BCG report reveals the impact of US trade restrictions

In the past decade, the U.S. semiconductor industry has invested $312 billion in R&D, and $39 billion in 2018 alone - almost twice the total investment of the rest of the world in semiconductor R&D. It has to be admitted that the United States does have a head start in the semiconductor industry, but other countries are not to be outdone, especially China. Therefore, in order to maintain its "hegemonic" position, the United States has proposed a policy of restricting trade with China. So, is this a benefit or a disadvantage for the United States and China?

Recently, the Boston Consulting Group in the United States released a research report titled "How Restricting Trade with China Could End US Semiconductor Leadership". (hereinafter referred to as the "Report") The "Report" predicts two possible directions of Sino-US trade frictions in the chip field. It points out that if the United States continues to increase its export control of commercial chips to China, the competitiveness of US semiconductor companies will be weakened, and the United States' long-term leading position in the semiconductor field will be threatened, which will have a far-reaching negative impact on the US semiconductor industry, even far exceeding the expected effect of the "Made in China 2025" policy.

If the U.S. policy stance toward restrictions on China continues to intensify, South Korea could replace the U.S. as the global leader in the semiconductor industry due to its strong capabilities in key products such as memory, display, image processing and mobile processors, as well as its ability to expand production capacity.

At the same time, the report also evaluates two possible scenarios based on the current level of policy uncertainty in the United States’ technology restrictions on China, and predicts the short-term and medium-term impact on the semiconductor industries of both China and the United States based on these two scenarios.

Source: Boston Consulting Group

1. To protect itself: the U.S. semiconductor industry has lost its healthy innovation cycle

In the era of digital transformation and artificial intelligence, a strong semiconductor industry is critical to the United States' global economic competitiveness and national security. The United States has always been the world's national semiconductor leader, accounting for 45% to 50% of the share. And the United States' leadership is built on a virtuous innovation cycle that relies on access to global markets to reach the scale required to fund the massive R&D investments that continue to keep the United States technologically ahead of global competitors.

1) China is one of the most important markets for the US semiconductor industry, with huge development potential

Excluding the manufacturing activities of foreign companies in Chinese factories, Chinese companies account for 23% of global semiconductor demand. Today, China's semiconductor industry (without the manufacturing plants built by foreign semiconductor companies in China) accounts for only 14% of domestic demand. Obviously, China is one of the most important markets for the US semiconductor industry.

Based on this, Boston estimates that the "Made in China 2025" plan will increase China's semiconductor self-sufficiency rate to around 25% to 40% by 2025, reducing the United States' global share by 2 to 5 percentage points.

Therefore, broad unilateral restrictions on China’s access to U.S. technology could significantly deepen and accelerate market share erosion for U.S. companies. Over the next three to five years:

If U.S. companies continue to comply with the restrictions imposed by the current Entity List, they will lose 8% of their global share and 16% of their revenue. If the United States completely bans semiconductor companies from selling to Chinese customers, their global market share will lose 18% and their revenue will lose 37%, which will actually lead to a technological decoupling from China.

These revenue declines will inevitably lead to significant cuts in R&D and capital spending, and the loss of 15,000 to 40,000 high-skilled direct jobs in the U.S. semiconductor industry.

II) The U.S. semiconductor industry faces multiple competitions

In addition, according to Gartner data, U.S. semiconductor companies (including integrated device manufacturers (IDMs) that design and manufacture products in their own factories, as well as fabless design companies that rely on independent foundries to manufacture their chips) provided about 48% of the global semiconductor market in 2018. And in all end-application markets from PCs and IT infrastructure to consumer electronics, the United States leads in 23 of the 32 semiconductor product categories.

In fact, the U.S. semiconductor industry owes its global leadership to technological excellence and product innovation resulting from massive R&D investments. Semiconductors are highly complex products produced by highly advanced manufacturing processes. Improvements often require breakthroughs in hard science that take years to achieve. Over the past decade, the U.S. semiconductor industry has invested $312 billion in R&D, including $39 billion in 2018 alone—almost twice as much as the rest of the world invested in semiconductor R&D combined. For its part, the U.S. government has invested heavily in basic research, which helps bridge the gap between academic breakthroughs and new commercial products. However, compared with other countries, U.S. government investment has been flat or declining for years.

