China Tech War and Semiconductors PDF

JANUARY 2020
Semiconductors at the Heart

of the US-China Tech War
How a New Era of Techno-Nationalism is Shaking up
Semiconductor Value Chains
BY ALEX CAPRI
RESEARCH FELLOW, HINRICH FOUNDATION
Contents
CONTENTS 2
LIST OF GRAPHS 4
LIST OF TABLES 4
FOREWORD 5
EXECUTIVE SUMMARY 6
INTRODUCTION 7
China’s Semiconductor “National IC” Plan 8
US – Counter Measures 9
The Proliferation of Non-Tariff Measures (NTMs) 9
Impact on Trade Flows and Global Value Chains 10
REPORT OBJECTIVES AND FOCUS 11
1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS 13
MANUFACTURED?
What are Semiconductors? 14
How are Semiconductors Manufactured? 15
Semiconductor Value Chains Operating Models 16
Semiconductor Manufacturing Cost Breakdown 17
2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS 20

The Large Gap between China Semiconductor Companies
and their Competitors 21
Dominance of American Semiconductor Companies 22
3. CHINA’S SEMICONDUCTOR INDUSTRY 23
China’s Technology Gaps in Semiconductors 23
Can China Produce Semiconductors? 24
Chinese Fabless Companies: Slow but Steady Design Progress 24
New Fab Projects in China 25
SPOTLIGHT: Huawei’s Latest Microchip Design Capabilities 26
Semiconductor Demand by Chip Size 27
SPOTLIGHT: China’s State-backed Production of Memory
Chips Could Lead to Overcapacity 29
4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND 30
INDUSTRIAL POLICIES
Made in China 2025 30
China National Integrated Circuit Industry Investment Fund (China’s Big Fund) 31
Inward and Outward Investment Strategies 32
SPOTLIGHT: China’s Inward and Outward Investment Strategies 33
SPOTLIGHT: The Impact of Foreign-Invested Enterprises (FIE’s) on China’s GDP 34
SPOTLIGHT: Global Semiconductor Sales: China versus other Markets 35
The US China Decoupling of Semiconductor Companies 36
Technology Acquisitions by Chinese State-funded Actors 37
CASE STUDY: California Chip-Designer Atop Tech and a
Mysterious Chinese Buyer 38
5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS 39

Export Controls of “Dual Use Technologies” 39
China’s Military-Civil Fusion Initiative 41
HINRICH FOUNDATION REPORT – SEMICONDUCTORS AT THE HEART OF THE US-CHINA TECH WAR
Copyright © by Alex Capri and Hinrich Foundation. All Rights Reserved.
2
Contents
Wassenaar and the International Application of Export Controls 41

Export Control Classification Numbers (ECCNs) and Supply Chain Traceability 42
Tracing ECCN’s in the Semicon Value Chain 43
Blacklisted Entities/Parties, Specially Designated Nationals (SDNs) 44
Semiconductor Value Chains are Deeply Entangled 44
CASE STUDY: American Technology Inside Huawei’s P30 Smart Phone 45
Chinese Acquisitions of US Companies 46
Blocked Chinese Technology Acquisition Deals 46
SPOTLIGHT: Mergers And Acquisitions in the Semiconductor Industry 47
6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS 49

The “De-Americanization” of Global Value Chains 49
SPOTLIGHT: De Minimis Example 50
CASE STUDY: International Traffic in Arms Regulations (ITAR regulations) 52
The Second Incorporation Rule 52
Moving More Value-added Operations out of the United States 53
Ring-fencing and Off-Shoring Operations —China and Beyond 54
Vertically Integrated Semiconductor Value Chains 54
Exclusions and Waivers on Export Controls 55
SPOTLIGHT: Increased Cyber-Security Threats 55
Federal Register Notices 56
Decoupling Due to Excessive Regulations 57
Specially Designated and Blocked Persons List (SDN) 57
7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES 58

Increased Government Intervention 58
Trans-Atlantic Technology Alliance 59
Semiconductors and Techno-Nationalism 60
The Evolution of China’s Techno Nationalism and Techno Mercantilism 61
Should the West Emulate China’s Industrial Policies? 61
The IDAR Methodology 62
SPOTLIGHT: Milestones of Chinese Techno-nationalism 63
The Scale of China’s Technology Laboratory 64
The Proverbial Horse Race 65
Military Involvement in Semiconductor Research 66
SPOTLIGHT: The Galapagos Syndrome 67
8. THE DECOUPLING OF US-CHINA VALUE CHAINS 68

The Decoupling of Talent 69
De-Americanization of Value Chains by Chinese Companies 70
The European Union and China 70
Japan in the Semiconductor Landscape 71
South Korea 72
Qualcomm-Samsung 5G Axis 73
SPOTLIGHT: Taiwan: A Strategic Semiconductor Hotbed 74
CONCLUSION 77
APPENDIX A: REFERENCES 79
RESEARCHER BIO: ALEX CAPRI 84
FOOTNOTES 85
3
Contents
LIST OF GRAPHS
Graph I: Global Semiconductor Sales Revenue from 1987 to 2020 7
(in billion US dollar)
Graph II: China’s Top Imports and Exports 8
Graph III: Semiconductors: At the Core of all Future Industries 13
Graph IV: The Semiconductor Ecosystem 15
Graph V: Rising Costs of Keeping up with Moore‘s Law and 17
Growing Release Dates for Intel lead-generation Chips
Graph VI: Highly Integrated Semiconductor Value Chains 18
Graph VII: Geographic Dispersion: Semiconductor Value Chains 19
Graph VIII: Location of Semiconductor Companies, in Global Value Chains 19
Graph IX: Global Market Share (Sales: Company Nationality by Market Share) 20
Graph X: Top Semiconductor Companies 2018 21
Graph XI: Global Semiconductor Sales and American Semiconductor 22
Companies by Market Share
Graph XII: China’s National Champions vs. Global Leaders 23
Graph XIII: Market Share of China’s Semiconductor Firms 24
Graph XIV: Semiconductor Demand by Microchip Size 27
Graph XV: Dominance of Foreign Firms in China’s Semiconductor Market 28
Graph XVI: Made in China 2025 Foundry Targets 31
Graph XVII: US Semiconductor Firms Joint Ventures in China, 2014-2018 34
Graph XVIII: Global Semiconductor Sales: China versus 35
US Sales: American & Foreign Firms
Graph XIX: US Semiconductor Company Revenue from China Sales (2018) 36
Graph XX: Made in China 2025 & Export Controls in the US 40
Graph XXI: Export Control Classification Numbers (ECCNs) 43
along a Semiconductor Global value chain
Graph XXII: Export Control Classification Number 3C002.a 46
- Selected List of Chinese Restricted Entities 9/2019
Graph XXIII: CFIUS Reviews of Proposed Acquisitions and Mergers 47
Graph XXIV: De Minimis Rule Example 1 50
Graph XXV: De Minimus Rule Example 2 51
Graph XXVI: Second Incorporation Rule 53
LIST OF TABLES
Table I: Operating Models: Semiconductor Industry 16
Table II: 2017 China’s IC Design Industry’s Top Ten Company Ranking (PWC) 25
Table III: Huawei Smartphone American Technology Providers 45
4
Foreword
Semiconductors have become essential original research into the causes and
to our modern life and the world’s effects of trade issues. The ongoing
commercial and military technology. disintegration of technology-driven
Extraordinary innovations have global value chains (GVCs) will have
occurred in semiconductors in the last impacts on growth, innovation and
20 years, for the benefit of consumers geopolitics.
and industry.
This report discusses whether the
However, the commercial competition self-sufficiency narratives and national
between industry participants security-related neo-mercantilist
from the US and China (and indeed, approaches that are now playing out
participants from Taiwan, South Korea in the semiconductor industry – what
and Japan) has not been allowed to the author calls “techno-nationalism”
develop in a market-driven way. Whilst – might erode the last 70 years of
value chains have developed across gains from trade. The report looks at
borders in the search for competitive the impacts that a fragmentation of
advantage, government intervention semiconductor value chains along
for long term geopolitical purposes geopolitical lines may have in the
has distorted markets. Recent events longer term on innovation, economic
threaten to disintegrate previously transformation and growth.
integrated value chains, dilute the
efficiencies gained over past decades, We initiated this research to trigger a
fracture common standards and slow broader discussion about the effects
innovation. of the US China technology rivalry
on sustainable and inclusive growth.
Because of the ubiquitous nature of Please join us in the discussion.
semiconductors, much is at stake in
this new era, including fundamental
values about how business enterprises
contribute to the national security
agenda. Is it possible that the
unapologetic industrial policy approach
of the Chinese Communist Party could
find its way into liberal democratic
economies?
The Hinrich Foundation focuses on Merle Hinrich

advancing mutually beneficial and
Founder
sustainable global trade. We support
Hinrich Foundation
5
Executive
Summary
This report analyzes the growing US- subsidies and funding as well as forced
Techno-nationalism is at the core China tech war and how it is impacting technology transfer and intellectual
of the US-China tech war. Techno- the global semiconductor industry — property acquisition mandates. It also
nationalism is a set of mercantilist-like the critical technology at the core of focuses on countermeasures taken by
policies that link tech innovation and the world’s commercial and military the US government, such as export
enterprise directly to the national technology. controls, investment restrictions, the
security policies, economic prosperity BIS’s Restricted Entity List, blocked
and social stability of a nation. The purpose of the report is to technology acquisitions and new
answer questions about how the industrial policies.
US-China tech war is changing global
value chains and trade flows in Finally, the study drills down into the
semiconductors, and how both state consequences and possible outcomes
and non-state actors are behaving in resulting from techno-nationalism,
this fluid landscape. including how companies devise
strategies to circumvent onerous
More specifically, this report attempts controls and mitigate collateral
to answer questions about government damage. This includes an analysis
intervention and protectionist policies of scenarios involving the so-called
and how they impact and influence US-China decoupling and “de-
behaviors in semiconductor value Americanization” of semiconductor
chains. To put the US-China tech war value chains, the fragmentation and
in context, the author defines and reshoring of global value chains, and
develops an emergent narrative: the formation of new corporate and
“Techno-nationalism”. national alliances.
This includes a focus on China’s

industrial policies, which employ state
6
Introduction
The United States and China are in the And at the core of all these future
At stake is supremacy in the industries early stages of an historic tech war or technologies are semiconductors,
of the future: data analytics, robotics, era of techno-nationalism. which provide the vital materials
AI and machine learning, surveillance and circuitry necessary to produce
technology and 5G networks Techno-nationalism is a new strain microchips — which, in turn, are
of mercantilist thought that links required to operate everything from a
tech innovation directly to economic smart phone to an advanced satellite
prosperity, social stability and to the weapons system. In short, microchips
national security policies of a nation. In are the central nervous systems and
this regard, government intervention brains inside all new age technology.
in markets is justified as protection
against opportunistic or hostile state In 2018, global sales of semiconductors
and non-state actors. and related technology topped $468
billion.1 China’s semiconductor market
Techno-nationalism seeks to attain represents, by far, the world’s largest
competitive advantage for its own importer. Semiconductor-related
stakeholders, on a global scale, in technologies are China’s largest import
order to leverage this advantage for products, exceeding even its imports
geopolitical gain. of oil. 2
At stake is supremacy in the industries As will be revealed in this study, China

of the future: data analytics, robotics, depends almost entirely on American
AI and machine learning, surveillance and other foreign companies to supply
technology and 5G networks, to name its needs for integrated circuits, either
a few. as imports, or as foreign producers
within China’s domestic market.
Graph I – Global Semiconductor Sales Revenue from 1987 to 2020

(in billion US dollar) 3
500
450
400
350
300
250
200
150
100
50
0
2020*
2008
2000
2005
2009
2006
2004
2007
1999
2003
2015
2019*
2002
2016
1998
2018
1988
2014
1994
1989
1995
1996
2010
1993
2013
2017
1992
2001
1997
2012
1987
1990
2011
1991
Source: WSTS (2019) Sales revenue (in billion U.S. dollars)
7
INTRODUCTION
China has rolled out ambitious Graph II: China’s Top Imports and Exports4
strategies to acquire and develop TOP IMPORTS (2017) TOP EXPORTS (2017)
semiconductor technology to reduce 250
its dependence on foreign producers.
200
Intergrated circuits Telephones
Crude petroleum Intergrated circuits
Iron ore Office machine parts
in billions US$
150
Cars Computers
Gold Broadcasting equipment
100
50
Source: https://oec.world/en/profile/country/chm/
The intensifying nature of the US-China One such initiative is the Made
tech war, combined with the scale in China 2025 government plan,5
and depth of China’s market—and the with some estimates putting the
massive economic gains it provides to Chinese Communist Party’s funding
American and foreign semiconductor commitment at $300 billion over a ten-
companies—creates a collision of year period.6
vested interests that has sparked
a flurry of protectionist policies in The Chinese Communist Party’s
Washington and elsewhere. semiconductor financing efforts go
well beyond Made in China 2025,
China’s Semiconductor however. For example, China’s official
“National IC” Plan government numbers claim that, as of
2019, some $29 billion of funding has
In an attempt to reduce its
been provided for the China National
dependence on American and other
Integrated Circuit Industry Investment
foreign semiconductor technologies,
Fund.7
as well as advance China’s own
innovation, the Chinese Communist
Simultaneously, the government has
Party (CCP) has rolled out ambitious
been pumping large sums of money
strategies to promote and fund the
into other technology funds, such as
development of China’s technology
Tsinghua Holdings, the technology
in critical sectors. This funding
investment arm of one of China’s
is earmarked for attracting key
top state-led universities, which the
investment and technology transfer
Chinese Communist Party has charged
into China as well as acquiring critical
with funding and advancing China
technology overseas, through state-
innovation in the semiconductor
backed acquisition initiatives.
industry.8
8
INTRODUCTION
The US has passed a slew of laws

aimed at controlling the ownership
and export of strategic technology.
U.S. Counter-Measures propose that the ECRA’s newly added

