(Bloomberg) — China’s chip industry is growing faster than anywhere else in the world after US sanctions against local champions of Huawei Technologies Co. until Hikvision fueled the hunger for homegrown components.
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Nineteen of the world’s 20 fastest-growing companies in the chip industry in the past four quarters come from the world’s No. 2 economy, on average, according to data collected by Bloomberg. That compared to just 8 at the same point last year. Those China-based suppliers of design software, processors, and equipment essential to making chips are expanding their revenues several times over, such as the world leaders Taiwan Semiconductor Manufacturing Co. or ASML Holding NV.
That accelerated growth underscores how tensions between Washington and Beijing are transforming the $550 billion global semiconductor industry — a sector that plays an outrageous role in everything from defense to the advent of future technologies like AI and autonomous cars. In 2020, the US began selling US technology to companies such as Semiconductor Manufacturing International Corp. and Hangzhou Hikvision Digital Technology Co. limiting growth, successfully curbing their growth, but also fueling a boom in Chinese chip production and supply.
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While shares in companies like Cambricon Technologies Corp. have more than doubled from lows this year, analysts say there may still be room to grow. Beijing is expected to orchestrate billions of dollars in investments in the sector under ambitious programs such as the “Little Giants” blueprint to support and fund national tech champions, and to encourage “buy China” tactics to circumvent US sanctions. The rise of native names has caught the attention of some of the pickiest of customers: Apple Inc. Yangtze Memory Technologies Co. consider as the latest supplier of iPhone flash memory.
“The biggest underlying trend is China’s quest for supply chain self-sufficiency, catalyzed by Covid-related lockdowns,” Morningstar analyst Phelix Lee wrote in an email responding to inquiries from Bloomberg News. “Amid lockdowns, Chinese customers who primarily use imported semiconductors must seek homegrown alternatives to ensure smooth operation.”
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The FactSet China Semiconductor Index, which tracks some of the country’s biggest players in the industry, is up about 20% since late April, as Covid lockdowns pushed local prices up. But it remains about a third lower than its July 2021 peak.
At the heart of Beijing’s ambitions is the impetus to secede from a geopolitical rival and to import more than $430 billion worth of chipsets by 2021. Orders for chip production equipment from foreign suppliers rose 58% last year as local factories increased their capacity. expanded, data provided by trade association Semi-show.
This in turn drives local activity. The total revenue of China-based chipmakers and designers rose 18% in 2021 to a record more than 1 trillion yuan ($150 billion), according to the China Semiconductor Industry Association.
An ongoing chip shortage that is limiting production at the world’s largest auto and consumer electronics manufacturers is also working to the advantage of local chip makers, giving Chinese suppliers easier access to the international market — sometimes with premiums tacked onto the best-selling products, such as car and PC chips.
SMIC and Hua Hong Semiconductor Ltd., the largest contract chip manufacturers, have been running their factories in Shanghai near full capacity even as the worst Covid-19 outbreak since 2020 paralyzes factories and logistics across China. With the help of local authorities, cargo flights from Japan delivered essential materials and equipment to chip factories while the city was under lockdown. SMIC recently reported a 67% increase in quarterly revenue, beating much larger rivals GlobalFoundries Inc. and TSMC surpassed.
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The turnover of Shanghai Fullhan Microelectronics Co. grew by 37% on average due to high demand for surveillance products. The video chip designer has promised to expand into electric vehicles and AI after winning the “Little Giant” designation. And design tools developer Primarius Technologies Co. has doubled sales in the past four quarters, saying it’s developed software that can be used in creating 3-nanometer chips.
Leaving aside concerns about long-term profitability, Morningstar’s Lee said the aggressive capacity building of Chinese players will increase their presence globally. That causes resentment in Washington.
“America is on the brink of losing chip competition,” international relations scholar Graham Allison and former Google chief Eric Schmidt warned in a Wall Street Journal column. “If Beijing develops sustainable advantages in the semiconductor supply chain, it could deliver breakthroughs in fundamental technologies that the US cannot match.”
Read more: Eric Schmidt urges US to lean on TSMC, Samsung for chip security
(Updates with comments from ex-Google chief, chip stocks from the 6th paragraph)
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