CCP Stealth War 139; Feature: Chinese Perspectives on US Semiconductor Strategy
By:
This Week:
* Feature: Chinese Perspectives on US Semiconductor Strategy
* National Security Concerns Over Chinese Acquisition of US Farmland Prompt Legislation
* Mongolian PM Makes Official Visit to China
* China Downgrades Presence at the 26th St. Petersburg International Economic Forum
* China’s Growing Investment in Africa’s Pharmaceutical Industry
Chinese Perspectives on US Semiconductor Strategy
By Daniel Fu
As the US and its partners impose export controls on semiconductors and chip-manufacturing equipment to China, it becomes important to examine the perspectives of Chinese scholars and policy elites on the impact of such restrictions and how it may affect Chinese strategy. Although Chinese thought leaders do acknowledge select challenges US export controls pose, they largely remain confident that such restrictions will be unsuccessful in impeding Chinese technological progress or its larger strategy towards semiconductor production. Many have written about how Washington’s strategy on semiconductors is counterproductive and how perceived containment by Washington over microchips actually provides Chinese companies opportunities and advantages.
First, Chinese policy elites have argued that US semiconductor strategy will only end up impacting the revenue of American semiconductor companies and causing rifts between producers. Fu Suixin of the Chinese Academy of Social Sciences has noted that in 2021, a quarter of the global revenue of American semiconductor firms Intel and AMD came from the Chinese market. He asserts that “forced decoupling” instigated by the US will only “weaken their R&D capabilities” and lead to “heavy losses” for American firms (China News, August 15, 2022). Wang Dong, a Professor at Peking University’s School of International Relations, has written that the “anti-China chip alliance” formed by the US will cause the “US chip industry to lose 37 percent of global market revenue and 15,000 to 40,000 jobs in the US semiconductor industry” (China-US Focus, August 15, 2022).
Li Wei, a Professor at Renmin University’s School of International Relations, has noted that there is likely to be an “interest struggle” between chip manufacturers on how money invested via legislation such as the Chips and Science Act will be allocated (CSSN, October 12, 2022). For example, Yang Yang of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations (CICIR) has documented disputes between TSMC and Intel, given the latter’s insistence that government funds be allocated primarily to American firms due to concerns regarding intellectual property rights and the loss of key technologies (CFIS Net, March 14).
Li Zhang, Vice President of CICIR, has written that “localization” will also cause the “crowding out” of small and medium-sized semiconductor companies, since it would be difficult for them to “enjoy industrial incentives” that will be primarily distributed to larger firms (CICIR, December 2022). Wan Zhe of Beijing Normal University has also asserted that the industrial policies of the Chips and Science Act will bring about “opportunistic arbitrage.” By this, he is suggesting that US semiconductor companies will use government subsidies to engage in stock buybacks rather than invest in research and development (Beijing Normal University, August 15, 2022).
Second, Chinese political analysts have identified acute challenges related to the high cost of reshoring and localizing chip production in the US. Wei Zengyou, a Professor at Fudan University’s Center for American Studies, has stated that “localizing” the global chip industry in the US will entail at least $1 trillion in upfront costs and between $45 to 125 billion in annual operating costs (Aisixiang, May 26). Prominent academic Qiao Xinsheng has asserted that “all chip manufacturers deciding to set up factories” in the US will face “huge risks” such as high production costs and “inadequate US financial subsidies.” (Aisixiang, February 28). Wan Zhe concurred, writing that the $50 billion invested by the Chips and Science Act into semiconductor manufacturing constitutes only a “drop in the bucket” (Beijing Normal University, August 15, 2022). Gao Ruidong, chief macroeconomist of Guotai Junan Securities, has noted that “high inflationary pressure” could further compound issues related to high production costs. He noted, for example, how TSMC’s manufacturing costs in the US are 100 percent higher when compared to production costs in China (Sina Finance, May 5).
Other Chinese policy elites noted that a shortage of talented workers in the semiconductor industry would prove a challenge. Wu Zelin and Shang Xiucheng of the Shanghai Academy of Social Sciences assert that the US “especially lacks highly skilled workers, particularly local workers, which has become an issue for US semiconductor companies.” They note that 40 percent of high-skilled workers in the US semiconductor industry were born abroad; as competition for talent becomes increasingly fierce, they suggest that “brain drain” will be a “challenge the US has to confront” (Shanghai Academy of Social Sciences, February 16).