In response to Beijing’s semiconductor tech controls also be adopted by its
initiatives, the U.S. passed the Export allies under the multilateral framework
Control Reform Act (ECRA), in 2018.9 of the Wassenaar Arrangement12,
This was born largely from a broader which includes 41 other member
narrative shift that links the level of countries. Meanwhile, the Foreign
development of a nation’s commercial Investment Risk Review Modernization
technology directly with national Act (FIRRMA)13 of 2018, enforced by
security —which increasing numbers of the U.S. Department of the Treasury,
policy makers in the U.S. military and has led to a substantial increase in
security establishment argue is more foreign investment reviews by the
important than trade deficits or tariff Committee on Foreign investment in
rates. the United States (CFIUS). As such, the
number of high-profile acquisitions of
Under the ECRA, The Department of US technology companies by Chinese
Commerce’s Bureau of Industry and entities have ground to a halt.
Security (BIS) is currently reviewing
the addition of new “emerging” The Proliferation of Non-
and “foundational” technologies,10 Tariff Measures (NTMs)
for inclusion on U.S. Department of The US-China technology rivalry is
Commerce’s Controlled Commodity driving an escalation of non-tariff
List (CCL)11, which would require export measures (NTMs), which could have
licenses for the sale and transfer of more profound effects on global supply
such technologies. At issue is the chains than tariffs.
relevance of “dual use,” which is
The most noteworthy NTMs include:
defined as a commercial technology
• Sanctions
or product which can be used for
• Export controls
military purposes–which would apply
• Licensing requirements
to virtually all of the industries of the
• Restricted entity lists
future.
• Blocked acquisitions and
investments
These new measures will spill over into
other markets, as the U.S. will likely
9
INTRODUCTION
By definition, an export control is And then there are military, space and
US export controls are damaging simply a regulation that is put in place defense related articles as defined
American semi-conductor companies, to protect national security, promote under the International Traffic in Arms
with ripple effects throughout foreign or domestic policy, and, in Regulations (ITAR) in the US, which
extended global value chains. some instances, control the export of control the manufacture, sale and
items in short supply. An export control distributions of such items. Here, a
is not, by itself, a prohibition to sell or simple transaction with a restricted
buy something. party is forbidden. Many companies
are asking how broad might the ITAR
Export controls, however, mean that an controlled list become?
export license may have to be issued by
the appropriate government licensing Impact on Trade Flows and Global
agency to allow an exporter to sell, Value Chains
transfer or transport a product to a
The world’s semiconductor companies
foreign market, depending on where
are now caught in the middle of the
the final buyer is located, who the
US-China tech war.
buyer is, and how the controlled item
will be used. In almost all cases, when
Export restrictions on Huawei and
the facts surrounding a controlled item
other Chinese entities have inflicted
are reviewed, US government agencies
collateral damage on American
issue export licenses in the vast
semiconductor companies such as
majority of instances.
Broadcom, Qualcomm, Intel, Nvidia,
and others, while the ripple effects of
But NTMs such as export controls add
these actions are being felt throughout
a layer of uncertainty to GVCs and
extended global value chains.
threaten to turn a long-time supplier
into an unreliable supplier. Export
The US-China tech war presents an
controls also mean that a company’s
historic inflection point, therefore,
global value chains will be examined
for technology companies, with far-
under the proverbial regulatory
reaching consequences for trade flows.
compliance microscope, adding
This rivalry signals the beginning of
compliance costs, delays and risks.
a momentous shift in global value
chains. Multinational companies in the
Such was the case when the US
semiconductor industry and beyond
threatened to block the sale of
will need to react and adjust to this
American technology to Chinese
changing landscape.
telecoms company ZTE (which was later
rolled back). Subsequently, Huawei,
The ensuing sections of this report
HikVision, SenseTime and other key
delve into these issues and aim to
Chinese tech firms have been placed on
answer the key questions, outlined
the US Restricted Entities List.
below.
10
Report Objectives
and Focus
As the US-China tech war escalates, Key Sections of the Report

trade flows and supply chains involving To answer the above questions, the
semiconductors are being disrupted. research, data and analysis are broken
into eight distinct sections.
Key Questions
• What are semiconductor products? The report begins with an overview
Where are semiconductor of the complexity and nature of
products manufactured? What do semiconductor global value chains.
semiconductor value chains look Then it reveals the market leaders
like today and how extensive is and dominant players, and describes
the interconnectivity between the current semiconductor industry
international firms? landscape in China. This is covered in
the following sections:
• What countries produce the most
semiconductors? What are the top 1. What are Semiconductors and
semiconductor companies? How Where are Semiconductors
significant is their lead? Manufactured?
• Can China make chips and what 2. Top Semiconductor Companies,
are its current capabilities in the Innovators and Market Leaders
semiconductor industry?
3. China’s Semiconductor Industry
• How will non-tariff measures such
as export controls, export licensing The report then delves into China’s
and BIS entity lists disrupt the funding initiatives and the Chinese
semiconductor industry? Communist Party’s techno-nationalist
efforts to promote the development
• Are semiconductor value chains of Chinese semiconductor companies
destined to fragment along
geopolitical lines? or national champions. The analysis
features a deep dive into its inward
• How will companies mitigate risks and outward strategies to attract
and circumvent industrial policies specialized foreign direct investment
and/or protectionist measures? (FDI) and its efforts to acquire
• How will “techno-nationalism” fuel semiconductor companies, assets and
new industrial policies? technology abroad.
• Is US-China decoupling for This is followed by an examination of

semiconductor companies
US protectionist policies designed to
inevitable?
prevent China from obtaining sensitive
• What does the future hold for and controlled US tech. Here, the reader
semiconductor trade flows? is introduced to the different kinds of
enforcement mechanisms being used
in the export control process and how
they impact global value chains and
11
REPORT OBJECTIVES AND FOCUS
trade flows. Finally, the report concludes by looking

Next, the reader is presented at the direction in which semiconductor
with different scenarios whereby value chains appear to be heading
semiconductor companies leverage under techno-nationalist pressures,
strategies to circumvent and reduce the and outlines potential scenarios for re-
risks of export controls and restrictions, alignment, restructuring and US-China
with an analysis of how these different decoupling:
outcomes could transform the global
semiconductor industry. 7. Techno-nationalism and Industrial
Policies
These themes are explored in sections:
8. The Decoupling of US-China
4. China’s Tech Funds, Government Semiconductor Value Chains
Subsidies and Industrial Policies
The author’s analysis and conclusions
5. US Export Controls and the BIS were drawn from a variety of research
Entity List methodologies including review
of salient literature and corporate
6. Strategies to Manage Tech Controls publications, interviews with company
Within Global Value Chains management at various semiconductor
companies, and from the dissemination
of questionnaires to entities in the
semiconductor ecosystem.
12
1. What are Semiconductors?
Where are Semiconductors
Manufactured?
Graph III: Semiconductors: At the Core of all Future Industries14
Artificial Quantum Wireless Internet of

Intelligence computing networks Things
Robotics Gaming
VR/AR Medical devices
Laptops and computers Planes
Power equipment Military devices
Additive Autonomous Smart Storage and

Source: Author’s compilation manufacturing drivings phones memory
The fabrication of a state-of-the Only a small number of multinational

art microchip represents, perhaps, companies can compete in this
humankind’s greatest technological dynamic environment, where R&D
achievement. The process of designing, costs run to the billions of dollars and
creating and mass-producing, for represent more than 20 percent (and
example, a 7-nanometer integrated rising) of annual profits.15
circuit, with virtually zero margin of
error, is the result of one of the world’s The cost of building a highly
most complex, knowledge-intensive automated, AI-enabled factory starts at
processes. $10 billion, and requires “clean-rooms”
that are 100,000 times more sterile than
the average hospital environment.16
13
1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?
What are Semiconductors? Integrated circuits are the most

A semiconductor (also referred to as a common microchips and are often
“microchip”) is a material that provides the technology that is referred to
conductivity between an insulator and as “semiconductors” in the press
other materials. and academic journals. This paper
will use “integrated circuits” and
There are three types of “semiconductors” interchangeably.
semiconductors: What makes the science behind these
microchips so impressive is the size
at which these tiny devices perform
• Discrete their functions. A silicon atom is about
• Integrated Circuits (IC’s) half a nanometer in diameter and
• Opto-electronics today’s most advanced microchips are
Discrete semiconductors contain only produced at commercial volumes that
one transistor. Integrated circuits attain a size of 7 nanometers or smaller.
contain multiple transistors, while (One nanometer is one billionth of a
optoelectronics detect and generate meter.17)
light pulses.
14
How are Semiconductors can be managed. There are four basic

Manufactured? stages in a semiconductor value chain:
Semiconductor value chains in the
semiconductor industry have become 1. Research and Development
hyper-specialized, with critical portions 2. Design
of the global value chain located
3. Manufacturing
throughout the world. Highly complex
functions in the manufacture of these 4. Assembly, Testing and Packaging
products are performed at virtually any (ATP), also called Outsourced,
location that can confer competitive Assembly and Testing (OSAT)
or relative advantage, so long as risks
Graph IV – The Semiconductor Ecosystem18
Intelectual Property Raw Material

(IP) Companies Supplies
Provide IP cores Raw wafer, Lead frames

used to build chemicals packaging
advances ICs material
RESEARCH & DESIGN MANUFACTURING ASSEMBLING, DISTRIBUTION

DEVELOPMENT TESTING &
Provide services Provide PACKAGING
using specialized equipment
design tools and tools
Electronic Design Equipment

Automation (EDA) suppliers
Companies
Source: SIA Beyond Borders
15
Semiconductor Value Chains Foundries - So-called “foundries”

Operating Models specialize solely in fabricating (hence
Participants in the semiconductor they are also known as “fabs”). A
industry fall into four categories: manufacturing foundry’s operating
model depends on contracts with
IDM – A number of companies such design firms to perform fabrication.
as Intel, Samsung and Micron are
vertically integrated, meaning that OEM/ODM – Finally, when a microchip
they can perform all phases in-house. completes its journey through the
These companies fall under the label semiconductor global value chain,
of integrated device manufacturers it will be delivered to an original
(IDMs). For example, Samsung makes equipment manufacturer (OEM) or
chips primarily for their own branded original design manufacturer (ODM)
products and finished goods such as such as Apple, Oracle, BMW or Airbus –
smart phones and TVs. Intel is also where it is incorporated into everything
vertically integrated in that it makes from smart phones, IoT infrastructure,
chips for a whole range of its branded autonomous vehicles and aircraft
components and subcomponents, but navigation software. Often, original
it will also sell its chips to third parties. equipment manufacturers use contract
manufacturers for the fabrication
Fabless – In a separate niche, “fabless” of their products, which adds more
companies focus on the research complexity and interconnectedness to
and design of semiconductors, or, the end of the value chain.
for example the electronic design
and automation (EDA) software tools
needed to design integrated circuits.
These companies do not do any
manufacturing.
Table I – Operating Models: Semiconductor Industry19
Fabless-Foundry Model
Outsourced Distribution
Research & Design (Fabless) Manufacturing (to OEMs/
Assembly & Test
Development AMD, Broadcom, (Foundries) ODMs)
(OSAT)
CEA-Leti, IMEC, Media Tek, Global Foundries, HH Allied
Amkor, ASE, ChipPAC,
ITRI, Spreadtrum, Grace,SMIC, Tower Electronics,
JCET, J-Devices,
SEMATECH, Qualcomm Jazz, TSMC, UMC Arrow
Powertech, SPIL
Semiconductor Electronics,
Research Avnet, Digi-Key,
Cooperation IDM Model Mouser
Electronics
Integrated Device Manufacturer (IDM)

Infineon, Intel, Micron, Renesas, Samsung, Texas Instruments
16
Graph V – Rising Costs of Keeping up with Moore‘s Law

and Growing Release Dates for Intel Lead-Generation 100 BILLION USD
Chips21 0.8/0.15µm
0.13µm
OLDER
65nm
75 40/45nm
28nm
NEWER TECHNOLOGY
50 20nm
16/14nm
25
0
2015 2020* 2025*
TECHNOLOGY NODE (nm)

COST TO ADVANCE TO NEXT LEVEL OF CHIP DESIGN
200
600 MILLION USD 1993 to 2012 : ev er y tw o ye ars
180
500 160
140
400
120
300 100
200
80
60 14nm slip s 10nm slips
by 2 qua rt er s by 2 year s
100 40 7nm??
20
0
65nm 45nm 28nm 22nm 16nm 10nm 7nm 5nm 0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Older INTEGRATED CIRCUIT DESIGN NODE Newer
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019
Semiconductor Manufacturing Cost According to the Semiconductor

Breakdown Industry Association, about 90 percent
As Moore’s Law20 reaches its end, of an IC’s value is derived from the
the costs of achieving the next design and manufacturing phases of
breakthrough in a semiconductor have the global value chain. 22
become increasingly expensive and
complicated, thus the semiconductor This is an important fact, as this has a
value chain could become more direct bearing on the state of China’s
unbundled as it migrates towards firms semiconductor industry, which has
that not only can absorb escalating been heavily concentrated in the
costs but also can hyper-specialize in assembly, testing and packaging
unique areas of the integrated circuit phase, at the low-value end of the
value chain. semiconductor value chain — and many
of these operations are performed by
Having reached the boundaries of the subsidiaries of US companies. 23
Moore’s Law with the silicon-based
chip, a race is on to develop the next This will be discussed later, in more
generation of technologies, including detail, in the context of the US-China
gallium and nitrogen-based materials tech war and what this could mean for
and quantum computing. international trade flows should heavy
export controls and restrictions be
imposed on semiconductors.
17
Over the past twenty years of 3. Ingots are shipped to the US and
globalization, semiconductor global fabricated into blank wafers
value chains have evolved into the
most internationally integrated of any 4. The wafers are then sorted and cut
industry. For example, when tracing the into dies within the US
end-to-end value chain of a microchip,
it may be exported and imported 5. Dies are shipped to Indonesia to be
dozens of times, across multiple tested and assembled
borders before finally being imbedded
into a finished product. For example, 6. Product-ready microchip goes
consider the following scenario for a through a centralized distribution
standard integrated circuit (see Graph center and is shipped to China
VI Highly Integrated Semiconductor
Value Chains): 7. Microchip is imbedded into end-
products in China
1. R&D is performed in the US
8. Finalized products are shipped to
2. Base silicon ingots are cut into customers around the world
wafers in Japan, Taiwan,
Philippines or Korea
Graph VI – Highly Integrated Semiconductor Value Chains24
Example of one
global value chain
adopted from SIA
Sorted and cut
into dies R&D
Chip integration by end-
4 1 product manufacturer
3 8 7 Cut silicon ingots into

wafers
2
Customer buys end
6
product
5
Final product shipped
for inventory
Dies are assembled,

tested & packaged
Source: SIA (2019)
18
Graph VII – Geographic Dispersion: Semiconductor value chains25
Research and Design
Manufacturing
Assembly
Testing Intel Micron Toshiba Samsung Infineon NXP

A closer look at where semiconductor of key production activities for leading

companies perform their highest value- semiconductor companies Intel and
add activities (the R&D and critical Micron (US); Toshiba (Japan); Samsung
manufacturing stages) reveals that (S. Korea); Infineon (Germany) and NXP
they choose to ring-fence their most (Netherlands).
valuable intellectual property and keep
these processes close to home, while Leading US, European, Japanese
performing the lower-end assembly, and South Korean semiconductor
testing and packaging in other markets. companies all show similar behavior
regarding where they have placed
For example, Graph VII from the strategic assets, formed partnerships
Semiconductor Industry Association and optimized their global value chains.
(SIA) shows the geographical dispersion
Graph VIII – Location of Semiconductor Companies, by step in

production, in Global Value Chains26
U.S. 51% U.S. 62% U.S. 10% U.S. 17%
S. KOREA 6%
JAPAN 2%
JAPAN 5%
TAIWAN 73%
TAIWAN 54%
S. KOREA 28%
JAPAN 1%
EUROPE 2%
TAIWAN 18%
CHINA 12%
JAPAN 11%
CHINA 10%
EUROPE 7% SINGAPORE 12%

CHINA 7%
TAIWAN 73%
OTHER 1% OTHER 7% OTHER 2%
Design, manufacturing, Design, no manufacturing Manufacturing Assembly, testing

assembly and testing or assembly (fabless) (45% (foundry) (45% of value (OSAT) (10% of value
(IDM) of value chain) chain) chain)
TYPE OF COMPANY
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact,SCMP Stratford 2019
19
2. Top Semiconductor Companies:
Innovators and Market Leaders
The semiconductor industry has high barriers to entry. In the past two
Market share and innovation has been been dominated by a small group of decades, however, a handful of Asian
dominated by US and South Korean companies, comprised primarily of semiconductor companies including
companies. American semiconductor companies, Toshiba (Japan), Samsung (South Korea)
which have been able to build upon and TSMC (Taiwan), have managed to
first-mover advantage and create grow market share.
Graph IX – Global Market Share (Sales: Company Nationality

by Market Share)27
Japan
Korea
9%
24%
US
45%
EU Taiwan China
9% 6% 5%
Source: SIA, World Semiconductor Trade Statistics (WSTS), IHS, Global, PwC
The Asian late-comers benefited and foreign direct investment. 28

from a timely combination of Ambitious industrial policies by the
government support, a narrow focus Japanese, South Korean and Taiwanese
on specialization and innovation, and governments assisted these companies
access to key foreign partnerships to achieve success.
20
2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS
The Large Gap between China Graph X, below, provides a snapshot

