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Alex He: Chinese IC enterprises need to expand r&d innovation and seek cooperation

Updated: Jan 6

Alex He, Fellow at the Center for International Governance InnovationI

Alex He is a fellow at the Center for International Governance InnovationI. His research interests focus on China and global economic governance, g20 and Chinese domestic politics.

His latest articles:

Ditigal RMB: A Possible Way to Reassert Data Control in the Digital Economy

China's Techno-Industrial Development: A Case Study of the Semiconductor Industry

Top-level design for supremacy: Economic policy making in China under President Xi

The Belt and Road Initiative: Motivations, financing, expansion and challenges of Xi’s ever-expanding strategy. Journal of Infrastructure, Policy and Development, Vol 4, No 1.2020

Interaction between the G20 agenda and members’ national-level policy: A theoretical model for increasing G20 effectiveness, South African Journal of International Affairs, Volume 26, Issue 4

Chinese IC enterprises need to expand r&d innovation and seek cooperation

1.Your article shows the successful case of Hisilicon, a Chinese Integrated Circuit Enterprise. Is it possible to extend the successful experience of this enterprise to the whole of China?

It’s quite unlikely for other Chinese IC enterprises to copy HiSilicon’s success as the unique relationship between Huawei and HiSilicon is crucial to the latter’s rise. However, some elements that contribute to HiSilicon’s achievements could be inspired for other Chinese companies in the semiconductor sector.

First, HiSilicon’s huge and consistent R&D investment and high R&D intensity for innovation eventually led to its success. In the IC industry, a huge and consistent R&D investment is one of necessary factors for success. China’s IC foundry champion SMIC has a high R&D intensity although its total R&D expenditure is quite lower than HiSilicon’s in 2019. This might help explain somehow why SMIC is China’s IC foundry champion. China’s internet giants such as Alibaba, Tencent and Baidu also have a huge R&D expenditure in 2019. If they are really determined to develop their own IC section, huge and consistent R&D expenditure are something they need to do.

Second, HiSilicon’s R&D research has a very close connection with the market. Huawei as HiSilicon’s powerful parent company provided very convenient playground for it to test its products in the market, and other Chinese IC companies don’t have the privileges to do the same. That being said, HiSilicon’s story of rise still reveals that research and innovation must have a close connection with the market. Otherwise, huge investment on innovation and research could still lead to a failure.

2. After Biden came to power, the Biden administration proposed a "democratic supply chain" plan to try to push India, Europe, Japan, South Korea and the US to rebuild their supply chain systems as an alternative to the new industrial ecology of Chinese supply. To what extent do you think "democratic supply chain" can replace Chinese supply chain?

I would say an idea like “democratic supply chain” is quite an ideologically-based one. It’s a latest development of US “decoupling” policy with China that started in the previous Trump administration and was spurred by the inability for the US and quite a few Western industrial economies to produce and supply Personal Protective Equipment during the period when the COVID-19 pandemic is hitting the world. Basically, it demonstrates that the geopolitical and ideological ways of thinking are above the market-oriented rules. The way I look at it is that the idea of democratic supply chain could die out with the end of COVID-19 pandemic. Global market rules will eventually prevail. China with its huge manufacturing capacity and relatively cheaper labor and lower cost will continue play a significant role in global supply chain. However, the US-led technological “decoupling” with China would not go away anytime soon as China’s rising in high-tech in the age of digital economy is regarded by American as one of the biggest challenges to the US supremacy in the world. China would still face technological and geopolitical block in high-tech fields, especially in crucial areas such as semiconductor, frontier technologies such as 5G and IoT, AI and big data, quantum computing, etc.

3.Recently, Japanese media reported that Japan and the United States reached a consensus on semiconductor cooperation at the April 16 summit, and the two countries will set up a joint working group to study joint research and Development and industrial division of Labor in the Semiconductor industry. In the face of Western countries joining hands to suppress China's industrial development, how do you think China should respond?

In the semiconductor sector, China is in the low and mid-end of the global supply chain. Chinese IC fabrication companies are basically providing low and mid-end IC products in domestic and global market. As I mentioned in my paper, “ In general, domestic IC enterprises can supply low-end products while high-end chips rely heavily on imports, with the value of IC products having become the single largest imported item since 2015 and the value of IC imports reaching as high as US$312 billion in 2018 and US$305 billion in 2019.” The United States have great advantages in many aspects of semiconductor industry, such as IC design, IC equipment and material, core IP. Successful big IC and tech companies such as Qualcomm, Micron, Intel, Texas Instruments, Broadcom, Apple, West Data, as well as Cadence, Synopsys and Mentor in the core IP area. Japan also has technological and industrial advantages in IC equipment materials. China faces “choking points” in almost every areas of IC industry, including fabrication, design, equipment and materials, and core IP.

Yes, the US in the recent decades has gradually lost most of its capacity in IC fabrication because of the development of global division of labour in the semiconductor industry. TSMC of Taiwan and Samsung in South Korea account for a significant percentage of global semiconductor manufacturing, especially in the high-end chip fabrication. The shortage of chips supply for automobile industry in 2020-2021 reminded the US government and industry this weakness in semiconductor fabrication.

Anyway, based on the analysis above, one can say that the US is playing the “fear card” by claiming that China threatens US leadership in semiconductors and seek cooperation with Japan in semiconductor to deal with China’s rise in this sector.

As for China’s response, I would say, like I write in the paper, China is left with the following options: rely even more on indigenous innovation; seek possible cooperation with other advanced economies, such as the European Union, Japan and South Korea; and encourage the American business community to lobby the US government to relax restrictions for the sake of its own interest in global markets. But even then, China first needs to overcome fundamental structural problems in its S&T approach and policies.

4.Your article mentioned that China's bureaucracy-dominated research system is the biggest barrier to China's S&T and industrial development. What kind of political system do you think is beneficial to the development of science and technology?

It’s not the political system that would determine whether a country can or can not have a successful S&T and industry development. S&T and industry can have chance to develop and grow under any political system, as long as appropriate policy environment and market-oriented arrangements could be realized. They are determined more by other factors, such as existing S&T and industrial foundation, infrastructure, investment of capitals and talents, R&D expenditure, supply of qualified and skilled labors, a broad domestic market, etc.

Editor Assistant Research Fellow: Xianglin Gu

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