Our recent report describes China’s semiconductor ecosystem and maps it across the production steps in the global value chain. We explain the function of each production step and its international market landscape, and in this context review recent Chinese government and industry activity. For each of these production steps, we evaluate the prospects of China closing the gap with foreign industry leaders over the next five to ten years, and the strategic implications from a range of national interest viewpoints.
Competitiveness, national security, and resilience
For each production step in the value chain, we present national interest implications in three “strategic dimensions” – competitiveness, national security, and resilience – based on an assessment of China’s position alongside that of the U.S. and other actors. “Competitiveness” captures commercial and technical features of this step in the value chain that affect the foundations of national power, not least because semiconductors are the foundation for so many other industry sectors. “National security” reflects the potential for “weaponization” by national governments to damage the interests of other nations. “Resilience” addresses the negative impacts from disruption in a particular value chain step for the global semiconductor ecosystem.
For each dimension, we use three criteria to describe the national interest considerations involved. For competitiveness, policymakers must concern themselves with revenue capture from market share in the relevant field, barriers to entry for any new player trying to enter the market, and spillover benefits that could have utility for other steps in the value chain and other industry sectors. For national security, relevant considerations include the potential to facilitate espionage, the military utility of capabilities in a particular value chain step, and the degree to which market concentration provides a chokepoint that can be “weaponized” by nations whose firms hold dominant market share. And for resilience, the extent to which a value chain step represents a concentrated point of failure for the global semiconductor industry, the potential for disruptions to generate spillover damage in other value chain steps, and replicability of the relevant functions in the event of disruption are all essential to national planning.
The matrix below maps these nine criteria against the eight production steps that we describe, providing a “heat map” of the value chain’s strategic importance. The color codes show the degree to which each criterion applies to a given production step. This indicates the level of interest that governments will show and the likelihood they will take particular actions concerning this step in the value chain, which are explored in further detail by our report.