China’s semiconductor companies Semiconductor Companies and their of the top semiconductor companies
have less than 5% market share and Competitors by revenue and how a select group
are multiple generations behind in This begs the question of whether of multinationals dominate global
technology. the Chinese government will be able markets.
to play catch-up and replicate these
success models on a larger scale under What is noteworthy is the conspicuous
its own ambitious Made in China 2025 absence of China semiconductor
industry policy objectives or whether companies, not only from global
the current state of geopolitics will markets but also from the China
prevent such an outcome. market, which is almost entirely
dependent on foreign firms for the
Given the growing US-China tech microchips required for both its
rivalry (and the US’s historic allies domestic and export markets.
in Europe and Asia) as well as the
overwhelming amount of influence According to the SIA, China’s current
that both American semiconductor national champion semiconductor
companies and the US government companies supply less than 5 percent
wield in the semiconductor industry, of the worldwide market and are at
the answer to this question is far from least two generations behind in their
certain for China. ability to produce microchips for
consumer electronics. 29
Graph X – Top Semiconductor Companies 201830
COMPANY HEADQUARTER LOCATION OPERATING MODEL 2018 REVENUE

(IN BILLION US$)
Samsung Electronics South Korea IDM $65.90

Intel United States IDM $61.70
TSMC Taiwan Foundry $32.20
SK Hynix South Korea IDM $26.70
Micron Technology United States IDM $23.70
Broadcom United States Fabless $17.80
Qualcomm United States Fabless $17.00
Texas Instruments United States IDM $13.90
Toshiba/Toshiaba Japan IDM $13.30
Memory
Nivida United States Fabless $9.40
NXP Semiconductors Europe IDM $9.30
ST Microelectronics Europe IDM $830
Infineon Europe IDM $8.10
Sony Japan IDM $7.90
Western Digital United States IDM $7.80
Source; IC Insights (2018)
21
2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS
Dominance of American This also means that should the

Semiconductor Companies US government choose to impose
American semiconductor companies additional export controls on American
enjoy a large footprint in all of the technology there could be extensive
world’s markets, another indication collateral damage, impacting American
that should the US-China tech war multinational technology companies
morph into a full-scale neo-mercantilist primarily, but extending well out into
rivalry across global markets, the US their first, second and third levels of
government and its allies in Europe and suppliers and service providers.
Asia could collectively weaponize a
substantial installed base of American
technology already imbedded in
extensive supplier networks and
industry.
Graph XI – Global Semiconductor Sales and American Semiconductor

Companies by Market Share31
Americas market
$103bn
Chinese market
$154.4bn
Europe market
$43bn
Japan market
$40bn
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019, Author’s compilation
22
3. China’s Semiconductor
Industry
China is currently the largest consumer percent) and smart televisions (65
of integrated circuits in the world. percent). 33
In 2018 its imports of microchip
technology were valued at $300 billion At home, China’s domestic production
and exceeded even the cost of its only accounts for 9 percent of
imported oil. 32 consumption – leaving 91 percent
of China’s demand to be satisfied by
China’s Technology Gaps in imports, including 56.2 percent from
Semiconductors the United States. 34
Semiconductor technology is vital to
Domestically, China produces 16
China’s economy and its manufacturing
percent of its semiconductors
base, particularly as it feeds the supply
– yet only half of this amount is
chains of China’s top exports, including
manufactured by Chinese companies. 35
smartphones (90 percent of global
production); personal computers (65
Graph XII – China’s National Champions vs. Global Leaders36
China’s major IC manufacturer sales China’s IC market and domestic production

in 2018
Billion USD Market Domestic production
Total: 250 Billion USD
$23.8 billion $91
SK Hynix (S. Korea)

200
150
Samsung (S. Korea) $4.6
100
SMIC (China) $3.2
50
Intel (U.S.) $2.7
Huanghong Grp. (China) $1.5

TSMC (Taiwan) $1.0 0
Other $1.8 ‘09 ’11 ‘13 ’15 ‘17 ’19 ‘21 ’23
Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact,SCMP Stratford 2019
23
3. CHINA’S SEMICONDUCTOR INDUSTRY
Can China Produce Semiconductors? Chinese Fabless Companies: Slow but

Steady Design Progress
The Chinese Communist Party’s Made
in China 2025 plan calls for Chinese In the fabless semiconductor space, for
semiconductor companies to produce example, Chinese fabless companies
80 percent of chips domestically but have been making progress and have
this goal is far from being realized. clawed their way to 11 percent of
Chinese semiconductor companies market share37.
accounted for only $4.7 billion out of
$23.8 billion worth of local production The area of fabless design has seen
in 2018. a surge in the numbers of mainland
Chinese firms. According to PWC,
China’s dependence on US and foreign between 2010 and 2015 alone, the
semiconductor technology has been number of Chinese IC design firms
a catalyst for Beijing’s doubling down went from 485 to 715, with the largest
on its Made in China 2025 industrial 20 percent of these firms producing
policies for the promotion of its own revenues of between $2.3 billion and
homegrown companies. $16 million. 39
Graph XIII – Market Share of China’s Semiconductor Firms38
MAKING PROGRESS China’s semiconductor firms have slowly but steadily increased their market share
Top Chinese mainland fabless suppliers by revenue Fabless semiconductor industry market share by sales, 2017
Company Background Revenue
HiSilicon Subsidiary of telecom $3.87

giant Huawei billion US Taiwan
Chinese mainland Europe
Tsinghua Government-backed $1.86
Unigroup group that acquired billion
1% 17% Japan Other
Spreadtrun and RDA 2%
Omnivision Founded in California $893
and sold to Chinese million
11% 2010 market share
Investors in 2015 53% US 69%
ZTE Micro- Subsidiary of leading $506
electronics telecom firm ZTE million Taiwan 17%
16% Chinese mainland 5%
CEC Huada Subsidiary of central $506
Europe 4%
government-controlled milliom
enterprise Japan 1%
Other 4%
Nari Smart Chip Main supplier to govern- $478
ment-controlled utility million
firm State Grid
Source: IC Insights, Electronic Design

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24
Table II – 2017 China’s IC Design Industry’s Top Ten Company Ranking
RANKING COMPANY NAME SALE (MILLION RMB)
1 HiSilicon 361
2 UNIS Spreadtrum 110
3 ZTE Microelectronics 76
4 Huada Semiconductor 52.1
5 IPCore Microelectronics 44.9
6 Goodix 38.9
7 Hangzhou Silan 31.8
8 Focaltech 28
9 Galaxycore 25.2
10 Vimicro 20.5
Source: PWC
These Chinese tech companies have production of critical 7 nm and 5 nm

been able to grow and innovate microchips, and the next generation
because of unfettered access to of integrated circuits, which are
collaborative relationships and currently in the R&D phase. To meet
partnerships with foreign research growing demand, in October of 2019,
and academic institutions, as well as TSMC announced additional capital
access to foreign companies through expenditures of $4 billion to bolster the
acquisitions and other mergers. company’s 2019 overall expenditures to
between $14-$15 billion.42
The US China trade war and tech war
has changed this, however, as will be In the wider context of US-China tech
discussed in the subsequent sections war, Taiwan’s relations with both the
on US export controls and restrictions US and China could tilt the tech war
on acquisitions. significantly one way or the other. The
geopolitical significance of Taiwan is
The HiSilicon scenario underscores discussed in section 8.
China’s dependence on foreign
technology and has been a catalyst for New Fab Projects in China
Beijing’s massive funding campaigns to
According to SEMI’s World Fab Forecast
produce Chinese technology around
Report, China has the most new fab
critical technologies of the future.
projects – some 30 new facilities either
under construction or in the planning
China’s home-grown semiconductor
stages — of any country in the world43.
industry relies heavily on TSMC, a
Of these projects, 13 are said to be fabs
Taiwanese firm, to meet demand for
targeted at the foundry market.
25
SPOTLIGHT
Huawei’s Latest Microchip

Design Capabilities Multinational semiconductor
companies are involved in the most
noteworthy projects:
• TSMC (Taiwan) plans to produce

16 nm FinFets44 at a new fab in
Nanjing, in addition to the
production of 200 nm integrated
circuits that it has been producing
in commercial quantities at its site
in Shanghai. This is part of a phased
plan to eventually migrate to a
12 nm integrated circuits. This is a
significant development for China
semiconductor production.
• Global Foundries (US) is building a

300mm wafer fab in Chengdu, and
has announced that it intends to
use the fab for production of the
company’s 22 nm chip, which is
suited for 5G, IoT and specialized
One revealing insight into China’s HiSilicon cannot design its edge computing.45
semiconductor design progress microchips without licensing the
involves Huawei’s fully owned intellectual property from UK-based • Foxconn (Taiwan) and Sharp (Japan)
subsidiary HiSilicon. The company, chip designer Arm Holdings, which are said to be in talks to build fabs in
which is a fabless microchip maker, was recently bought by the investor Zhuhai that will produce specialized
has developed an advanced smart group Softbank of Japan. 300 nm chips.46
phone integrated circuit, which is on
par with those used by the iconic US In addition to not owning vital • UMC (Taiwan), which has been
brand Apple.40 design IP required to produce its producing 300 nm integrated circuits
chips, HiSilicon relies on Taiwan in a fab in Xiamen, has been looking
HiSilicon’s chips are vital for Semiconductor Manufacturing to raise funds to produce 40 nm
competing in the next phase of Company (TSMC) for its production. and 28 nm chips. In order to finance
wireless broadband, 5G, which Huawei could be vulnerable to US capacity expansion, UMC has slated
means it could compete head-to- technology controls, since TSMC an initial public offering (IPO) of its
head with American firm Qualcomm, may still rely on US manufacturing Chinese unit, Hejian Technology
the world leader in designing 5G technology for its high-volume (Suzhou) Co Ltd (although the IPO is
compatible processors. HiSilicon’s commercial production lines. on hold at time of writing).47
new microchip has a state-of-the
art line width of 7 nanometers, Thus, as the tech war intensifies, Meanwhile, as of 2019, there is
which has been verified by Tokyo- Washington could exert pressure on significant overcapacity in the 28 nm
based technology “tear-down” firm, the Taiwan political establishment to niche of integrated circuits in China.48
TechanaLye.41 restrict the sale of semiconductors SMIC, China’s most advanced domestic
to Chinese buyers, such as ZTE and foundry, has been stuck at the 28 nm
However, looking more closely at Huawei. threshold as it continues to grapple
HiSilicon’s latest accomplishment to produce high yield commercial
reveals a high level of dependence quantities. SMIC currently does not
on foreign technology. have the IP, processes or know-how to
improve its yields.
26
By contrast, TSMC, Samsung, Global Semiconductor Demand by Chip Size

Foundries and UMC remain two or even Beyond the specialized and lucrative
three generations ahead of Chinese microchip niches below 14 nm, foreign
firms in the 28nm to 14nm range, and in firms still control a large swathe of
the R&D phases of 12 nm and 7 nm. the Chinese market in such niches
Within China, for example, Intel is as microchip packaging and testing,
increasing 14 nm production and is in semiconductor equipment, memory
the R&D stages of 10 nm microchip, and AI chips, as well as contract
which is well ahead of SMIC, China’s microchip making.
national champion.
An analysis of China’s semiconductor
Overall, China’s semiconductor development capabilities in 2018 shows
companies still have a long way to the degree of dominance by American
go before they are able to capture semiconductor companies and other
significant domestic market share, foreign firms, throughout all phases of
particularly in the critical space of the global value chain.
microchips below 14 nm.
Graph XIV – Semiconductor Demand by Microchip Size
100 Billion USD

0.25
0.8/0.15
0.13
65 nm
Older
75 40/45 nm
28 nm
20 nm
Newer Technology
50
16/14 nm
25
10/7 nm
0
2015 2020* 2025*
Source: Strat for 2019
27
Graph XV – Dominance of Foreign Firms in China’s Semiconductor Market49
(by revenue, in billions of dollars)

Mobile chips Chip packaging, testing Contract chipmaker
2.05 Unigroup Spreadtrum & RDA 3.79 Jiangsu Changjiang Semiconductor
Electronics Technology Manufacturing
Chinese HiSilicon 3.1 International Corp.
company 4.71 Technologies Up 24.5% year-on-year
Foreign
company 22.29
Qualcomm (U.S.) 9.54
6.6 Advanced Semiconductor
32.1
*Memory chip sales only
Apple’s chip unit (U.S.) Engineering (Taiwan) **Data for FY2018
Taiwan Semiconductor Sources: Company filing,
Manufacturing Co. (Taiwan) IC Insights
AI chip Cryptocurrency Semiconductor Memory chips

mining chip equipment
Tsinghua Unigroup’s Yangtze
1 Cambricon
Technologies
2.5 Bitmain
Technologies
0.354 Naura Memory Technologies Innotron Memory
N/A N/A
56.4*
9.71 14.53 Samsung Electronics
Nvidia** (U.S.) (South Korea)
Applied Materials (U.S.)
28.1 SK Hynix (South
Korea)
Source: https://asia.nikkei.com/Business/China-tech/Chinese-companies-rush-to-make-own-chips-as-trade-war-bites/
28
SPOTLIGHT
China’s State-backed
Production of Memory Chips
Could Lead to Overcapacity
For 2020, China’s state-backed Despite a steady accumulation of

companies have announced major financial losses at Yangtze Memory
production increases in both NAND Technologies, the state-backed
and DRAM — critical memory company continues to operate
technology for a broad range normally, has not defaulted on its
of devices, from computers to debts, and continues to receive large
smartphones. amounts of cash as well as the support
of key shareholders. 52
Yangtze Memory Technologies Co.
(which is owned by the state-backed Losses at the group were reported
Tsinghua Unigroup), expects to triple to be $460 million in the first half of
production to 60,000 wafers a month, 2018. 53
or 5 percent of world output, by the
end of 2020 at a new $24 billion plant As China’s memory chip production is
in Wuhan. 50 based on government output targets
and other strategic, non-market
ChangXin Memory Technologies, driven goals, then the possibility of
another state-funded company, an over-supply of NAND and DRAM
has announced that in 2020, it will chips would seem likely, at some point,
quadruple production of DRAM chips which would drive down global market
to 40,000 wafers a month (or 3 percent prices. None of this bodes well for the
of world DRAM output) at its $8 billion world’s existing players in this space.
facility in Hefei. 51
A recent OECD trade policy paper
China’s rapid progress in NAND and measured and highlighted the
DRAM production is noteworthy. But distortions caused by government
it is the business model behind this activities in semiconductor value
expanding output that should be chains. 54
getting increased attention from the
world’s dominant manufacturers in this
space.
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4. China’s Tech Funds,
Government Subsidies
and Industrial Policies
China’s dependence on US and foreign of the 10 industries of MIC 2025. As
China’s Made in China 2025 plan is technology is not only an issue of such, integrated circuits have been
not about market share. It’s techno- national security, it poses a serious singled out for special attention and
nationalism at work. impediment to the Chinese Communist have been receiving funding through
Party’s geopolitical ambitions as a an assortment of other state-backed
rising power, as virtually all hard and funds.
soft power will depend on achieving
technology supremacy. Beijing has set very aggressive goals
for growing China’s foundry capacity.
As such, a massive industrial policy According to recent analysis done by
initiative to develop, promote and McKinsey, in order to meet Made in
protect its own China semiconductor China 2025 growth targets for China’s
industry is underway. This is share of global foundry capacity,
technonationalism at work. virtually all of the foundry capacity
growth in the world would have to take
Made in China 2025 place in China (see Graph XVI). 57
Beijing’s Made in China 2025 plan aims
The backlash against China’s aggressive
to propel 10 key technology sectors to
funding initiatives is driven by a
national champion (a.k.a. global leader)
growing consensus in Washington
status. According to the US Chamber
and other capitals that the Made in
of Commerce, these key sectors
China 2025 plan is motivated by the
comprise 40 percent of China’s value-
Chinese Communist Party’s ambitions
added manufacturing base. 55
for geopolitical power, and is not
merely about capturing market share
Some estimates put the Chinese
for Chinese state-owned enterprises.
Communist Party’s funding
As such, it would differ considerably
commitment for Made in China
from other contentious industrial
2025 at $300 billion over a ten-year
subsidy programs, such as the Airbus
period. 56 China’s key technology
Consortium in Europe, which focuses
sectors include: Next generation IT
solely on capturing market share and is
(AI, IoT), aerospace and aeronautical
not seen as a geopolitical or systemic
equipment, automated machine tools
threat by the EU’s trading partners.
and robotics (AI and machine learning),
This same logic, for example, applies
new materials, maritime equipment
to the ongoing Belt and Road Initiative
and high-tech shipping, advanced
(BRI)58, which seeks to build a network
railway equipment, power equipment,
of costly hard and soft infrastructure
new energy vehicles, biopharma and
(roads, ports, wireless networks and
advanced medical products, and
railways etc.) through some of the
agricultural equipment.
world’s least developed and more
politically unstable countries. In the
All of these key sectors depend on
case of China’s new silk road, its
advanced semiconductors. In 2018,
objectives are seen by many as purely
Chinese, Premier Li Keqiang named
techno-nationalist.
semiconductors as the top priority
30
4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND INDUSTRIAL POLICIES
The China National IC Plan is to spend Graph XVI – Made in China 2025 Foundry Targets59
twice as much on R&D for integrated 2014-25 global foundry TAM vs China foundry 2014-20 2014-20
circuits as the rest of the world TAM, $ billion CAGR,2 % CAGR, %
combined.
78
58
42 -0 0
48
42
43
36 21 20
16
5
2014 2020 2025
10 28 46
China capacity as % of total
Rest-of-world TAM1 China foundry TAM Total available market.

