CHIPS Act.

The Chinese are clearly hunkering down for more semiconductor sanctions and supply chain restrictions. During Trump’s first term in office, he imposed restrictions to access to US advanced technologies on Chinese telecommunication conglomerates Huawei Technologies and ZTE, as well as chipmaker Semiconductor Manufacturing International Corp (SMIC). In a forum last month, Huawei founder Ren Zhengfei remarked that the Chinese should adopt the American open innovation system, where survival and growth extend beyond borders. Since East Asia continuously faces pressure to align with US restrictions, we should be able to witness an acceleration of Chinese semiconductor expansion into broader Southeast Asia during Trump’s second term.

The 2024 Report to Congress of the US-China Economic and Security Review Commission (USCC) acknowledged that US and China are “neck and neck, with one being ahead or behind depending on the specific critical and emerging technology”. In advanced semiconductors, “the United States and like-minded countries currently have an advantage in the advanced semiconductors needed to power AI technologies. China is aggressively working to address this deficit”.

The USCC recommended that Congress establish and fund a Manhattan Project-like programme dedicated to racing to and acquiring an artificial general intelligence (AGI) capability. Furthermore, Congress should tighten the effectiveness of export controls on China accessing technology originating from the US and its allies. According to an August 2024 report by the Information Technology and Innovation Foundation (ITIF), the Chinese are around “five years behind global leaders in high-volume manufacturing of leading-edge logic semiconductor chips” and trail in memory chips and semiconductor manufacturing equipment.

China semiconductor veteran Ye Tianchun, vice-president and secretary-general of the China Integrated Circuit Innovation Alliance, said in late May that “external pressures [read US export controls] will compel the Chinese IC industry to innovate its paths seven to eight years ahead of the global semiconductor industry”.

Although China is behind in cutting-edge 7nm and high-quality chips, it is building capacity and dominance in legacy chips, which are slower but are used ubiquitously in consumer products such as electric vehicles. Based on past experience, once China’s massive new semiconductor fabrication capacity comes online, it may flood the world with cheap legacy semiconductors, forcing prices down. In turn, this could threaten the viability of other countries’ legacy semiconductor industries and provide China with significant global economic leverage. The recent price war within China has spilled over to competitors in Taiwan and South Korea. Bloomberg has reported that Samsung;s market capitalisation has fallen by US$122 billion since July. This implies that there may be a “China shock” from overcapacity in the near future.

Based on Trump’s selection of cabinet members, it is likely that Trump 2.0 will double down on anti-China measures on top of an increase in tariffs on Chinese goods and services. This threat is driving the country’s investments in Asean, into areas such as advanced packaging. Malaysia has been China’s key semiconductor trading partner, with bilateral IC trade reaching nearly US$24 billion in 2022. In contrast, China’s unilateral IC trade with Vietnam was valued at US$12 billion, while that with Singapore was at US$15 billion.

The outlook for the near future, therefore, appears turbulent, where Trump 2.0 policies are only one significant factor in a series of entangled evolutions in the technology sector. The US leads China in the capital markets area, where the high market valuations of the top tech platforms help to fund investments in risky and increasingly expensive innovation in chips, production equipment and software, as well as technology infrastructure.

Funding and the ability of the capital market to continually fund risky innovation and technology is itself a bottleneck in the technology game. No money, no tech. No tech, no money.

Tan Sri Andrew Sheng writes on Asian global issues. Loh Peixin is a research associate at the George Town Institute of Open and Advanced Studies, Wawasan Open University. The authors are engaged in a major study of the tech industry in Penang.

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