Fallout of US-China chip war could be global overcapacity across industries
- China’s pursuit of semiconductor self-sufficiency risks leading to overcapacity and price wars
- The current experience may motivate China to look into its other vulnerabilities and develop domestic substitutes, spreading overcapacity across many industries
Chinese companies have come to appreciate the risk of losing access to key equipment or components. Their responses, sometimes with financial assistance from local governments, are leading to a wave of import substitution.
While precision and complexity make some equipment difficult to replicate in the short term, a decade could be enough for China to be self-sufficient in some key technologies. The replication of global tech supply chains within China will lead to overcapacity and price wars.
Global sales of mobile phones, tablets, personal computers and printers were worth about US$700 billion last year. These products need the latest chips and are mostly made in China. Foreign companies, such as Apple, that have factories in China are largely not affected. Many Chinese companies, perhaps because the US considers them tech users rather than creators, are not subject to restrictions. They keep making consumer tech products for export or the domestic market.
The people who support the chip war seem to think China cannot develop its own substitutes. This ignores the fact that the chip industry is not that old to begin with and has moved to different locations many times.
It began in the US in the 1960s before production and equipment manufacturing shifted to Japan in the 1980s. In the past two decades, production moved to Taiwan and South Korea while equipment manufacturing went to Europe and the US. It is arrogant to assume that China lacks the capacity to make breakthroughs in this industry.
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The biggest issue for the industry is that, when China does break through, it will mean a huge jump in production capacity. The consequence will be collapsing prices for the whole supply chain. The chip war has probably ruined the industry for investors for a long time to come. It will not be an attractive investment for private capital, and its best days are likely behind it.
China’s factories are upgrading to 5G and AI-fuelled production models. The idea appears to be to make factories that do low-volume or bulky work operate like car factories instead. This is likely to involve wholesale rebuilding of these factories, something that will require massive amounts of capital.
The labour savings will make that investment productive in the long term, though the process does involve importing some key equipment and components, which could trigger worries among the businesses concerned.
China’s model for tech breakthroughs taps into talent around the world. An engineer who comes to China to make a product that is a mature technology, but one that China doesn’t have, could list the company on the stock market. The financial rewards are just below what an engineer who works for a large company could attain. China’s form of state capitalism is a powerful magnet for talent.
As an old Chinese saying goes, ghosts will grind your rice for you if you pay enough. People who believe in the efficacy of the chip war lack sufficient appreciation for the power of money.
Andy Xie is an independent economist