1
Compound annual growth rate.

2
Source: McKinsey analysis

Note: For Beijing to reach its national IC plan targets for new foundries, virtually
all the global growth in the semiconductor sector would have to occur to China.
China National Integrated Circuit National IC Plan.60 As of 2017, the SIA

Industry Investment Fund (China’s has estimated that provincial and
Big Fund) municipal integrated circuits-related
In June 2014, the Chinese government funds have raised another $80 billion
published “Guidelines to Promote and are likely to reach the overall China
National Integrated Circuit Industry” National IC Plan goal of $150 billion.61
(the China National IC Plan). The China
National IC Plan (also known as the To put this in perspective, in terms of
“China Big Fund”) called for $150 billion just R&D spending on semiconductors,
in funding, from both the central SIA reports that US companies spent
government as well as provincial and $32.7 billion in 2018, followed by EU
municipal governments. Companies ($13.9 billion) and Taiwanese
companies ($9.9 billion). Japanese
Official government numbers claim companies and Korean companies were
that, as of 2019, some $29 billion of at $8.8 and $7.3 billion, respectively.62
funding has been secured for the China
31
In addition to the China National IC Yet, despite all of these requirements

Foreign companies remain drawn to Plan, however, the Chinese Communist and China market access conditions,
China for its market size, role in GVCS Party has been pumping large sums of American semiconductor companies
and attractive government incentives. money into Tsinghua Holdings63, the and other foreign players remain drawn
tech investment fund of one of China’s to China, primarily because of the China
top state-led universities, which the market size and its growing importance
Chinese Communist Party has charged in global value chains.
with funding and advancing innovation
in China’s semiconductor industry. To support the Chinese Communist
Party’s efforts to attract strategic
To mobilize these subsidies, grants foreign direct investment, China’s
and other monetary assistance, Beijing technology funds have been instructed
is pursuing an overarching strategy to provide US and other foreign
that combines both domestic and companies with generous Chinese R&D
international dimensions. The end game incentives to relocate research and
is to create the next generation of processing activities to China.
Chinese “national champions” within all
the strategic sectors identified in both For example, in the construction of
the National IC Plan and Made in China new fabs, Samsung, Intel, TSMC,
2025. UMC, Global Foundries and others
are availing themselves of Chinese
Inward and Outward Investment government funding and incentives,
Strategies including subsidized loans. Local
governments including Shanghai
These policies are focused on two key
(Pudong), Shenzhen and Wuxi are
objectives:
offering incentives to bring high tech
manufacturing to those regions. This
• Attracting specifically targeted
includes land for free and employee tax
foreign direct investment and
savings.
technology into China; and
• Acquiring strategic
technology abroad.
32
SPOTLIGHT
China’s Inward and Outward

Investment Strategies
Foreign Direct Investment: Attracting including:

specialized foreign direct investment in • Strict foreign equity caps
semiconductors in exchange for China • Mandatory joint ventures with
market access. designated local entities
• An administrative approval process
According to the Organization based on broader requirements,
of Economic Cooperation and including agreeing to other specified
Development (OECD), China has the investment parameters and
most restrictive inward foreign direct government projects
investment policies of all the G-20 • Licensing requirements contingent
countries.64 upon the transfer of blueprints,
designs and technology
In 2017, a survey conducted within • Requirements that the foreign firms
the semiconductor industry by the US conduct R&D in China
Department of Commerce’s Bureau of • Concessions regarding the use
Industry and Security (BIS), found that of local content and export
25 US companies – which accounted requirements
for more than $25 billion in annual sales
— had been required to form JVs and/ In October 2019, perhaps as a result
or transfer technology as a condition of of the on-going US-China trade
market access.65 talks, China announced that it would
abolish its forced technology transfer
As recently as May, 2019, after more requirements for foreign companies.
than a decade of dialogue between The US-China Business Council – which
Washington and Beijing on matters represents over 200 companies –
involving IP protection and tech publicly stated that there was also
transfer, the US-China Economic a need for more transparency and
and Security Review Commission, consistent application of these rules,
published a paper66 which stated that, across China. In the past, Chinese
when applying for a license or a permit government policies have not been
to operate in a China, foreign firms are implemented uniformly, if at all, across
still dealing with onerous conditions, different provinces and municipalities.
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33
SPOTLIGHT
The Impact of Foreign-Invested

Enterprise’s (FIE’s) on China’s GDP
Foreign invested enterprises (FIEs) employment, and value added in In China’s computer sector, foreign-
have a hugely under-valued impact China’s industrial sector, and in some invested enterprises accounted for
on China’s semiconductor industry, advanced areas – such as computers, 59 percent of industry assets and
and, more broadly, China’s economy in autos, and chemicals – the percentages 57 percent of industry profits in the
general. are substantially higher. Since the manufacture of computers, in 2013.68
industrial sector accounts for roughly
Simply measuring foreign direct half of China’s GDP, industrial foreign- The number of joint ventures in China
investment in new fab sites or R&D invested enterprises contribute between American semiconductor
centers, for example, does not approximately 10 percent of China’s companies and local partners — even
accurately measure the on-going GDP just through their own operations. without the transfer of technology – is
economic contribution of FIE’s to benefiting China’s economy immensely.
China’s GDP. There is an FIE economic ripple effect
that drives value chains and a multiplier Therefore, should American and
According to the China foreign direct effect from direct and indirect Chinese JVs be forced to de-couple,
investment research commissioned employer wages that can be traced there will be collateral economic
by the Hinrich Foundation to Enright, back to foreign-invested enterprises’ damage to the local economy as well
Scott & Associates, FIE’s contribute daily operations. as to JV partners and their respective
more than 20 percent of sales, value chain.
Graph XVII: US Semiconductor Firms Joint Ventures in China, 2014-201869
ANNOUNCED DATE NON-CHINESE COMPANY CHINESE COMPANY

Jan-14 IBM Suzhou PowerCore
Mar-14 IBM Teamsun
Sep-14 Intel Tsinghua Unigroup
Nov-14 Texas Instruments Existing Texas Instruments facility expansion
Dec-14 Micron PowerTech (Taiwan)
Jan-15 Qualcomm-IMEC SMIC, Taiwan
May-15 Hewlett-Packard Tsinghua Holdings (Unisplendour)
Jun-15 Broadcom H3C Technologies Co.
Sep-15 Ciscc Systems Inspur Group
SJ Semi (SMIC & Jiangsu Changjiang Electronics
Dec-15 Qualcomm
Technology JV)
Jan-16 Qualcomm* Guizhou Province (Huanxintong)
Tshinghua University and Montage Technology
Jan-16 Intel
Global Holdings
Apr-16 AMD Tianjin Haiguang Advanced Technology Investment Company
May-16 Brocade Guizhou High-Tech Industrial Investment Group
May-16 Dell Guizhou YottaCloud Technologies
May-16 VMWare Sugon Information
Sep-16 Western Digital Tsinghua Unigroup (Unisplendour)
Feb-17 GlobalFoundries Chengdu Municipality
Mar-17 IBM Wanda Internet Technology Group
Jul-17 Nivida Baidu
Feb-18 Intel Tsinghua Unigroup (Spreadtrum & RDA)
May-18 Qualcomm Datang Telecom Technology Co.
Note:* = Since dissolved.
Source: US International Trade Commission, Journal of International Commerce and Economics
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SPOTLIGHT
Global Semiconductor Sales:

China versus other Markets
American firms have been transforming As the below graph shows, for most
China’s semiconductor industry for foreign and American semiconductor
years. This has occurred primarily companies and specialized equipment
through joint ventures. However, makers, growing portions of their
these same American semiconductor revenue are directly attributable to
companies have been instrumental in China, which is the world’s largest
driving the transfer of human capital consumer of integrated circuits.
via US universities and R&D institutions
and industry associations, which have
benefited China greatly.
China
Chinaversus
versusUSA
USASales:
Sales:American
American& &Foreign
ForeignFirms
Firms
Graph XVIII: Global Semiconductor and Specialty Equipment Sales:
China versus USA Sales: American & Foreign Firms70
Semiconductor
Semiconductor
suppliers
suppliers
Semiconductor suppliers Semiconductor
Semiconductor
Semiconductor equipment
equipment
equipment
US$
25 4bn
3.4
25 US$
1bn
3
5 4.8
2.3
2.2
4 3.8 3.8
2 1.9
3.0 1.6
3
2.3 1.3 1.3
1.9
2
1.3 1
1.1
1 1.1
2
2
Qualcomm Micron Broadcom NXP Texas Instr Nvidia Intel SK Hynix Total Applied Dainippon Lam Tokyo KLA Teradyne ASML Total
Sales 22.7 30.4 20.8 9.4 15.8 11.7 70.8 36.2 217.8 Sales Materials Screen Research Electron 4.0 2.1 12.5 60.7
(bn US$) US$ % US$ % US$ % US$ % US$ % US$ % US$ % US$ % US$ % 17.2 3.3 11.1 10.5
China 15.1 67 17.4 57 10.3 49 3.4 36 7.0 44 2.8 18.8 27 14.1 39 88.9 41 (bn US$) US$ % US$ % US$ % US$ % US$ % US$ % US$ % US$ %
24 China 5.1 30 0.9 27 1.8 16 1.9 18 0.6 16 0.4 17 2.1 17 12.8 21
US 0.60 3 3.6 12 2.7 13 0.9 10 2.3 14 1.5 13 14.3 20 12.8 35 38.7 18 US 1.5 9 0.4 12 0.8 7 1.2 11 0.5 12 0.3 13 2.2 18 6.9 11
Source: Bart van Hezewijk, Holland Innovation Network China

Confidential
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and Proprietary.
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Alex All
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Bart van
BartHezewijk,
van Hezewijk,
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Holland
Innovation
Innovation
Network
Network
ChinaChina
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35
The US China Decoupling of To put this into perspective, more than

Semiconductor Companies 60 percent of Qualcomm’s revenue
Given the degree of penetration into came from China in the first 4 months
the China semiconductor industry of 2018 (see below chart); for Micron,
as well as integration within global over 50 percent; for Broadcom about
value chains, decoupling of American 45 percent.71
semiconductor companies from the
China market and relevant industry In the case of Broadcom, the Huawei
would have a traumatic impact on the ban and overall market uncertainty
entire technology industry, and alter from the US-China tech war has
the global economic landscape. prompted the company to revise its
2019 revenue estimate down by $2
Because key technology sectors billion.72
require a steady supply of leading-
edge integrated circuits, a sudden ban All other semiconductor companies
or severe reduction of these integrated have seen a similar decline in their 2018
circuits would result in manufacturing business.
slow down and unfulfilled demand
across a broad spectrum.
Graph XIX – US Semiconductor Company Revenue from China Sales (2018)73
Qualcomm Micron Broadcom Texas Instruments Applied Materials Intel

Nvidia Analog Devices Lam Research
60
40
20
Return since May 3 (%)

0
2018 Revenue from China (%)
Source: Ned Davis Research
36
Technology Acquisitions by Chinese into semiconductor niches along global

Chinese acquisitions of US technology State-funded Actors value chains.
companies have been substantial and
often state-funded. Chinese investors have taken Westlake Ventures is a Silicon Valley-
advantage of generous government based entity that receives funding
funding for technology acquisition to from the Chinese City of Hangzhou.76
attempt to invest in large projects with Another Silicon Valley-based VC fund
key niche players in the semiconductor is ZGC Capital Connection, which lists
industry, primarily in the US. itself as a subsidiary of a state-owned
enterprise funded by the Chinese
By providing state funds for government.77
acquisitions of foreign technology
companies, the Chinese government A start-up tech company could make
has been able to stay directly involved the argument that any money is better
in orchestrating its broader objectives than no money, even if it comes from
of the China National IC Plan and Made a Chinese state-backed company.
in China 2025. Ultimately new capital can propel a
company to create new innovations
Acquisition of American technology and economic opportunities that
and businesses peaked in 2015, when benefit the entire industry. The
Chinese entities were involved in 34 challenge arises when previously
announced mergers and acquisitions silent investors gain enough control
with American companies, valued at over a start-up company to steer its
$8.1 billion.74 strategic decision making and facilitate
intellectual property theft.
Digital Horizon Capital, a Chinese
technology fund, has been used Dealing with Chinese entities that have
extensively by the Chinese government (or could have) linkages to the Chinese
to invest in strategic overseas government, has added huge risks and
targets. The fund has invested in 113 complexities for technology firms as
US companies which the Chinese they face the dangers of intellectual
Communist Party has identified as property theft or having their Chinese
strategic priorities.75 partners turn up on the BIS entity list or
another Restricted Entity List.
Digital Horizon Capital’s focus has been
on an across-the-spectrum approach The purchase of Atop Tech went ahead
to acquiring critical technologies, despite concerns, but it soon attracted
including: the attention of US agencies doing
national security reviews and even
• Micro-electronic mechanical devices beyond, in the EU.
(MEMs)
• Memory chips The Atop Tech acquisition went on to
• Advanced microchip making become a catalyst for the revamping of
materials The Committee on Foreign Investment
in the United States (CFIUS), the US
China’s state-backed venture capital government committee assigned with
firms have been active in Silicon Valley reviewing mergers and acquisitions
in targeting start-ups working on of US companies and “dual use
innovations that can be incorporated technologies” or other strategic assets.
37
CASE STUDY
California Chip-Designer
Atop Tech and a Mysterious
Chinese Buyer
In early 2011, California-based The individual listed was a Chinese

microchip designer Atop Tech, steel magnate, who also controlled
a company with a $1 billion another Hong Kong-based company
market share in electronic-design that was the major shareholder in
automation (specialized software) Avatar.78
and integrated circuits markets, filed
for bankruptcy in a Delaware court. For observers within the
semiconductor industry this was a
A Hong Kong listed company, Avatar text-book example of the Chinese
Integrated Systems (which had been government working with a proxy
set up at the same time that Atop for strategic technology acquisition.
was filing for bankruptcy) moved to
buy Atop. Avatar had a sole director
listed in its incorporation papers.
38
5. US Export Controls and
the BIS Entity Lists
The tech war is driven by national All of these “non-tariff measures” have
security concerns in both the US and a disruptive effect on global value
China. chains in the semiconductor industry,
with far-reaching implications for
The Trump Government and the second, third and fourth-tier suppliers.
security establishment in Washington
claim to have implemented what they Export Controls of “Dual Use
consider to be necessary protectionist Technologies”
policies and counter-measures to
The Bureau of Industry and Security
China’s long-standing “predatory”
(BIS) of the US Department of
industrial policies.79
Commerce enforces export controls
on all items on the Commerce Control
Washington’s countermeasures aim to
List (CCL). The Commerce Control
impede the Chinese Communist Party’s
List covers information, goods and
ability to promote technology transfer
technology, and places special
and IP transfer to Chinese entities —
restrictions on exports.
either by stopping sales of technology,
stopping investment flows into China’s
A core feature of the Commerce
semiconductor industry or blocking
Control List is the concept of “dual
the acquisition of strategic assets from
use technology” which applies to any
US and foreign companies by Chinese
commercial information, goods or
state-backed entities.
technology which could be converted
or used for military purposes.
The protectionist policies used by the
It is necessary to obtain a license
US security establishment to achieve
before exporting, re-exporting or
this goal include:
transferring a controlled technology
or item, depending on its destination
• Export controls and export licensing (which country), the identity of the
of “dual use technologies”
actual buyer and the intended use of
• Restricted entities/parties such as the item.
the BIS Entity List
• Blocking of mergers and acquisitions In 2018, the US passed the Export
by the Committee on Foreign
Control Reform Act (ECRA)80, which
Investment in the United States
was largely a result of the US-China
(CFIUS)
trade war and broader narrative shift
around the link between technology
and national security.
39
5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS
Under ECRA, the BIS is reviewing the follow-up on the issue until the roll out
addition of newly “emerging” and of the ECRA.
“foundational” technologies81 to the US
Department of Commerce’s Controlled All 10 categories targeted by Beijing
Commodity List.82 The importance for development under Made in China
of emerging and foundational 2025 are either already classified as
technologies was acknowledged as dual use technologies or will likely end
early as 2012 by the US government, up on the Commerce Control List, as
but there had not been significant such.
Graph XX – Made in China 2025 & US “Dual Use” Commerce Control List83
Artificial intelligence (AI) and