Despite its clear leadership worldwide, the U.S. semiconductor industry faces enormous competition. End products such as smartphones, personal computers, and consumer electronics have short cycles, but they account for more than half of total semiconductor demand, which means that U.S. semiconductor companies must compete fiercely every year to win supply contracts for each new generation of equipment.

In 18 of the world’s 32 semiconductor product lines (accounting for 61% of total global demand), at least one non-U.S. company has a global market share of 10% or more, making it a potentially viable alternative to the United States.

According to the China Semiconductor Industry Association (CSIA), the total reported revenue of semiconductor companies operating in China has grown at a rate of more than 20% per year over the past five years. In addition to the operations of foreign semiconductor companies in China, it is estimated that Chinese companies accounted for only 3% to 4% of the overall share of global semiconductor sales and semiconductor manufacturing in 2018. Among them, China's progress in fabless design is the most significant: first, China's Fabless has increased net in the past few years. The China Semiconductor Association's report shows that the country currently has more than 1,600 local companies, with a total share of 13% in the global market, while in 2010, this figure was 5%.

In terms of demand, China currently accounts for 23% of global semiconductor demand. This means that US semiconductor companies only account for 14% of the total demand of Chinese terminal equipment manufacturers.

The Chinese government has also previously developed a plan called "Made in China 2025" and set an ambitious goal of achieving semiconductor self-sufficiency. The goal is to have domestic suppliers meet 70% of the country's semiconductor needs by 2025. To date, the central and local governments have committed about $120 billion to the plan. In addition, China is actively seeking overseas talent and M&A opportunities.

Analysts expect China to meet 25% to 40% of its domestic demand with locally designed semiconductors by 2025, more than double the current level but still below its own 70% target.

It is in this context that the United States feels threatened and has taken actions to preserve its position in the global semiconductor industry. However, the report believes that the result of doing so is that restrictions on China will significantly affect the revenue and market share of American semiconductor companies, weaken the United States' ability to continue to invest heavily in innovative research and development, and lead to the interruption of the innovation cycle on which its semiconductor industry relies, and ultimately lose its leading position in the industry. South Korea may surpass the United States to become the world's semiconductor leader in a few years, while China can maintain long-term leadership.

2. The importance of the semiconductor industry to the US strategic layout

A strong, financially healthy semiconductor industry is of strategic importance to the U.S. Semiconductors enable technological breakthroughs that drive economic growth and are critical to national security.

1) Achieving technological breakthroughs

Over the past three decades, the semiconductor industry has been at the heart of a series of revolutionary advances in information and communications technology (ICT). In turn, ICT breakthroughs have been a driver of economic growth, enabling the United States to outperform other high-income countries in both productivity growth and real GDP growth since 1988. U.S. semiconductor technology has made these technological advances possible, influencing the rest of the world as well.

Over the past three decades, the number of transistors per chip has increased nearly a million times, processing power has increased 450,000 times, and costs have fallen 20% to 30% per year. This rapid technological advance enabled computing devices to transition from mainframes in 1980 to smartphones in 2010. Today, more than 5 billion people in the world own smartphones, and the semiconductor industry itself has grown rapidly: semiconductors (industry revenue as a percentage of global nominal GDP) have increased 2.8 times since 1987. Global demand for semiconductors has increased at an average annual rate of 8.6% and reached $475 billion in 2018.

We are in the early stages of another massive technology-driven transformation of the global economy: the digital transformation and the AI ​​era. Revolutionary applications such as augmented/virtual reality experiences, driverless cars, Internet of Things (IoT) and Industry 4.0 systems, and smart cities are becoming commercial realities. Enabling each of these new applications are advances in semiconductor technology. And, the semiconductor industry is currently testing the first quantum computing prototypes that could run 100 million times faster than current computers.