Chip Shot
China will conquer semiconductors just as it has conquered EVs and solar.
“To cope with international science and technology competition, achieve a high level of self-reliance and self-improvement, we urgently need to strengthen basic research and solve key technology problems from the source.” – Xi Jinping
Stop us if you’ve heard this one before…
The Chinese Communist Party (CCP) decides to develop a homegrown version of a strategically important industry currently dominated by Western companies. Upstart Chinese firms nobody has ever heard of begin appearing at industry conferences, and these new attendees spend extensive time asking questions, taking pictures of prototypes and poster boards, and developing relationships with Western suppliers keen to penetrate the vast Chinese market.
Months later, these same Chinese companies (and a few more out-of-nowhere entrants) release primitive products that seek to compete domestically at the low end of the industry. Market leaders chuckle at the sophistication level of these new players, comfortably resting on their technologically superior laurels. Nobody makes money in China, they figure, so there’s probably not much to worry about—although, some of the designs do look suspiciously close to technology that had been firmly shielded by patents and as trade secrets…or so they thought.
Lured by the prospect of filling factories and beating Wall Street expectations, more Western suppliers get in on the action, competing to win orders in the world’s ultimate growth market. As a condition of securing Chinese business, joint ventures with state-owned enterprises (SOEs) are set up, technology is shared, and factories are built locally. Within months, virtually all industry leaders conform to the rules of the game. Wall Street demands growth above all else, and the fear of missing out is strong.
Suddenly, yet another unheard-of company is launched out of China, but this one is shockingly different. This SOE combines the best of the incumbent technology, and its products are demonstrably superior to what the West can offer. This phenom company begins rolling up market share in China, forcing international competitors to scramble. Then the exports begin. The value proposition on offer is hard to believe: the products are excellent, the price is a fraction of what was previously thought to be impossibly cheap, and supply appears to be practically infinite. Unable to compete and with precious little domestic support, waves of Western companies go out of business. In a flash, the CCP now monopolizes the industry.
No matter how many times the same pattern plays out, the West always seems blind to the game China is playing, with one recent exception: semiconductors. China is making the development of a domestic semiconductor supply chain a matter of urgent national importance. The US and its allies are running in the same race while doing everything in their power to prevent China from succeeding. Much ink has been spilled on the geopolitical tensions rising from these efforts.
The US might be “early to worry” in this instance, but will they succeed in preventing China from becoming the global leader in this technology? Count us among the doubtful. Let’s explore why.