Emerging & Foundational
machine learning technology
Technologies
(US CCL) Additive manufacturing Quantum information
(e.g, 3D printing) and sensing
Advanced Position, Navigation, and Timing
Materials (PNT) technology Brain-computer
interfaces
Advanced
Data analytics
computing Hypersonics
technology
technology
Aerospace and
Microprocessor aeronautical equipment
technology
New advanced New materials

Advanced
information technology
surveillance
Maritime equipment &
Biotechnology high-tech shipping
Agricultural
Automated machine machinery
Logistics
tools and robotics
technology Advanced railway
Robotics equipment
New energy vehicles &
equipment
Power equipment
Key sectors in the Biopharma & advanced
China 2025 Strategy medical products
Source: Federal Register/Vol 83, No. 223/Monday, November 19, 2018; Bertelsmann Foundation China 2025, Author’s compilation
40
As graph XX, shows, virtually all innovations and technologies (not

industries of the future could be just in semiconductors) pertaining
designated dual-use technologies and to the industries of the future will be
subject to licensing or restricted entity considered dual use technologies, and
laws, including every category of goods therefore, end up on the US Commerce
in Made in China 2025. Control List.
China’s Military-Civil Fusion Initiative Wassenaar and the International

Application of Export Controls
In addition to committing funding
for the Made in China 2025 plan The US is pushing for ECRA approach
and the various large funds for the to be adopted under the multilateral
semiconductor industry, Beijing has framework of the Wassenaar
appropriated special technology Arrangement , with the aim of
funding to promote what the Chinese preventing Chinese tech companies
Communist Party calls “military-civil from replacing US semiconductor
fusion”. technology with identical (if it is
available) technology from other
The Chinese government has launched countries.
a series of state-backed venture capital
technology funds that are designed Key countries in semiconductor
to bring together tech startups and GVCs such as Taiwan and Singapore
other private companies with the are not members of the Wassenaar
People‘s Liberation Army (PLA). In but generally follow its rules and
2017, for example, the Foshan Military- application of standards. A key
Civil Innovation Industries Fund was question, therefore, is whether Taiwan,
launched to the tune of $28.75 billion86. for example, would enforce new, more
stringent rules on semiconductors
China’s military-civil fusion funding intended to block China’s access to key
campaign virtually ensures that technology.
Source: Dji/Amazon
41
The European Union recently described Export Control Classification Numbers

China as a “systemic rival”, thus (ECCNs) and Supply Chain Traceability
despite the fact that the Wassenaar Under the US Export Administration
Arrangement is a voluntary rules- regulations (EAR), the BIS assigns
framework, the EU appears willing to 5-character alphanumeric ECCNs to
align with the US on matters regarding goods, software and technology.
EU technology and national security. Most ECCNs are harmonized across
multilateral regimes such as the
This scenario is already playing out: Wassenaar, thus, enable international
after facing pressure from the US, application of export controls among
Dutch authorities have delayed the different countries.
issuance of an export license to ASML
(Europe’s largest maker of highly An ECCN determines whether an
specialized chip making machines) export control license is needed by an
for technology sales to SMIC, China’s exporter (depending on destination
semiconductor national champion.88 and buyer). As controlled goods,
software or technology that moves
ASML makes extreme ultraviolet through semiconductor global value
lithography chip tools (EUVs), which chain companies must be closely
are required by foundries to produce tracked and traced using ECCN.
state-of–the-art integrated circuits
in commercial volumes. Each EUV From a supply chain perspective, tech
machine is valued at approximately firms must commit time and resources
$150 million. Should SMIC be blocked to track and trace ECCNs in order to
from acquiring this technology, its manage:
ambitions of achieving domestically
produced, leading edge microchips will
be thwarted.
• The de minimis rule – Applies
to US controlled content that is
incorporated into foreign made
The BIS appears willing to draft products. If an item contains more
unilateral semiconductor agreements than a certain percentage of US
with specific countries such as the origin by value it requires an export
Netherlands. Just as an increase in license. This is important as even
bilateral trade agreements between goods made outside of the US
two countries could undermine the with American technology could
spirit of multilateralism and the WTO, be subject to export controls and
an increase in bilateral export control cannot be sold to restricted parties.
agreements could undermine the
Wassenaar Arrangement. This is yet The de minimis rule will be discussed
another example of how techno- later, in Section 7, as a reason why
nationalism could fracture the global semiconductor companies may look
trade landscape. to restructuring value chains to
circumvent export controls in order
to maintain a profitable business –
while still complying with all relevant
export control laws.
42
• End-use of the technology - In the below example, ECCN’s

Exporters must ensure that the apply to the design, materials,
ECCN is used for the purposes production testing and end-use of
described in the export license the semiconductor value chain. As
application, thus they must put in materials, parts, components, sub-
place processes to verify who the components, software and equipment
end user of the technology is and move around the world, companies
how it will actually be used. must track and trace everything, obtain
licenses or refrain from transacting
Tracing ECCN’s in the Semiconductor business with restricted entities and
Value Chain customers in certain countries.
As was described earlier,
Failure to manage this process results
semiconductor value chains are highly
in fines, penalties, loss of export
complex, with niche players operating
privileges and criminal prosecution.
hyper-specialized functions and
operations throughout.
Graph XXI – Export Control Classification Numbers (ECCNs) along a semiconductor global value chain88
Design Materials Production Testing Incorporation &

End-use
Semiconductor design/ Hydrogen fluoride Semiconductor Testing equipment for End-use

development ECCN: 1C350d.1 production technology semicondutors determination
technology Fluorinated polyimide ECCN: 3E003.d ECCN: 3B002.b / mass market products
ECCN: 3E003.b. ECCN: 1C009.b Semiconductor 3B992.b vs. non-civilian
Photoresists manufaturing purposes
ECCN: 3C002.a equipment
De minimis
ECCN ECCN: 3D991 or 3D001 consideration
Semiconductor produc-
tion and manufacturing
equipment ECCN 3B001
Computer aided Software for the Software “specially Mass market software
design software for production of designed” for the “use” ECCN: 5D992.c
semiconductor design semiconductors of equipment controlled Software “specially
ECCN: 3D003 ECCN: 3D001 by 3B001.a designed” for the
“development,”
to .f, or 3B002.
Software “production,” operation,
ECCN: 3D002 or maintenance of
military aircraft
ECCN: 9D610
Source: Author’s Compilation
43
Blacklisted Entities/Parties, Specially technology from the P30 Smart Phone.

Export controls force manufacturers Designated Nationals (SDNs) As such, the US companies previously
to replace component suppliers across A denied or restricted party is any in the P30 global value chain provide
their global value chains. entity with which a US company or compelling examples of the collateral
individual is forbidden to do business. damage inflicted by export controls.
In May of 2019, the US government Once a company is decoupled from a
famously placed Huawei, China’s customer relationship under an export
telecommunications giant (and 68 of controls scenario, it is unlikely that it
its non-US affiliates in other countries), will ever recapture that business.
on a so-called restricted entities or “US
blacklist”, which effectively banned the Restricted entities in the semiconductor
sale of American technology to Huawei. space are not limited to technology
In this scenario, the application for an companies. Take an example where
export license would be presumed an exporter wishes to sell or transfer
denied. a semiconductor material used in the
fab process called photoresists (ECCN
3C002) to a foreign entity – assuming,
Semiconductor Value Chains Are in this scenario, that this foreign buyer
Deeply Entangled was a named restricted entity. See
According to Ken Hu, one of Huawei’s Graph XXI.
rotating chairmen, the company has
more than 13,000 suppliers globally, This example shows the wide range of
and it purchased some $70 billion in different kinds of entities that could be
components and parts in 2018. These subject to restrictions if they are named
technology industries include suppliers as restricted entities or specifically
from across the globe and in the US, designated nationals (SDNs). These
including Intel, Qualcomm, Broadcom could include:
and Xilinx Inc.89
• Individual end-users (persons), who
may be denied access to the end
In the same timeframe, Huawei bought
product (even an email or a text
approximately $11 billion worth of
message to a restricted foreign
microchips from American technology
national on the SDN list is considered
companies alone.
a deemed export, and, therefore,
illegal).
Fully executing a technology ban
on Huawei, therefore could have a • Financial institutions, who may be
disruptive impact on a tectonic scale, banned from processing transactions
not just on US companies, but on the for a buyer or supplier named on an
semiconductor industry as a whole, as OFAC SDN list
an entire industry comprised of supplier
networks, service provider relationships
• Academic and research institutions,
who may be prevented from using
and manufacturing operations are
the component in their research
forced to adjust.
• Professionals, academics, subject
Take for example, the US companies matter exports, consultants that
that, until recently, suppled microchips, have been placed on Restricted
design software and operating systems Entity Lists or are subject to
for Huawei’s P30 Smart Phone, below. restrictions
As a result of its designation as a

• Manufacturers and assemblers, other
technology companies that have
restricted entity, however, Huawei been placed on Restricted Entity
claims to have replaced all US Lists or are subject to restrictions.
44
CASE STUDY
American Technology
(Previously) inside Huawei’s
P30 Smart Phone
Table III – Huawei Smartphone US Technology Providers90
COMPANY FEATURE COUNTRY NEW STATUS
Skyworks Solutions Radio Frequency Chips United States Replaced/Changed

Qorvd Radio Frequency Chips United States Replaced/Changed
Micron DRAM and NAND Chips United States Replaced/Changed
Mentor Graphics Design software United States Replaced/Changed
Cadence Design Design Software United States Replaced/Changed
Synopsis Design Software United States Replaced/Changed
Google Android Android Operating System United States Replaced/Changed
Source: US Department of the Treasury
HUAWEI MATE P30 SMARTPHONE

CHINA U.S. SOUTH KOREA JAPAN
GERMANY UK. NO ALTERNATIVE / FAR BEHIND

Screen (OLED display panels)
Samsung Electronics Co Ltd System-on-Chip
BOE HISilicon Kirin 980
ARM Blueprint
Communication (Sophisticated
radio frequency chipmaking)
HiSilicon Balong modem Other components
Skyworks Solutions Inc and Qorvo Dolby Laboratories Inc’s immersive audio
transceiver and “front-end” technology
radiofrequency chips Shenzhen Goodix Technology Co Ltd.
Murata Switch fingerprint sensor
Huizhou Desay Battery batteries
Memory
Micron DRAM and NAND chips
SK Hynix Inc DRAM chips
Design software
Cameras EDA software from Cadence Design
Synopsys, or Mentor Graphics
Sony image sensors Android software
Leica tenses
Sunny Optical Technology (Group) Co
telephoto camera in cooperation with Leica
Source: Reuters China’s Chip Challenge
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Graph XXII – Export Control Classification Number 3C002.a - Selected List

of Chinese Restricted Entities 9/201991
TECHNOLOGY
COMPANIES
• Beijing Opto-
Electronics
Technology
VARIOUS INDIVIDUAL Company
BANKS / FINANCIAL END-USERS
• Shanghai Haisi
INSTITUTIONS* • Yan, Xiaobing Technology Co., Ltd
• Ryugyong • ZHANG, Keping • Sino
Commercial Bank
• SUN, Sidong Superconductor
• DCB Finance Technology
• LI, Fangwei
ACADEMIC Limited Company
• Etc ...
INSTITUTIONS • Hana Banking • Zongyi
Corporation Ltd. Superconductor
• Changchum Institute
CORPORATE END- Technology Co., Ltd.
of Applied Chemistry,
Chinese Academy LOGISTICS / TRAD- USERS
of Sciences ING COMPANIES** • Hebei Fas East
Communication MANUFACTURERS/
• Guangdong • Dalian Sun Moon
Star International System Engineering ASSEMBLERS
University of
PHOTORESISTS Logistics Trading • Xi’an Micromach
Technology • North Huawei ***
ECCN 3C002.a Co., Ltd. Photon Manufacture
• Nanchang University Technology Co., Ltd.,
A light sensitive Technology
• Golden Start • Shijiangzhuang
polymer used in • Beijing University of • Hebei
Trading & Communication and
semiconductor Aeronautics (BUAA) Seminconductor
International Freight Control Technology
fabrication • Renmin University
• Guangzhou Syriss Institute • Xian Semi
Logistics & Services Electronic Co., Ltd
*Most are actually North Korean banks with China branches

**Many China 3PLs are linked with or also function as trading companies
***For Huawei Companies, there is currently a 90 day reprieve for licensing requirements expiring on 19 November
Chinese Acquisitions of US Companies American and Chinese semiconductor

