China's chip tech still lags the West – by up to five generations

Think tank warns US and friends they can't assume Beijing won't catch up

China's chip design and fabrication capabilities lag significantly behind the US and its allies, according to a report from US think tank the Information Technology and Innovation Foundation (ITIF).

"Chinese firms are about two years behind the global leaders when it comes to designing logic chips, whereas they're several more years behind in memory chips," explained report author Stephen Ezell.

Semiconductor manufacturing equipment – such as the lithography tools that make the chips – is another field in which China significantly lags. The report cites one unnamed commentator who believes China could be five generations behind in this field.

Ezell warned that does not mean the US and allies can "rest on their laurels," else "they risk seeing a significant diminution of their industries."

The Middle Kingdom has made notable progress in intellectual property and innovation, surpassing the US and Japan in patent filings, according to the report. China files the bulk of chip-related international patent applications under the Patent Cooperation Treaty (PCT), and the nation's semiconductor industry secured over 3,400 approved patents in 2020 – up from a mere 122 ten years prior. Many of those, it should be noted, do not represent significant innovations.

US share of global semiconductor manufacturing fell from 37 percent in 1990 to 12 percent in 2021, while China's rose from virtually nothing to match US share in the same time frame. China's growth, however, has been largely in the production of legacy semiconductors (those greater than 28 nanometers) – commonly used in automobiles, medical devices, household appliances, energy, infrastructure, and aerospace products.

The report noted that Chinese firms do appear to compete more on price than on innovation, which makes sense for a country whose industry R&D ranks quite low among peers. The Semiconductor Industry Association calculated China's R&D score was 40 percent of the US, and also significantly lower than those of Europe, Taiwan, Korea and Japan in 2022.

However, according to Ezell, it isn't uncommon for innovators to lose out to cheaper competitors. It's happened before in industries such as consumer electronics, solar panels, and telecom equipment.

China's ultimate goal is to achieve semiconductor self-sufficiency in all facets of the industry. In 2015, the nation set a goal to be 70 percent self-sufficient in semiconductors by 2025 – ITIF reckons it will get to 30 percent by that year and will need an additional $1 trillion of investment to make it all the way.

The ITIF argues "China has been committed to the development of its semiconductor industry since at least the mid-2010s, well before the Trump and then Biden administrations began to impose export controls on this sector, so it is a canard that US export controls have emboldened China to embark on a crash course to develop an indigenous semiconductor industry."

The think tank warned that a "go-it-alone" strategy will be very difficult for China "in such an extremely complex tech ecosystem."

Ezell recommends that the US collaborate with allied nations to update World Trade Organization rules and implement stricter conditions on industrial subsidies.

The report also recommends Washington target its export controls narrowly, so the regs balance "the competing interests of keeping advanced American technologies out of the national security apparatus of foreign competitors" against "the reality that export controls reduce sales for American companies."

The ITIF report concedes that it is especially difficult to assess the innovation capabilities of China's chip industry. This is partly because, under president Xi Jinping, China has reduced its disclosures to the world – particularly when it comes to industrial and technological capabilities. ®