(Source: China Daily, 2022-08-31)

The chip industry has a globalized industrial chain. According to the principle of comparative advantages, countries and regions possess different advantages in the various sections of the semiconductor industry, which is monopolized by a few companies.

There are several characteristics of the global chip industry.

First, there is a clear division of labor in different areas of the world. The United States, thanks to its robust technological research and innovation capacities, boasts a remarkable advantage in electronic design automation, logic chips, and advanced manufacturing equipment, and the Chinese mainland excels in assembly, packaging and testing, as well as wafer fabrication. The world's chip manufacturing capacity is mainly concentrated in East Asia, with the region accounting for 73 percent of the global semiconductor production.

Second, there is a high degree of market concentration. The semiconductor industry is a capital-intensive and technology-intensive one, with key components and production materials monopolized by a few companies.

Third, there is a prominent supply-demand imbalance. On the one hand, the world is witnessing a chip shortage aggravated by the COVID-19 pandemic which has caused disruptions to the global semiconductor supply and logistics chains. On the other hand, the booming digital sector, not least the rapid development of autonomous driving, artificial intelligence, and the industrial internet, is pushing up the demand for chips.

The pandemic has accelerated the process of global digitalization and aggravated concerns over the supply chains in the digital sector, prompting major countries to launch an arms race in the chip sector. Against the background of changes in the global political and economic landscapes, China faces both challenges and opportunities.

There are two challenges. First, China's semiconductor products are concentrated in the medium-and low-end areas such as wafer production. The country mainly produces 28-nanometer chip wafers or larger. The lack of core technologies in the area remains the major development bottleneck for the country's semiconductor industry.

Second, to contain and suppress China, the US seeks a decoupling from China in cutting-edge technologies and has launched a technology Cold War against China. The global semiconductor supply chains risk being divided along ideological lines drawn up by the US as part of its attempts to maintain its hegemony. The US has recently passed the CHIPS and Science Act, which prohibits recipients of federal funding from building advanced semiconductor production facilities in countries that present a national security concern, including China. The US is also trying to form a Chip 4 Alliance with Japan, the Republic of Korea and the Chinese island of Taiwan with a view to excluding the Chinese mainland from the global semiconductor industry chain.

Facing the dual impacts of the pandemic and geopolitical tensions, the global chip and semiconductor industry is bound to experience a period of structural adjustment, which will provide an opportunity for China to upgrade its industrial structure and move up the industry's value chain.

First, the US' suppression of China's chip industry has busted the myth of the free market, shattered the illusion of Chinese people that buying is better than manufacturing, renting is better than buying and firmed up the determination to master cutting-edge technologies.

Second, the US' chip ban provides a golden opportunity for Chinese enterprises to tap the domestic market. Another positive factor for the development of China's chip industry is the growing input from the government.

China should intensify its efforts to support the development of the chip and semiconductor industry to ensure the security of the chip supply chain and further raise the global competitiveness of its high-end manufacturing sector.

First, the strategic significance of the chip industry needs to be fully grasped. After the founding of the People's Republic of China, the country made huge breakthroughs in its nuclear industry and aerospace industry despite the blockage imposed by the US and the Soviet Union. In light of the important role the semiconductor industry plays in economic development and national security, and considering that China lags behind in the global semiconductor industry and has several technological bottlenecks to overcome in key areas, the country should vigorously push for the development of the chip industry in a systematic way.

Second, large investment is required to incentivize enterprises and research institutions to make innovations. On the one hand, the government needs to chart a long-term roadmap for the development of the semiconductor industry and roll out support measures; on the other hand, it should use macro control measures to carry out nationwide resources allocation in different links of the semiconductor industry, build an innovation system pooling the efforts of enterprises, universities and research institutes, and create a sound environment for realizing technological innovations and the development of local enterprises.

Third, personnel training and talent introduction should be accelerated. The competition in the semiconductor industry is, to a large extent, a competition among top-notch technology talents. China's semiconductor industry started in the 1990s, and personnel in the sector are mainly concentrated in manufacturing, with both the number and quality of talents not sufficient to meet the industry's demand. Therefore, the country needs to cultivate more talents at home and introduce high-level talents from overseas.

Last but not least, a plan needs to be drawn up for the development direction of the semiconductor industry based on long-term goals. The gap between China and the US in the semiconductor industry will remain for a period. China should further push for high-level opening-up, and draw on the successful experiences of the global semiconductor industry, and form a new landscape in the semiconductor sector with domestic independent development and global cooperation supplementing each other.

Cai  Cuihong is a professor at the Center for American Studies at Fudan  University. Guo Wei is a postgraduate student at the School of  International Relations and Public Affairs at Fudan University. The  authors contributed this article to China Watch, a think tank powered by  China Daily.