CFIUS appears poised to block The purchase of California-based chip companies. Below are a few examples
virtually any mergers and acquisitions designer Atop Tech by Avatar, the of early activity in this area.
in the semiconductor industry Hong Kong listed company, played
involving American and Chinese an instrumental role in the recent Blocked Chinese Technology
semiconductor companies. enlargement and enhancement of Acquisition Deals
powers granted CFIUS. Aixtron (2016) – US President Obama
blocks the Chinese firm Fujian
But the semiconductor industry had Grand Chip Investment Fund from
already been undergoing a gradual acquiring Aixtron, a German-based
ratcheting up of controls and blocked semiconductor firm with US assets
deals involving Chinese entities. Since because the acquisition would have
Beijing’s roll out of Made in China also included the company’s US
2025, the China National Integrated subsidiary and assets in California.94
Circuit Fund and its Foshan Civil-
Military Innovation Industries Fund, GSR Ventures (2016) – CFIUS advises
CFIUS appears poised to block virtually blocking a deal between GSR Ventures
any mergers and acquisitions in the and Nanchang Industry, a subsidiary
semiconductor industry involving of Royal Dutch Philips Electronics Ltd
46
SPOTLIGHT
Mergers & Acquisitions

in the Semiconductor
Industry
The US-China Tech war has sparked deals, particularly involving technology
a surge in new regulations and acquisition by Chinese buyers.
enforcement actions surrounding
technology mergers and acquisitions in In 2018, with the US-China trade war
the semiconductor industry. providing impetus, the US Congress
expanded the scope, reach and overall
In America, the Committee on Foreign remit of CFIUS, with the passage of
Investment in the United States the Foreign Investment Risk Review
(CFIUS) is responsible for reviewing Modernization Act (FIRRMA).92
all mergers and acquisitions involving
American technology companies Among other things, FIRRMA gave
and foreign entities. CFIUS, an inter- CFIUS the authority to review all
agency committee, scrutinizes scenarios that might involve acquisition
proposed and pending deals with the of US technology by Chinese state-
aim of preventing strategic dual-use backed entities, no matter how small,
technology from being purchased (or and across a broad range of sectors.
obtained via any other financial means)
by foreign actors. This means that even partial or
“beneficial ownership” scenarios
Overall, there has been a steady (compared with full legal ownership),
increase in the number of cases where individuals have any kind of
reviewed by CFIUS as well as a access to intellectual property or
dramatic increase in the committee’s technology, can be blocked.
recommendations to block or prohibit
Graph XXIII – CFIUS Reviews of Proposed Acquisitions and Mergers93
Foreign investment investigations Countries under review

The most common foreign investor on the radar of the Committee on
From 2008 to 2015, CFIUS investigations into foreign acquisitions nearly tripled
Foreign Investment in the United States is China. Nearly 20 percent of the
committee’s reviews from 2013 to 2015 involved China.
Investigations Total 387
70 China 74
Canada 49
60 U.K. 47
50 Japan 41
France 21
40
Germany 14
30 Netherlands 14
Switzerland 12
20
Singapore 12
10 Hong Kong 9
Israel 9
0
2008 2009 2010 2011 2012 2013 2014 2015 Australia 8
South Korea 8
SOURCE: Annual Report to Congress, CFIUS
SOURCE: Annual Report to Congress, CFIUS
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that manufactures LED, which includes Germany recently blocked another

semiconductors. attempt by a Chinese company, the
Yantai Taihai Group, to buy Leifeld
Fairchild Semiconductor International Metal Spinning AG, a high-tech
(2016) – Because of CFIUS concerns, machine tool company.100
Fairchild rejects China Resources
Microelectronics and CRE‘s $2.49 billion Export controls and investment
acquisition bid.95 restrictions are having a profound
impact on semiconductor value chains.
Lattice Semiconductor (2017) – US The added risks and uncertainties mean
President Donald Trump blocks that businesses must fundamentally
Chinese-backed private equity firm, rethink their strategic and operational
Canyon Bridge Capital Partners, from plans, going forward.
the $1.3 billion acquisition of Lattice
Semiconductor.96 The next section of this report will
focus on the major risk mitigation
Qualcomm (2018) – President Trump strategies that semiconductor
blocks a $117 billion acquisition offer companies are currently exploring,
for semiconductor chip maker by as they seek to protect market share
Singapore-based Broadcom.97 and sustainable trade flows, while
also adhering to relevant laws and
Meanwhile, after it officially labelled requirements.
China as a “systemic rival”, the EU
Parliament has approved bloc-wide
rules to increase scrutiny of foreign
investment and acquisitions that could
result in threats to national security.98
These latest technology acquisition

efforts were triggered, in part, when
The EU Parliament has approved
China’s Midea Group acquired an 81
bloc-wide rules to increase scrutiny of
percent stake in German industrial
foreign investment and acquisitions
robotics company Kuka AG, in 2016,
that could result in threats to national
which sparked a public outcry among
security.
policy makers in the EU.99
Since then, the current trade landscape

in the EU, as in the US, is shifting
towards more protectionist policies
and non-tariff measures. Source: Wolfgang Rattay/Reuters
48
6. Strategies to Manage Tech
Controls and Global Value
Chains
National security issues and • Lobbying of government agencies
semiconductors will remain inextricably to obtain exclusions and waivers on
linked, well into the foreseeable future. export bans and export controls
• Decoupling entirely from entities on
This evolving trade landscape will the US blacklist.
inevitably lead to the reconfiguration of
global value chains and will necessitate The “De-Americanization” of Global
corporate strategies that could involve Value Chains
the shifting of manufacturing and other
In 2018, when Huawei was placed
critical operations to new locations.
on the US government’s Restricted
Entities List, effectively cutting it off
The world’s top semiconductor
from critical US inputs for its products,
companies cannot ignore the
it immediately sought other non-
importance of China’s market, and, as
American sources for its estimated $11
businesses that must compete in an
billion worth of technology needs.
extremely challenging and complex
environment, this will require a host of
However, this most important
new approaches for risk mitigation.
China tech company remains highly
dependent on a broad range of
Going forward, semiconductor
American technology companies for its
companies will grapple with the many
products.101
or all of the below challenges:
As such, Huawei’s legal team began an
• The “De-Americanization” of global analysis to determine if the company
value chains
could legally circumvent US export
• Circumvention of “de minimis” value controls by instructing its suppliers to
thresholds on foreign made goods
reduce the overall value of American
• “Reshoring” of certain value-add technology in its value chain.
operations
• “In-China-For-China” localization
strategies
49
SPOTLIGHT
De Minimis Example
For eligible items, there are two de the costs of foreign labor, overhead, IP
minimis threshold levels that apply to license fees and the costs of materials.
inputs of US origin content which is
designated US controlled technology: Conversely, the US can arbitrarily lower
10 percent and 25 percent of a non- a de minimis threshold (from 25% to
US made product’s overall fair market 10% or below, for example), making it
value. more difficult for items further down a
supply chain to escape the constraints
In order to meet de minimis exclusion, of export controls.
either of the below outcomes must be
achieved: Take, for example, an integrated
circuit that is of US origin (controlled
1) reduce the value of the US under ECCN 3A001.a.7), which is
content; or bundled together with a non-US made
underwater device known as a “towed
2) increase the value of the acoustic hydrophonic array“.
non-US made product.
An initial calculation shows that the
This can be done by sourcing total US content is at 26.3 percent
technology elsewhere or adding more which exceeds the de minimis level,
non-US value to the finished item. For which means the product requires a
example, to manipulate the value of license if it is to be shipped to, in this
non-US inputs, companies can increase case, Russia.
Graph XXIV – De Minimis Rule Example 1
Product: Field programmable

gate array integrated circuit
Origin: US
ECCN: 3A001.a.7
Product: Towed acoustic hydrophonic
Fair market value: $250 array
Origin: UK 2 destinations
Fair market value: $950 • Australia
• Russia
US origin calculation:
Australia: No license required because ECCN 3A001.a.7 is
US$ (250/950) X 100= 26.3%
granted a license exception
Russia: License required because the controlled US

content exceeds the de minimis threshold of 25%
Can the license be avoided? (See example 2)
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SPOTLIGHT: DE MINIMIS EXAMPLE
A second illustration shows how which makes the product eligible for
changes in the prices lead to a the de minimis exclusion.
reduction of the US content to 20%,
Graph XXV – De Minimis Rule Example 2
Product: Field programmable

gate array integrated circuit
Origin: US
ECCN: 3A001.a.7
Product: Towed acoustic hydrophonic
Fair market value: $200 array
Origin: UK 2 destinations
Fair market value: $1,000 • Australia
Adjust the values? US origin calculation: • Russia
• Reduce price of US US$ (200/1,000) X 100= 20%
integrated circuit Australia: No license required because ECCN 3A001.a.7 is
• Increase price of granted a license exception
hydrophonic array
Russia: No license required because the controlled US
content is within the de minimis threshold of 25%
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CASE STUDY
International Traffic
in Arms Regulations The Second Incorporation Rule
Another way for companies to legally
(ITAR regulations) circumvent US licensing controls

is for suppliers to use the second
incorporation rule. In the case of
Huawei, the Chinese tech company
performed a second incorporation
analysis of all its supply chains and
has instructed suppliers to utilize this
loophole.
This rule applies where controls on

American technology imbedded into
a non-US second product (known as
a “discrete product”) would no longer
be subject to export licensing if the
second product is incorporated into
a third non-US product (i.e., second
incorporation).
Here, for example, a US made

microprocessor chip classified under
Export Control Classification Number
Source: Fabrizio Gandolfo/Jetphotos
3A001.a.3 (a controlled commodity) is
first incorporated into a non-US CPU
Military items listed under the Consider the example of the sale board classified under Export Control
International Traffic in Arms of a Boeing 737 civil aircraft with Classification Number 4A003.c (also
Regulations (ITAR) regulations GPS technology embedded in the controlled because of the American
have a 0 percentage de minimis cockpit valued at $1000. Because technology imbedded in it). The CPU
threshold. This means that they the GPS technology was on the ITAR board is then incorporated (i.e., a
cannot be sold to a restricted entity list, the entire civil aircraft becomes second time) into a non-US laptop
regardless of value. subject to ITAR regulations, computer. The second incorporation
despite the technology in question rule releases the non-US laptop
ITAR covers the manufacture, sale representing a tiny fraction of the computer from licensing controls.
and distributions of military, space aircraft’s value.
and defense related articles. The second incorporation rule is part
Thus, if no special permission of an interpretive guidance document
Under the so-called “see-through were obtained from the US State issued by the BIS and is not part of the
rule”, if a part or component is Department, the sale of the aircraft existing export control regulations.
subject to ITAR regulations and would constitute a violation subject The BIS is concerned about the
incorporated into a larger system, to criminal and monetary penalties. fact that Huawei issued directions
the entire larger system becomes to its suppliers to use the second
subject to ITAR regulations. incorporation rule, thus, it is possible
that this rule could be rescinded or
changed significantly.
52
6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS
Graph XXVI – Second Incorporation Rule
SECOND INCORPORATION RULE
(2ND INCORPORATION)
Product: microprocessor chip

Origin: US
ECCN: 3A001.a.3
(1ST INCORPORATION)
2nd incorporation rule releases the No license required in most destina-

laptop from EAR license control tions*
Product: incorporated into non-US- *Note however that strict conditions have to be met before this is accepted (e.g., the
origin CPU board (aka discrete product) discrete product after first incorpation must be a standalone/mass market product, and
ECCN: 4A003.c should not be bespoke to the buyer), not to mention the conditions stated in the previous
slide.
Prior to 2nd incorporation the CPU board will still
be subject to de minimis calculations and licensing
Moving More Value-added are looking into these de minimis

Operations out of the United States exclusions as a means to help mitigate
Even under normal circumstances, risk and maintain their businesses.
semiconductor companies must The US-China tech war is adding costs
struggle to manage highly complex, to semiconductor companies in the
competitive and demanding global following ways:
value chains. As the US Restricted
Entities List expands and the US-China • Lost sales to restricted entities
trade war escalates, many companies (which often awards the market to
competitors)
53
• Increased supply chain traceability Ring-fencing and Off-Shoring

Circumventing export controls is costs (to track ECCN’s through global Operations – China and Beyond
adding costs to semiconductor value chains) In the avoidance of export controls,
products. • Risks of monetary and civil penalties there is historical precedent with
and revoked export privileges for another American technology sector:
non-compliance the US communications satellite
• Legal and professional services industry which, in the 1980s and 1990s,
costs. responded to increasing US export
controls and restrictions by offshoring
Therefore, unless foreign and key parts of global value chains.
American semiconductor companies
can convince US officials to walk- Because of China’s high demand for
back or remove export controls and semiconductors, the business case for
export restrictions on a growing adopting an in-China-for-China supply
list of emerging and foundational chain remains strong for US and other
technologies (see Graph XX, Made in foreign companies.
China 2025 and US Export Controls),
efforts to circumvent US export Localizing and ring-fencing
controls will increase. semiconductor operations in a
controlled, secure environment in
Redesigning a supply chain around de China, however, is still very hard to
minimis thresholds and the second do, as detailed earlier under China’s
incorporation rule are perfectly investment and local business
legitimate strategies available to requirements for foreign firms.
companies looking to maintain their
businesses, so long as they maintain
Vertically Integrated Semiconductor
compliance with relevant laws. Value Chains
At the moment, however, the One way to reduce the inherent risks of
semiconductor industry is taking doing business in China is to diversify
a wait-and-see posture regarding operations and activities to multiple
large-scale reshoring operations, as markets in Asia, such as Taiwan,
companies continue to gauge the Singapore or Vietnam, to achieve a so-
likelihood of the rolling back of US called “China-plus 1-2-3” strategy.
export restrictions or a future US China
trade deal that would address both However, with the huge investments
sides’ concerns regarding technology. associated with both fabless and
foundry-related activities, it is difficult
54
SPOTLIGHT
Increased Cyber-Security
Threats to move facilities and operations or
replicate them. As such, there may be
a need for consolidations and mergers
within the industry to form more IDM
semiconductor business models.
An IDM (Integrated Device

Manufacturing) model is essentially a
vertically integrated semiconductor
value chain and is employed by Intel
and Samsung.
Exclusions and Waivers on Export

Controls
The best hope for the semiconductor
industry (in the near term) may
be to redouble its efforts to lobby
the US government to roll back
export restrictions on certain items,
rather than try to restructure global
value chains around the de minimis
exclusion.105 Here, associations like the
Semiconductor Industry Association
(SIA) would be well placed to facilitate
and provide reliable information to all
Cyber security experts have noted American semiconductor parties.
that since imposition of export companies operating in China or
restrictions on Chinese tech planning new operations are faced The outcome of the ZTE case, in
firms such as Huawei, Hikvision, with a conundrum: how to tap 2018, may serve as an encouraging
SenseTime and others, there has into China’s huge market, while at precedent for future efforts by the
been an escalation of cyber security the same time, protect intellectual industry to work with and consult
threats (attacks and attempted property and sensitive technology. with the US government regarding its
cyber-intrusions) at American export control enforcement activities.
technology companies.104 According
to CrowdStrike, the cyber-security
firm, this uptick in activity coincides
with both the US-China trade war
and the roll out of Made in China
2025.
55
When the US government threatened A Federal Register Notice on a

