China’s semiconductor industry is rapidly developing and, while still lagging behind international counterparts in some areas, is set to make crucial breakthroughs in the next 1–2 years

For the latter half of this year, much has been made of the US’s increasing economic sanctions against China, with the latter’s semiconductor industry being hit heavily due to its major reliance on foreign exports. As a result, the industry itself appears to have gone into overdrive, seeing massive investment and a considerable push to achieve domestic self-sufficiency.
But just how realistic are these claims that Chinese chip industry could achieve maturity in only a few years?
To answer this question, we must look to the past, as well as to the future.
China’s 14th Five Year Plan: Creating the perfect ecosystem for semiconductor industry growth
In 2021, the latest iteration of China’s Five Year Plan will begin to be implemented, a nationwide initative that, at least in part, focuses on achieving national self-sufficiency, particularly when it comes to the technology. As such, a major goal for this broad government strategy is to boost the rapid growth of China’s semiconductor industry and ultimately shift the industry’s reliance away from US technology.
But while this drive may seem like a knee-jerk reaction to the US sanctions that have smothered China’s semiconductor industry of late, it should be remembered that this is a process that has been generating momentum for many years now. 
Back in 2014, the State Council issued an ‘Outline?of the Program for?National Integrated Circuit Industry Development’ with the goal of supercharging the country’s semiconductor industry. The first stage of the related investment fund, known as Big Fund Phase I, raised around 130 billion yuan (~$20 billion) to drive industry growth, with money going to 23 semiconductor companies and resulting in numerous mergers, acquisitions, and IPOs.
Unsurprisingly,  the industry has evolved greatly since 2014, but the drive for the evolution of the domestic semiconductor industry has been relentless, with a series of tax incentives being introduced in the last two years alongside a range of local and national policies aiming to nurture further growth. The China Semiconductor Industry Association suggests that the industry’s value has increased around 14-fold in the past 15 years, with the industry currently growing at a rate of around 16–20% annually, around five-times the speed of its international counterparts. 
Investment remains strong too. In October 2019, the Big Fund Phase II raised more than 200 billion yuan (~$30 billion). 
With government and private investment in the industry booming, it surely comes as no surprise that Semiconductor Manufacturing International Corporation (SMIC) is set to build a $7.6 billion factory in Beijing – with around $2.2 billion funding provided by the Chinese government.
Just a few months ago, the Chinese government announced a new raft of policies entitled: ‘Policies of Promoting the High-Quality Development of Integrated Circuit Industry and Software Industry in the New Era’, with targets of 70% self-sufficiency in chip production by 2025.
It is clear that the Chinese government is doing everything in its power to make sure its domestic industry can gain momentum as quickly as possible. But, in terms of the technology itself, how far behind is China compared to industry leaders in places like the US and Europe?

Closing the gap with the rest of the world
When it comes to chip design, the Chinese chip industry already shows a healthy level of competition; Huawei’s Kirin chipset, for example, is arguably one of the most advanced in the world. The issue instead arises when it comes to the actual manufacturing process, with China reportedly around two generations behind the global first-class level, unable to produce 5nm and 7nm processes. As a result, China relies heavily on imports in this area – a limitation that the government wants to overcome.
However, with the immense growth the industry has seen over the last few years, this gap is closing quickly.
"If our products were 30% or 40% worse than those of our international peers 15 years ago, today this figure may be 5%," said Professor Wei Shaojun, Director of the Research Center of Mobile Computing at Tsinghua University, speaking to Sohu Technology. 
Furthermore, this gap is not as important as one might think; while cutting edge phones and supercomputers will require the latest chipsets, 28nm processes will be enough for typical logic processing scenarios and so has an enormous potential market with the IoT and edge computing. This is an area where China already expects significant breakthroughs in the next couple of years, especially with companies like Shanghai Micro Electronic Equipment (SMEE).
“Shanghai Microelectronics plans to deliver the first domestic 28nm immersion lithography machine in 2021. In fact, for all commercially available chips, 28nm has a large market for most logic processing-related scenarios, such as Internet of Things (IoT) and edge computing,” explained Omdia in a recent study. “28nm is expected to make a big breakthrough in 2021, which will enable China to achieve a high degree of self-sufficiency in mature technology manufacturing within two years.” 
Analyst firm GlobalData concurs, suggesting that this breakthrough could be the ‘first step’ in the path the self-sufficiency.
“SMEE’s first Chinese assembled 28nm machine is scheduled for customer delivery by the fourth quarter of 2021,” notes a report from GlobalData. “If SMEE can lead the way in successfully commercialising 28nm and then 20nm UV technology in China with domestic technology, it will be a signal first step in the Long March to ‘de-Americanizing’ China’s semiconductor supply chain.”
An opportunity for China’s semiconductor industry
"When a new technology or product enters the market, there is inevitably a certain number of gaps with mature ones,” explained Prof Wei. “For example, its stability and reliability may not be as good as a mature product’s, and may have higher costs. However, after repeated trial and iteration, our products can mature more quickly. It’s that trial-and-error process that matters and is valued."
Ultimately, the latest round of US sanctions have simply accelerated an evolutionary process that was already happening for the Chinese semiconductor industry and, while there is still much work to be done, the gap is closing fast.
Prof Wei argues that industry maturation within two years is “doable”, so long as China continues to invest heavily and focusses on not only the quick breakthroughs in the current generation of technology, but also preparing for those to come.
“We should start R&D on the second or even the third generation of one technology while mass producing the first generation,” he said.
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