China spends more importing semiconductors than oil

China imported $350 billion worth of semiconductors in 2020—more than the value of the crude oil it imported the same year, according to the country’s customs data. Importing semiconductors also accounts for the country’s largest categorical trade deficit, where the difference between what China imports and exports for this particular type of goods is the widest.

China has been the world’s largest importer of chips since 2005. As a result, global chipmakers and the governments in their home countries have grown obsessed with its plan to pursue independence on semiconductors for the past few years. They fear that China is looking to build a domestic chip supply chain and decrease its reliance on imports that have proved profitable for certain economies, most notably South Korea, Taiwan, and the United States. 

It is true that China is determined to increase its domestic chip production. But the goal is not to make China a silicon locavore, entirely independent from global supply chains. Making a chip is a hugely complicated process involving hundreds of companies that specialize in different steps, and no country does it all. China is trying to bring the highest value-added steps in the process, like chip design and manufacturing, on shore, but no matter how well this goes the country will remain dependent on the industrys’ global supply chains.

The actual source of the 70% figure is hazy—in fact, it may have been invented for television. It was first mentioned by China Central Television in August. Citing “relevant data from the State Council,” the state broadcaster said that China will realize a “self-sufficiency rate of 70%” in semiconductors by 2025. But there is no support for such a claim in any Chinese official document. Media reports cite the country’s Made in China 2025 initiative, first released in 2015, as the source of the 70% goal, which is misleading. The plan did call for improving domestic chip-designing ability, but it did not set a specific timeline for self sufficiency or a figure.

Beijing certainly wants to bring more semiconductor manufacturing on shore—but its goals appear to be relatively realistic. 

Chips are China’s biggest imports

China’s semiconductor imports surged to an all-time high in March to stockpile against the threat of a global chip shortage. That month, the country imported 58.9 billion semiconductor units worth $35.9 billion, according to data released by China’s General Administration of Customs, the South China Morning Post reported.

In 2020, China spent more money on semiconductors than on crude oil, according to the data. In fact, semiconductors were China’s largest imports last year as well as the country’s largest categorical trade deficit. In 2020, China booked an overall trade surplus of $570.4 billion, while semiconductors ran at a trade deficit of $233.4 billion. By comparison, the trade deficit within crude oil was $185.6 billion in 2020.

China’s trade deficit in semiconductors is getting deeper, increasing 15.3% in 2020 from the previous year and surging nearly 150% compared with 2014.

One of the reasons for China’s push for self-reliance on semiconductors is to “develop high value-added manufacturing and service industries and help reduce the country’s largest source of trade deficit,“ wrote insurance firm Euler Hermes in a report (in Chinese) in February. 

And China is chips’ largest importer

China needs chips, but chip makers around the world also need China. The country accounts for a huge part of their revenue—56% for Qualcomm and 26% for Intel. Numbers for the industry as a whole were not available. The US-China decoupling on technology has been bad news for them and we’ve seen they have lobbied for less restrictions on chips exports to China.

The bottom of the semiconductor value chain

China is the world’s largest buyer of semiconductors, but most of what China buys isn’t consumed at home. Instead, chips are used to make other products and then exported. The chips are incorporated into end products like smartphones, personal computers, and telecommunications equipment, which are then exported to other markets.

Market research firm IC Insights estimated that 60% of semiconductors sold in China in 2020 were components for export products.Making gadgets out of imported semiconductors is a low-margin business. Semiconductor revenue earned by companies headquartered in China only accounted for 5% of global semiconductor sales in 2019, according to data from the Semiconductor Industry Association, a US-based industry body.

China has been involved in the global semiconductor supply chain for a few decades, allowing companies to nurture the talent and skills to move up the value chain and reap greater economic benefits.

China has seen Taiwan improve its standing in the semiconductor industry over the past 60 years. The island has moved steadily up the value chain since the 1960s when American companies began setting up assembly plants there. Today, the island is the world’s second-largest semiconductor manufacturer behind South Korea, and home to Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker. Chip manufacturing now contributes to more than 56% of Taiwan’s semiconductor industry.

For China, the push for self-reliance in semiconductors is not only about making semiconductors at home. It is about pushing the industry upstream on the value chain—making chips rather than using chips, designing chips rather than packaging chips.

While this has already been in process over the past two decades, Beijing’s call for self-reliance on semiconductors is likely to accelerate the pace. The following chart shows the decrease in low-value activities for China and an increase in activities higher up the value chain, specifically chip design.

Rational growth

China’s ambitious semiconductor autonomy plan is about improving the proportions of chip designing and chip manufacturing in the industry, the Euler Hermes report said. 

By doing so, the country has increased investment in the segment. This newsletter mentioned in March that cash flowing into China’s semiconductor firms surged more than fourfold in 2020 compared with the previous year. One of the biggest underwriters is the state. 

The country’s National Integrated Circuit Industry Investment Fund, known as the Big Fund, manages more than RMB 340 billion ($52.5 billion). Around 84% of the Big Fund’s investment went into chip manufacturing and design firms. The rest went mostly into chip packing and testing firms, lower-value inputs necessary to the ecosystem.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries. 

The numbers seem massive, but the state is not throwing its support behind chip firms at any cost, support that some of China’s biggest firms have enjoyed in the past. In November, the government allowed Tsinghua Unigroup, a major state-owned semiconductor manufacturer, to default on a RMB 1.3 billion bond.

“Tsinghua Unigroup is one of China’s largest and most advanced semiconductor firms,” wrote Euler Hermes. “Tsinghua Unigroup’s default sends a signal that China probably won’t provide funds to its leading companies at all costs.”