The US technology industry regularly ZTE, the Chinese telecoms company, proposed action gives the public the
lobbies the US government to with a 7-year ban on sourcing US tech, opportunity to:
ease restrictions on the basis of a well-organized group of American
unreasonable harm. companies such as Qualcomm, • Disagree with the proposal
Qorvo, Google, Intel and Microsoft • Suggest alternatives courses of
were successful in getting the US action
government to back off its threats.106 • Respond to specific questions in the
Federal Register
When seeking an exclusion to an • Estimate potential losses and other
export restriction or license, companies burdens.
often argue successfully that the item
in question meets one of the below The importance of maintaining
circumstances: transparent and open public-private
communications through a process
• The restricted item is made such as the Federal Register Notice
elsewhere and readily available – cannot be overstated. In the realm
and therefore, a prevention of the of export controls and dual-use
export, re-export or transfer of technologies, special working groups
said technology would harm the and public-private groups representing
company requesting the exclusion the semiconductor and other sectors
• The item in question can be labelled have been successful in influencing
as “general merchandise”, meaning it policy making in Washington.
poses no national security threat.
One such group is the Information
Many of these same companies again Systems Technical Advisory Committee
played a key role in quietly convincing (ISTAC), which operates under the
the US Commerce Department to auspices of the Department of
delay a ban (for a second time) on Commerce’s BIS.108 Members of the
technology sales to Huawei, which ISTAC committee are deep subject
would have gone into effect on matter experts from the semiconductor
November 19, 2019. and other tech sectors and have been
instrumental in informing and guiding
Federal Register Notices policy making.
In the US, one of the most important
However, there is a high level of
public-private communication
anxiety in the semiconductor industry
mechanisms that has been used for
because, since 2017, there has not been
public-private cooperation is the
an effective public-private dialogue
US Government’s Federal Register
about the impact of export controls,
Notice.107 Before arbitrarily enacting a
BIS entity lists and other enforcement
law or new enforcement mechanism,
mechanisms.
US officials have used the Federal
Register to canvas the business sector
for feedback, which gives companies
and organizations the opportunity to
comment on proposed actions and
denials.
56
The general concern is that there has Chinese buyers, R&D partners,
The public-private communication been little or no consideration given to suppliers and other partners.
process around semiconductor-related the long-term outcome of technology
policy making in Washington has been bans and restrictions on US companies, Specially Designated and Blocked
largely abandoned in the early stages and how this impairs their ability to Persons List (SDN)
of the US-China tech war. compete and fully participate in global In what is often referred to as the
value chains. Key concerns are: “nuclear option” of export controls,
when an entity is placed on the SDN
• Restricting US firms from doing list by the US Office of Foreign Assets
business in key global value chains Controls (OFAC), then even simple
effectively cedes market share to financial transactions with named
Chinese and other foreign firms. entities become prohibited for US
• Restricting sales to Chinese global companies and persons.
value chain partners cuts off funding
for much-needed R&D. Assuming it is not possible to obtain
• Collaborative innovation across an exemption, this is the ultimate
specialized clusters and between deal-killer and even a company-killer:
human capital networks cannot such an outcome would result in a full
occur in fragmented global value decoupling with affected parties.
chains. At the time of publication of this
report, 168 Chinese individuals and
The public-private communication entities (representing a wide swathe of
process around semiconductor-related industries) were on the SDN list.109
policy making in Washington has been
largely abandoned in the early stages These restrictions are enforced by more
of the US-China tech war. than a dozen different US government
agencies and, can be implemented
In addition to trying to compete in without warning and cause massive
an already highly competitive global collateral damage. From a government
market, American semiconductor perspective, such actions should
companies are increasingly having not be undertaken without careful
to react to what they considered consideration about the long-term
short-sighted and seemingly irrational consequences.
policy making – with no over-arching
strategic vision on how to best position Therefore, even if businesses manage
US entities over the long-term. to legally circumvent export licensing
on dual-use goods by off-shoring
Decoupling Due to Excessive operations and driving US origin
Regulations values below de minimis thresholds,
Assuming they are unable to obtain newly imposed SDN prohibitions could
official exemptions or waivers from halt any dealings, whatsoever, with
the relevant US government bodies, restricted entities.
semiconductor companies also must
prepare for scenarios involving a
process of decoupling from their
57
7. Techno-Nationalism &
Industrial Policies
The US-China trade war is but one likely to become further entrenched,
Techno-nationalism is a set of symptom of an emerging systemic not only in the US, but in the EU and
mercantilist-like policies that link tech rivalry between the world’s two beyond.
innovation and enterprise directly superpowers. This competition covers
to the national security policies, the entire geopolitical spectrum Increased Government Intervention
economic prosperity and social and encompasses all aspects of hard
Under the banner of techno-
stability of a nation. and soft power — with fundamental
nationalism, US government
ideological differences between the
intervention is increasing. For instance,
two systems beginning to spill over
it is exploring ways to funnel money
beyond China and US trade-related
to European telecommunications
matters.
companies Nokia and Ericsson, in an
attempt to counter the dominance
One could say that over the past thirty
of Huawei in the next generation of
years, despite the systemic differences
wireless technology 110.
between the US and China, a kind of
de facto strategic relationship has
This kind of techno-nationalist rationale
developed through an intertwined
is new to Washington. A palpable
network of global value chains.
sense of urgency to find a competitor
However, after decades of
to Huawei reveals the degree to which
globalization, where offshore
techno-nationalist thinking is gaining
production became the norm, the trade
traction.
landscape has been shifting towards a
more fragmented and localized trade
Funding Nokia and Ericsson is
model, which the author calls “techno-
Washington’s attempt to counter the
nationalism”.
generous multi-billion credit lines
and other financial assistance that
Techno-nationalism is a set of
Huawei has been receiving from the
mercantilist-like policies that link tech
Chinese government via state-owned
innovation and enterprise directly to
enterprises and banks. Government
the national security policies, economic
assistance has allowed Huawei to
prosperity and social stability of a
offer cheaper prices for high quality
nation. In this regard, it considers
equipment when bidding for contracts
government interventions in markets
around the world, and has pumped up
as a form of protection against what
Huawei’s R&D war chest.
it considers opportunistic or hostile
foreign actors (both state and non-
Also on the international front, the
state) and to develop, enhance and
US plans to counter China’s Belt and
promote its own national champions’
Road Initiative by approving a huge
chances for success.
expansion of the Overseas Private
Investment Corporation (OPIC) into a
Many would challenge the underlying
new agency, the International Finance
rationale behind this new way of
Development Corporation (IDFC), that
thinking — which will be discussed
can co-invest some US$60 billion with
later. But, regarding semiconductor
non-US and private-sector American
value chains, this new mindset seems
58
7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES
technology companies in the same for the homegrown development

A palpable sense of urgency to find markets targeted by China’s Belt of software and technology that
a competitor to Huawei reveals the and Road Initiative.111 The focus is on would allow separate pieces of 5G
degree to which techno-nationalist developing telecoms that provide equipment from different companies
thinking is gaining traction in the US. alternatives to China’s state-backed to communicate with each other —
companies Huawei and ZTE. which would neutralize Huawei’s
end-to-end domination of 5G network
In the 5G space, the US has also been equipment.112 This approach will require
seeking to push Oracle and Cisco, two the successful implementation of
American technology companies, to universally accepted standards, but
enter the radio transmission market it is not clear yet which country or
niche as manufacturers, despite conglomeration of countries will win
objections from both firms on the the contest to set the standards —
grounds that Huawei’s first mover assuming that there will not be multiple
advantage is too great. 5G standards that emerge.
Finally, also in the 5G space, the
Trump Government has been
looking to use government funding
Source: John Thys/AFP
Trans-Atlantic Technology Alliance The report called for EU-US strategic

The EU intends to join forces with the The EU is also turning to techno- cooperation and the need to join
US to counter China’s attempts to nationalism. Brussels recently forces to counter efforts by Chinese
dominate next-gen technologies. issued a report that emphasized the Government backed companies
importance of working closely with to influence the International
America to create an economic model Telecommunications Union and
that would compete directly with the International Organization for
Beijing, particularly with the intent Standardization.
of blocking the Chinese Communist
Party’s attempts to influence global This strong shift in both America
standards in 5G and other next-gen and the EU to resort to a kind of
technologies.113 techno-mercantilist alliance, after
three decades of relatively open
59
globalization and unrestricted trade, value creation undertaken around

Policy makers on both sides of the represents a key moment for the the world, virtually anywhere that
Atlantic appear to be comfortable to semiconductor industry and global relevant competitive strategies can
embrace increasingly mercantilist and trade, in general. be leveraged. It has taken more than
nationalist strategies. three decades for global value chains
This is not a temporary phenomenon to migrate and agglomerate into key
that will recede with the election of a global industries and networks.
new American president in 2020. Policy
makers on both sides of the Atlantic Semiconductor value chains are
appear to be comfortable to embrace agnostic. They exploit competitive
increasingly mercantilist and nationalist advantage strategies found within
strategies. different countries in order to achieve:
This mindset was showcased in a long- • Maximum efficiency & productivity

running debate among the EU anti-trust • Access to the best innovation &
authorities on whether to allow two of human capital
Europe’s dominant manufacturers of • Access to new markets
high-speed trains (France’s Alstom AG • Movement up the value chain (when
and Germany’s Siemens AG) to merge. possible).
Coloring the debate were memories of
tech transfer agreements dating back Trying to nationalize or ring-fence
to the early 2000’s when Alstom and today’s hyper-complex semiconductor
Siemens agreed to hand over some global value chains within an artificial,
of their most precious Intellectual political-designated geographical area
property to their Chinese joint venture will prove to be a difficult task.
partners.114
Even in industries with less complexity,
Alstom’s and Siemens’ Chinese joint lower costs and lower barriers to entry,
venture partners have since merged to government-controlled champion
become CRRC Corp, the world’s largest building is generally seen to have a
maker of trains, and are now bidding dubious track record. The reasons
for contracts around the world in for the failings are well documented:
competition with Alstom and Siemens. failure to allocate funds efficiently,
systemic corruption and rent-seeking
Ultimately, the idea of creating behavior, and failure to punish subpar
a European “national champion”, performance. And, of course, state-
however, was rejected and the Alstom- driven growth targets encourage
Siemens merger was blocked on over-capacity and can distort markets,
anti-trust grounds, but not without as seen in the steel industry and other
significant backlash in political circles. industries involving commodities.
Semiconductors and Techno- Beijing, however, has been steadily

Nationalism expanding its state centric model
As was described earlier, and has continued to bolster Chinese
semiconductor global value chains are capabilities in the tech industry.
highly rationalized with key sustainable
60
The Evolution of China’s Techno- By the Chinese Communist Party’s

nationalism and Techno-mercantilism ninth Five Year Plan (1996-2000) and
Dating back to the 1960’s and the under the so-called Project 909,
establishment of the Huajing Group’s industrial policy had successfully
Wuxi Factory No. 742, which trained the lured Japan’s NEC, whose engineers
first generation of China’s chip industry transferred technology and trained
engineers, China has been riding local Chinese engineers for what
industrial policy toward the creation of would become China’s first domestic
a domestic semiconductor industry.115 production capabilities for Dynamic
Random Access Memory (DRAM).118
From 1978, Deng Xiaopeng’s “opening”
of China put the country on the Over the years, China’s industrial
trajectory that got it to where it is planners have oriented their focus to
today. By the early 1980’s, China’s emulate the so-called “fast-follower”
sixth Five Year Plan (1981-85) created approach, described below, that
a “Computer and Large Scale IC worked so well in the 1970s, 1980s and
Lead Group” which was tasked with 1990s for tech companies in Japan,
modernizing China’s semiconductors.116 South Korea and Taiwan.
Already in the 1980’s the Chinese
government had recognized the Should the West Emulate China’s
advantages of shifting toward the Industrial Policies?
hybrid industrial policy model that The Made in China 2025 Plan and
is evident today: joint ventures and the National Integrated Circuit Plan
technology transfer. Fund, among others, are the result of
a long series of initiatives focused on
In the 1980’s and early 1990’s, under semiconductors and related tech. Yet,
the so-called Project 908, Chinese as earlier sections of this study have
companies attracted joint ventures that described, China continues to struggle
included Canada’s Nortel, Holland’s to make substantive progress when it
Philips, Japan’s NEC, Belgium’s ITT and comes to reducing its dependence on
Lucent laboratories from the US.117 foreign technology and foreign entities.
61
SPOTLIGHT 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES
The IDAR
Methodology
China’s semiconductor industrial

policy has increasingly emphasized
the core principles of technology
transfer, joint ventures and strategic
partnerships, with the development
and acquisition of human capital, at
scale.
In March of 2018, during the

early days of the US-China trade
dispute, the United States Trade
Representative (USTR), published
the findings of its “Section 301”
investigation into China’s practices
regarding innovation, tech transfer
and IP protection. The report The US-China tech war has witnessed
concluded China’s successful a tilt by the United States, the EU and
industrial policies could be others towards techno-nationalism.
attributed to an acronym: IDAR. Why is there an emerging narrative
that government intervention in
IDAR stands for “Introducing- markets and trade protectionism are
Digesting-Absorbing-Re- needed to succeed in a tech war with
innovating”. China?
It is an IDAR methodology that has Whatever short comings state

enabled Beijing to leverage newly capitalist economies embody, there
obtained IP and technology as part is increasing acknowledgement that
of a “catch-up” strategy. Beijing’s methods have, in fact, been
succeeding in some technology
sectors.119
Thus, if Beijing’s financial support and

strategic funding of key tech sectors
have been successful, logic would
dictate that the US and its allies should
consider borrowing from China’s
playbook, and adopt some of its
methods.
62
SPOTLIGHT
Milestones of Chinese
Techno-nationalism
Examples of the successes of China’s Russia’s GLONASS. Beidou is said to

China’s success in telecoms, satellite industrial policies in the modern era: be the most accurate of the world’s
navigation and high speed rail has navigation systems and in just over 15
reinforced the attractiveness of Huawei – Huawei has become the years was designed, implemented and
industrial policy as a tool for economic largest telecommunications equipment successfully deployed through China’s
growth. manufacturer in the world. Its space and military programs.
dominance of 5G end-to-end wireless
technologies and infrastructure is well High Speed Rail – In roughly the same
documented. timespan that it developed the Beidou
Satellite system (15 years), China rolled
Huawei’s success is not linked out the world’s longest and most
exclusively to Beijing industrial extensively used public rail system,
strategies, but, without access to with trains attaining speeds of 250-350
the broad range of government kilometers per hour.
resources and financial assistance
(including compensation for price Huawei and 5G, navigation satellites
reductions and discounts on the and high-speed rail networks all
bidding of international contracts) were brought to fruition through an
the company would not have risen underlying, disciplined application of
to its current status. Huawei’s access industrial policy, emphasizing the core
to new technology and IP through objectives:
state-funded acquisitions and state-
orchestrated technology transfer • Technology transfer
programs have paid off. • Acquisition of IP
• R&D funding (ever-increasing)
The fact that the present US
government is adopting techno- • Development and acquisition
nationalist policies and has made it of human capital
a foreign policy priority to block the • Execution of IDAR
installation of Huawei’s networks methodologies (Introducing -
around the world and limit its access to Digesting - Absorbing -
American tech is testimony that China’s Re-Promoting)
industrial policies are working.
As industrial policies become acutely
Beidou Navigation Satellite System – focused on the industries of the future,
China built its own independent global as described earlier, emerging and
satellite system as an alternative to foundational technologies will garner
the United States’ Global Positioning ever more attention from public-
System, the EU’s Galileo system and private working groups.
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Even within the US tech sector, there This nationalist mindset is shared
There are calls in the US for a more is acceptance that a techno-nationalist by executives from Apple, Google,
overt industrial policy approach to agenda must emerge, with government Facebook, Intel, Microsoft and a host
counter China’s advanced in the tech initiatives that create the right of other big tech firms, some of which
sector. foundation for national innovation — participated in a national committee
which must spill over into “main street” that drafted a report on the topic,
and create jobs and economic benefits published by the Council on Foreign
for the middle class. This cannot Relations. The publication was aptly
happen without sound, well executed named “The Innovation and National
industrial policy. Security Task Force Report”.120
The Scale of China’s Technology Engineers were tasked with the