Third, many Chinese academics and political elites argue that perceived US containment over semiconductors will inadvertently benefit China by creating more opportunities for Chinese companies, compelling accelerated innovation in the domestic chip industry. Zhao Minghao, a Professor at Fudan University’s Institute of International Studies, has noted that “suppression of Chinese technology” could compel Chinese companies to “upgrade faster” or “even counterattack.” He asserted that China’s Semiconductor Manufacturing International Corporation’s (SMIC’s) success in developing 7 nanometer chips despite US export controls raises “questions about the effectiveness of US policy” (Aisixiang, August 15, 2022). Prominent academic Cai Cuihong, a Professor at Fudan University’s Center for American Studies, has also argued that the chip ban imposed by the US will benefit domestic companies, in that it enables the creation of “extremely valuable domestic market resources.” She notes, for example, that in 2017 US and Japanese firms supplied most of the chemical mechanical polishing (CMP) equipment in the Chinese market. Now, China’s CLP Group has “regained 70 percent” of the CMP market in China (Aisixiang, August 12, 2022).
Overall, as Li Yong, Senior Research Fellow at Tsinghua University’s Center for Global Studies, succinctly states, Chinese observers have “a lot of confidence” and believe that “there are enough coping methods in our toolbox” to deal with US export controls and landmark US legislation such as the Chips and Science Act (Xinhua, August 29, 2022). While their views and analytical assumptions may be misguided, exaggerated, or inaccurate, they nonetheless demonstrate a robust degree of confidence among Chinese policy elites regarding China’s ability to consolidate technological progress. In their view, state-led policy initiatives such as Made in China 2025 remain a viable path forward despite Washington’s efforts to stymie Beijing’s progress.
Daniel Fu is a Research Associate at Harvard Business School where he studies Chinese businesses, US-China relations, and companies caught between the US-China geopolitical crossfire.
BRIEFS
National Security Concerns Over Chinese Acquisition of US Farmland Prompt Legislation
Over the past four decades, Chinese investors have purchased large swathes of US farmland as well as acquired notable American food companies, such as Smithfield Foods, the largest processor of pork in the country. At present, China holds slightly over 383,934 acres of US land, and ranks 18th in terms of largest foreign investors of American farmland, falling well behind other countries such as Canada, the Netherlands, Italy, the UK, and Germany. While China by no means constitutes the largest foreign entity that owns American farmland, the main concern derives from the highly sensitive location of Chinese acquisitions. In 2021, US lawmakers voiced serious concerns when a Chinese firm bought land near the Air Force base outside Grand Forks, North Dakota.
As of June 20, a bipartisan pair of Senators have been assuming a more concerted effort to limit Chinese purchase of US farmland. According to a joint statement from Senators Joni Ernst (R-Iowa) and Debbie Stabenow (D-Michigan), China is “acquiring US farmland near military installations” and threatening American food supply as well as national security. At present, US law does little in the way of oversight regarding foreign acquisition of farmland. Under current legislation, the USDA can track ownership of land and request that the foreign purchaser reports whether the land is for themselves, a government, or some other organization. However, aside from issuing a request, the USDA has minimal investigative authority. At most, the USDA’s powers are limited to reporting instances of incomplete or false filings and issuing a late fee. Ernst and Stabenow’s legislation hopes to upgrade oversight and transparency as well as limit future purchases of US farmland near sites that could compromise national security.
Mongolian PM Makes Official Visit to China
Mongolian Prime Minister Luvsannamsrain Oyun-Erdene is leading a delegation to meet with Chinese Premier Li Qiang and attend the World Economic Forum meeting in Tianjin, China. Mongolia is looking to further develop cooperation between the two nations in the technological sector, and has pledged to work closely on the development of renewable energy. Another objective of the trip is to enhance connectivity between China and Mongolia through the development of multiple railway projects, including the Gashuunsukhait, Bichigt, and Shivee Khuren rail networks. The recently opened Gashuunsukhait railway is expected to bring more than 50 million tons of coal to China a year. By expanding the Gashuunsukhait railway, along with the other two networks, Beijing and Ulaanbaatar aim to cultivate an increasingly symbiotic trade relationship, thereby bolstering their respective economies.
