[Chiptalk] China's Semiconductor Rise Weakens Amid Recession Fears in Gyeonggi... Sales Down 21%

COVID-19 Lockdowns Cause Consumer Spending Drop
US Supply Chain Pressure Intensifies... "Improving Relations Essential"

[Asia Economy Reporter Hyunwoo Lee] The revenue of China's semiconductor industry has decreased by more than 20% compared to the previous year, which is more than twice the decline rate of the global semiconductor market, raising concerns that the 'semiconductor rise' is faltering. This is interpreted as the Chinese semiconductor industry failing to establish complete self-sufficiency despite massive investments made over the past decade.

Amid the compounded effects of COVID-19 lockdown measures and recession fears, along with U.S. pressure and the possibility of reduced investment by the Chinese government, China's semiconductor industry is expected to contract further this year. Experts point out that the top priority is the normalization of semiconductor technology and supply chains through improved relations with the United States.

The Largest Semiconductor Revenue Decline Among Major Global Markets

According to statistics recently compiled by the Semiconductor Industry Association (SIA) in the U.S. on the 16th (local time), China's semiconductor revenue in November last year was $13.41 billion (approximately 16.57 trillion KRW), down 21.2% compared to the same month the previous year. Considering that global semiconductor revenue during the same period decreased by 9.2% year-on-year to $45.48 billion, the decline in China's semiconductor revenue is very significant. In contrast to other major semiconductor markets such as the U.S. (5.2%), Europe (4.5%), and Japan (1.2%), which saw slight growth in revenue, China's semiconductor market revenue dropped sharply.

The main factor cited is the significant consumption slump caused by COVID-19 lockdown measures last year. According to the South China Morning Post (SCMP) in Hong Kong, the China Academy of Information and Communications Technology (CAICT) reported that smartphone sales in China in November last year fell 36% year-on-year to 22.2 million units.

SCMP stated, "Traditionally, November is the peak season for electronics consumption in China due to the Singles' Day shopping festival, and revenue growth was expected, but last year, the consumption boom did not materialize as expected due to the impact of COVID-19 lockdowns," adding, "The Chinese semiconductor industry expects revenue weakness to continue through the first half of this year."

Chinese Government Faces Continued Burden in Supporting Semiconductors Amid COVID-19 Impact

Reports are emerging that even within the Chinese government, which has continued large-scale investments since 2014 to strengthen the self-sufficiency of its semiconductor industry, doubts are being raised about the effectiveness of these investments.

Bloomberg News, citing sources within the Chinese government, reported, "Since a major investigation into corruption allegations involving senior officials related to the 'National Integrated Circuit Industry Investment Fund' in August last year, semiconductor investments have been shrinking," adding, "Many officials are now skeptical about investing hundreds of billions of dollars in the semiconductor industry."

The National Integrated Circuit Industry Investment Fund is a state fund established in 2014 to foster the semiconductor industry, with approximately $45 billion (about 56 trillion KRW) invested so far. Despite this, China's semiconductor self-sufficiency rate remains at 16-17%, and it is expected to reach only the 20% range by 2025, leading to evaluations of very low investment efficiency. This falls far short of the Chinese government's original self-sufficiency target of 70%.

The low investment efficiency is attributed to major funds not being properly invested due to intensified collusion between politics and business, and being scattered among insolvent companies. According to SCMP, by August last year, 3,470 semiconductor-related companies in China had closed, surpassing the 3,420 closures in 2021. In 2020, 1,397 companies closed, indicating that many semiconductor companies that had proliferated rapidly are now shutting down due to insolvency.

Moreover, with the impact of COVID-19, the Chinese government, suffering from financial shortages, is expected to find it difficult to make bold semiconductor investments. Bloomberg News pointed out, "The Chinese government recorded a massive fiscal deficit of 7.75 trillion yuan (about 1,430 trillion KRW) last year to recover from COVID-19 lockdown effects and implement economic stimulus measures, making it difficult to invest heavily in the semiconductor sector as before," adding, "Now, the Chinese government can only provide indirect support, such as inducing price reductions from semiconductor material suppliers, rather than large-scale fiscal injections."

[Image source=Reuters Yonhap News]

U.S. Pressure Tightening Supply Chains... "Improving Relations is Essential"

U.S. pressure on semiconductor supply chains is intensifying. The U.S. is demanding that major semiconductor equipment exporting countries, Japan and the Netherlands, restrict exports of semiconductor equipment to China, leading to expectations that China's semiconductor industry will be further constrained.

According to CNN, U.S. President Joe Biden held talks with Japanese Prime Minister Fumio Kishida on the 13th and will meet with Dutch Prime Minister Mark Rutte on the 17th. One of the main agenda items in these meetings is the restriction of semiconductor exports to China. The U.S. government is requesting that both countries establish measures to ban the export of equipment capable of manufacturing semiconductor products of 14 nanometers (nm, one billionth of a meter) or more advanced.

The Chinese government has protested by stating it will file a complaint against the U.S. with the World Trade Organization (WTO). On the 12th of last month, China's Ministry of Commerce announced that it had initiated WTO dispute settlement procedures. The ministry stated, "The WTO complaint is a legitimate means to address China's concerns and protect our lawful rights and interests," criticizing, "The U.S. is disrupting normal international trade of semiconductors and threatening global supply chain stability. This is a typical protectionist tactic."

Experts emphasize that it will not be easy for China to overcome the comprehensive U.S. semiconductor pressure and that improving relations with the U.S. is an essential task. Ryan Hass, a senior fellow at the Brookings Institution, a U.S. think tank, explained, "China and the U.S. are clashing not only on industrial issues such as semiconductors but also on security, technology theft, COVID-19, and environmental issues," adding, "With opportunities for contact between the two countries, such as U.S. Secretary of State Tony Blinken's visit to China next month and the Asia-Pacific Economic Cooperation (APEC) summit scheduled for November this year, efforts to ease tensions will be necessary."