China Downgrades Presence at the 26th St. Petersburg International Economic Forum
As the 26th St. Petersburg International Economic Forum (SPIEF-2023) commenced on June 14, high-level Chinese representatives were not in attendance. Despite this, President Putin, on the opening panel moderated by Dmitry Simes, a Russian-American political scientist and a “Channel One” presenter, went out of his way to highlight that the Kremlin has “good—not just neighborly—but really good relations with China.”
Established in 1997, SPIEF has become a premier global platform for addressing significant international economic topics. This year’s theme was the significance of “Sovereign Development as the Basis of a Just World: Joining Forces for Future Generations.” The annual forum, also known as the “Russian Davos,” has received limited coverage in Chinese state media, and the focus has predominantly been on the opening sequence of the forum and its overarching themes. The subdued coverage was likely due to the absence of high-level Chinese officials this year, with President Xi Jinping—who attended in person in 2019 and virtually in 2022—not participating in the forum at all. China’s Ambassador to Russia, Zhang Hanhui, appeared to be the only prominent official representing Beijing at the event. Ambassador Zhang was a panelist in a Russia-China business dialogue session on June 15; during the meeting, he expressed optimism regarding the bilateral trade between the two nations, which he expected to reach $200 billion this year.
Nevertheless, despite the absence of direct representation at the forum, Beijing has maintained its narrative of promoting stronger China-Russia relations. Amid the ongoing invasion of Ukraine, China has adopted a subtle pro-Moscow stance by refraining from openly condemning Russian aggression. Liu Weidong, a research fellow at the Institute of American Studies at the Chinese Academy of Social Sciences, suggested that Beijing should reassess its ties with Russia and actively seek to cultivate relations with a broader range of countries. This outlook reflects a multifaceted discourse within China regarding the benefits and potential risks of deepening economic and political ties with Moscow.
China’s Growing Investment in Africa’s Pharmaceutical Industry
Since early 2023, a significant number of Chinese companies have announced plans to construct pharmaceutical manufacturing facilities across Africa. Humanwell Hi-tech Industry Co. Ltd. officials declared their intent to build plants in Morocco and Chad in the near future, spending $48.9 million to build a plant in Mali. This would be in addition to their extant factories in Mali and Burkina Faso (completed 2009 and 2010, respectively). Another firm, Cheerland Biotechnology, stated that it will establish a major facility in North Africa by 2024; Shanghai Fosun Pharmaceutical Co. Ltd., the largest company to participate in the move, recently obtained a $54 million loan from the World Bank to establish in Burkina Faso what will become the largest pharmaceutical factory in West Africa upon completion. While China has signed many memoranda of understanding regarding the provision of medical aid and development of local healthcare infrastructure with partners across Africa in the past, the recent large-scale investment in pharmaceutical production appears to represent a shift in how the PRC defines financial and technical cooperation with the continent.
While local South African companies control sizable portions of the African market for medicine, a vast majority of pharmaceutical goods are imported from the West—as well as India and China, to some degree—totaling $21.8 billion in 2021. China has had some success in selling its pharmaceuticals in Northern Africa (comprising roughly 37 percent of Morocco’s market, 13 percent of Nigeria’s, and 11 percent in Egypt’s, respectively); nevertheless, it still accounts for relatively little of the continent’s overall supply of medicine.
At first, China’s interest in building up Africa’s pharmaceutical industry may seem especially humanitarian, aiding African countries in producing their own finished goods without having to rely on others like the West or China—an issue that has become especially sensitive since the COVID-19 pandemic, when several African states received their first shipment of vaccines for the most part after many in the West were getting booster shots. On the other hand, China has become dominant in another area of medicine manufacturing: the production of active pharmaceutical ingredients (APIs), which are in effect the “building blocks” of medicine, and a vital step in the supply chain. In 2019, China controlled 40 percent of the API market globally, and 82 percent of the PRC’s medicine-related exports were APIs. As African states draw closer to Beijing, Chinese support for domestic African pharmaceutical production may achieve both goodwill abroad and increased exports at home.