Laboratory re-writing of code and redesigning
The scale of China’s technology specifications in order that Huawei
landscape and its growing number of might minimize the damage of US
innovators and public-private industry export controls.121
partnerships is only just beginning to
be put in proper perspective. Regarding the replacement of the
Android operating system (and,
Regarding Huawei and the advantage allegedly, the replacement of virtually
of scale, consider the following: When all US parts and components from
Washington announced that Huawei Huawei’s smart phone) the engineers’
would be placed on the Department of efforts appear to have paid off. In
Commerce Restricted Entity List (which, October of 2019 Huawei paid its
among other things, restricted its employees some $285 million in
access to Google’s Android operating bonuses for “successfully coping with
system), management tapped 10,000 US sanctions”.122
Huawei engineers — requiring them
to work continuously in three shifts The ability of a Chinese company like
over 24 hours — to tackle the problem. Huawei to leverage high quality human
64
capital, at such a large scale, has not come with excessive constraints
US businesses would embrace gone unnoticed amongst businesses and conditions that would hobble
government funding for R&D, outside of China. participation in global value chains.
education and even more civil-military
technology development projects, As such, the question being asked is: There is widespread agreement in the
provided that the money did not would more government “support” US semiconductor space that export
come with excessive constraints in the form of new industrial policies controls can inflict long-term collateral
and conditions that would hobble be welcomed by the semiconductor damage, often resulting in the ceding
participation in global value chains. industry, particularly in the US? of market share to competitors and
the erosion of revenue bases that are
If so, what would effective public- vital for generating R&D activities.
private initiatives look like? In the past, Furthermore, escalating compliance
Japan, South Korea and most notably, costs resulting from supply chain
Taiwan, have benefited immensely from traceability requirements are also a
semiconductor industrial policies, but negative factor.
could similar practices work in the US
and Europe? But the days of laissez-faire
government approaches toward the
The Proverbial Horse Race digital economy and technology are
coming to an end, which means that
If the US-China Tech war was described
the semiconductor industry will have to
as a horse race, should the participants
learn to adjust.
devote their efforts towards trying to
slow down their opponent’s horse, or
Industry thought-leaders recognize
focus on making their own horse run as
an acute need to develop human
fast as possible?
capital and the necessary skill sets
for the industries of the future. This
The consensus among the world’s
comes down to the education of a
semiconductor companies is the latter.
new generation of professionals in the
As one Silicon Valley executive told the
science, technology, engineering and
author: “We need to hire the best and
mathematics (STEM) areas, beginning
brightest and run as fast as we can,
in primary and secondary schools
especially while we still lead the race”.
and then blossoming in the university
environment.
In terms of embracing new industrial
policies, the most oft-cited request
However, in the US, public funding
from today’s tech sector involves two
for the technology sector has been
areas: more general R&D funding and
steadily declining, particularly at
development of human capital —
universities, which are at the center
primarily through education.
of collaborative networks and are
increasingly the catalysts of innovation,
The author spoke with representatives
tech-startups and new jobs.123
from numerous semiconductor
companies in Silicon Valley and the
According to the OECD, the US has slid
emerging narrative, in general, is
to 28th out of 39 nations in government
that US businesses would embrace
funding for university research as
government funding for R&D,
a share of GDP, with the 12 leading
education and even more civil-military
governments investing more than
technology development projects,
double the US’s investment.124
provided that the money did not
65
However, in terms of overall R&D In the US, the Defense Advanced

To continue to be competitive, US spending on semiconductors, U.S Research Projects Agency (DARPA) has
universities would need a minimum of companies spent far more than any been increasing its focus and funding
$45 billion per year for public-private other country, at $32.7 billion in 2018, on semiconductors. In 2018, the US
research. followed by the EU ($13.9 billion) and Department of Defense announced
Taiwan ($9.9 billion).125 Therefore, its first chip innovation center, with
as industrial policy in the US and EU the aim of targeting more secure chip
reorients toward new milestones and design.126 Of particular interest to
public-private partnerships, human the US military is the development
capital development and other of trusted sources of 14 nm process
educational milestones should be technology and 2.5D chip packaging.127
achievable.
Another DARPA program, the
The Information Technology and Electronics Resurgence Initiative (ERI)
Innovation Foundation (ITIF), a US- was announced to the tune of $1.5
based foundation, estimates that US billion over 5 years, to explore among
universities should receive a minimum other things:
of $45 billion per year, to promote
public-private research. • Traceability of electronic
components from design to end-use
As Moore’s Law reaches its end, in a real supply chain
the need to achieve the next level • IC technologies that can enforce
of innovation in the semiconductor security and privacy protections
industry has reached an historic • Secure and leading-edge
milestone – one that could very infrastructure systems around
well catapult the next innovators emerging and new foundational
to an insurmountable lead over the technologies.
competition. Therefore, the entities
that can develop and leverage the Also under DARPA is the Joint
smartest people, at scale, will likely win University Micro-electronics Program
the race. (JUMP), which in 2018 committed to
semiconductor R&D in the following
This will require smart industrial policy areas:
that enhances innovation, but, at
the same time, does not create new • Materials & Integration
distortions in the market that ultimately • Architecture
harm key stakeholders. • Design.
Military Involvement in It is difficult to measure the true scale
Semiconductor Research of US defense R&D spending, as other
The scale of US and European
Military organizations will play an programs may not be made public. For
spending appears to be far less than
increasingly active role in public- publicly known programs, however,
what China has been spending on its
private partnerships and government the scale of US and European spending
civil-military fusion initiatives.
funded programs in the development appears to be far less than what China
of leading-edge technology for has been spending on its civil-military
semiconductors. fusion initiatives.128
66
SPOTLIGHT
The Galapagos
Syndrome
Techno-nationalism has risks.

Companies that dominate their
protected domestic market under
domestic standards may not be
capable of competing globally.
One of the risks of techno-nationalism continue to expand into Japan’s market

is that a ring-fenced, insulated market – as an invasive species, capable of
can put local firms at a competitive out-competing the vulnerable and un-
disadvantage on the world stage. adapted indigenous ecosystem.
Techno-nationalist policies can lead Techno-nationalist industrial policy

to the emergence of local companies must strike a balance between helping
that dominate the domestic market, the proverbial horse run faster, while
but because they evolve in isolation also avoiding short-sighted actions
from global industry (and operate on that lead to the horse falling over
different standards) they are unable to farther down the track. National
compete globally. This is known as the policies around R&D funding, human
Galapagos syndrome.129 capital development and defending
against unfair practices, therefore,
A classic example of the Galapagos must be balanced with intelligent
syndrome involves Japan’s NEC, trade facilitation efforts. As with
which for decades dominated Japan’s any government intervention, these
mobile phone market but ended up are significant challenges and prone
crashing out of the industry in 2013. to political and vested interest
Because the company had been manipulation.
wedded to local phone standards, it
lacked the scale to compete in bigger
international markets. At the same
time, foreign companies adopting
international standards such as
Google’s Android operating system
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8. The Decoupling of US-
China Semiconductor
Value Chains
In the semiconductor industry, the Co., which had to shut down chip
US export controls and other decoupling of certain US-China value production in March of 2019, as
restrictions have already damaged chains has become inevitable. Even its access to critical materials and
Chinese companies. But “de-coupling” if the two super-powers are able to technology were blocked.130
has far-reaching effects beyond just repair ongoing trade tensions and
Chinese and US companies. hammer out a series of “trade deals”, These same painful lessons were
there will be no turning back from the learned by China’s Hikvison, the
pervasive effects of techno-nationalist world’s largest manufacturer of facial
policies and the salient connection recognition and CCTV cameras, which
between semiconductors and national depends on US chip makers Intel and
security. Nvidia.131 And of course, Huawei has
become a microcosm of the greater
Given its heavy dependence on US decoupling narrative.
tech, China has no choice but to
double down on its efforts to “de- By definition, decoupling involves the
Americanize” its supply chains, which, divorcing or separation of previously
as was discussed earlier, will continue joined, embedded, intertwined value
to be a catalyst for the restructuring of chains. Although the name implies that
operations and supply chains by both just two primary parties are involved,
US and other foreign companies. many more entities and stakeholders
are affected in semiconductor
The placement of Huawei on the US ecosystem, including:
Commerce Department’s restricted list
marks a watershed in US-China bilateral • Primary and secondary suppliers up
relations and represents the beginning and down the value chain
of an increasingly fragmented and • Designated Individuals
uncertain trade landscape. • Companies
• Academic institutions and think
Non-tariff measures in the form tanks
of export controls and all-out • Government entities.
technology restrictions have already
done extensive damage to Chinese The recent addition of Huawei to the
companies, including state-owned US Restricted Entity List provides a
Fujian Jinhua Integrated Circuit window into this new reality.
68
8. THE DECOUPLING OF US-CHINA SEMICONDUCTOR VALUE CHAINS
The funding and staffing for programs

of academic institutions around the
world are now under intense scrutiny.
The Decoupling of Talent This scenario played out recently when

Shortly after being put on the US prosecutors indicted a University of
Restricted Entity List, Huawei laid off Kansas professor, Franklin Tao, on the
70 percent of its staff at its Silicon grounds that the Chinese academic
Valley-based R&D facility, Futurewei, failed to disclose his ties to Fuzhou
fearing theft of IP.132 According to the University in China, which funds
Nikkei Asian Review, Huawei has also research under various government
been redeploying its senior research civil-military fusion initiatives. China
scientists and executives with US already has the most academic
links for fear they may be co-opted institutions on the US Restricted
by American espionage agencies and Entities List.134
facilitate technology transfer.
Already, a number of the world’s
The deterioration in trust in US-China leading universities have elected to
relations has pervaded the entire stop receiving research funding from
Huawei value chain, affecting the entire China, including Oxford and Cambridge
industry and will be felt around the in the UK and MIT, Stanford and UC
world, as Chinese firms look for new Berkeley in the US.135
sources of talent.
This decoupling of human resources
Ren Zhengfei, the CEO of Huawei, from global value chains will present
held a press conference in September a challenge for the semiconductor
of 2019 and announced that Huawei industry. This also presents a paradox
would be looking towards Russia to for techno-nationalism, as the
find mathematicians and towards attempt to promote local champions
Europe to find scientists.133 will likely result in cutting them off
from international talent, especially
US academic institutions and research smaller companies and start-ups. At
organizations will feel the effects the very least, the world’s leading
of decoupling as they come under semiconductor companies will have
scrutiny for transferring, exporting to increasingly funnel resources into
or sharing controlled technology, localized R&D efforts in key markets
software and IP with restricted entities around the world.
— which includes individuals as well as
companies or governments.
69
De-Americanization of Value Chains historic allies in the EU, Taiwan, South

As trade tensions escalate, it is by Chinese Companies Korea and Japan. Ideally, this means
becoming evident how deeply As was discussed previously, Chinese figuring out how to engage the likes
American technology is embedded companies have committed to looking of ASML, TSMC, Samsung and others,
throughout global value chains and for alternative sources to American without putting them in a position
how far the long arm of US laws technology and aim to bring entire where they have to “choose sides”.
extends into the semiconductor value chains into closed, domestic
industry. loops within China. As trade tensions escalate, it is
becoming evident how deeply
As the Huawei case demonstrates, American technology is embedded
American and other foreign firms are throughout global value chains and
deeply imbedded in these supply how far the long arm of US laws
chains and are suffering collateral extends into the semiconductor
damage from export controls and industry, even when Chinese
restrictions on Chinese companies. companies purchase finished product
As such, US and other international from other foreign firms such as TSMC.
entities are actively looking for the
legal means to circumvent these The European Union and China
controls, including moving operations In 2019, the European Commission
out of the US and changing the source published a policy paper calling
and percentage of inputs to defeat de China a “systemic rival”. Beyond this,
minimis value thresholds. the EU has been promoting a more
robust trans-Atlantic alliance with
But the risks of facing more draconian the US and Canada to counter China’s
US extraterritorial laws, including those technological ambitions and growing
that fall under the Office of Foreign influence at international standards
Assets Control (OFAC) – especially as organizations, as described earlier.
the US dollar remains the predominant
international currency – means that If the Sino-US Tech war is polarizing the
even a simple financial transaction with global landscape, then the EU is tilting
a restricted entity could be prohibited, decidedly towards the US, despite
thereby killing the business relationship having to endure historically low levels
entirely. of trust with the Trump Government.
As such, Huawei and other Chinese The window appears be closing

tech companies are looking to for Chinese state-backed strategic
decouple entirely (or bide their time acquisitions of European tech
until it is possible) from US-influenced companies, as evidenced by the
supply chains. To do this, Chinese firms rejection of both the Aixtron
must form alliances with non-American attempted acquisition by Fujian Grand
technology companies. Chip Investment Group and the more
recent blocking of the acquisition of
For this strategy to succeed, however, Germany’s Leifeld Metal Spinning AG
the Chinese technology establishment by another China state-backed entity,
will need to differentiate US techno- the Yantai Taihai Group.
national interests from those of its
70
EU member countries have been This runs contrary to a general trend

The shift in EU-China relations has willing to voluntarily enforce export for Japanese companies relocating
seen EU members states voluntarily controls as members of the Wassenaar their assembly and manufacturing
enforcing export controls. Arrangement.136 One key indicator operations out of China: according to
involves the withholding of an export the Nikkei Asian Review, one quarter
license by the Dutch authorities for of Japanese companies in China are
the sale of state-of-the-art ultraviolet reducing their footprint, and more than
lithography equipment made by half of these companies believe that
ASML, to China’s Semiconductor US-China tensions will last for at least
Manufacturing Int’l Corp (SMIC). 10 years.137
Without this sophisticated technology
from ASML, SMIC’s efforts to produce The Japanese semiconductor industry
high quality commercial quantities of will, however, also remain attractive to
chips will continue to be hampered. Chinese and other firms as a source of
talent, as was evidenced by ex-Elpida
All of these developments reflect a CEO and Japanese semiconductor
broader shift in relations between the heavyweight, Yukio Sakamoto, being
EU and China. The days of check-book recruited by Tsinghua Unigroup, one of
diplomacy — where large delegations China’s leading chipmakers.138
of Chinese party members and state-
owned enterprise representatives Japan and China’s uneasy history,
toured Europe on well-publicized however, will continue to hang over
company visits – are over. the bilateral relationship, creating
opportunities for Washington – still a
Japan in the Semiconductor strong and vital ally of Tokyo – to exert
Landscape its will when it comes to enforcing
export controls and restrictions on the
Japanese semiconductor companies
transfer of American technology to
have remained, for the most part,
Chinese firms. In an extreme scenario,
hyper-specialized in the R&D and
this could involve putting pressure on
materials niches within global
the Japanese government to halt sales
value chains. In general, Japanese
of Japanese technology to Chinese
semiconductor companies have
companies on the US’s Restricted Entity
focused on Japan’s domestic market
List.
and have been active mostly within
the value chains of Japanese Keiretsu
Thus, as Beijing looks to de-Americanize
structures.
its semiconductor global value chains,
it will find Japanese entities to be
As such, Japanese companies have not
less than ideal partners. At the time
Japanese companies are reducing their scaled out internationally in ways that,
of this publication, Japan had already
footprint in China. It is foreseeable the for example, American companies have.
blocked Huawei 5G technology from its
US will pressure Japan to halt sales The growth of China’s semiconductor
domestic wireless networks.
to Chinese companies on the US’s sector has shifted attention to
restricted Entity list. Japanese expertise in specialized
materials, with the likes of Huawei,
SMIC and other Chinese firms looking
to build stronger ties with Japanese
companies.
71
South Korea In 2019, American export controls

Samsung benefited from the US’s For Samsung and SK Hynix, two of were timely for Samsung, as it had just
ban on Huawei, but realizes it has to South Korea’s largest chip makers, closed it last smart phone factory in
diversify away from its dependence China accounted for a substantial China due to declining sales and fierce
on China. portion the company’s sales in 2018: competition from local brands such
38 percent of Samsung’s and 41 as Vivo, Xiaomi and Oppo.140 Thus, the
percent of SK Hynix’s. This makes sales boost from Huawei’s dilemma was
China a vital market for South Korean welcomed.
companies and gives Beijing some
leverage in bilateral discussions. The However, the US-China tech war also
scale of China’s market will continue sparked forward-looking strategy
to be a strong attraction and desired at Samsung to not only reduce its
destination. dependency on the Chinese market,
but also to position the company
As US export restrictions were placed internationally, across a broad
on some $12 billion worth of chips swathe of 5G markets. As such,
from American companies, Samsung Samsung entered into an alliance with
increased its sales of chips to Huawei Qualcomm, the American chipmaker
and other Chinese firms. and wireless telecommunications
company.
72
Qualcomm-Samsung 5G Axis number of Samsung devices,

The Qualcomm-Samsung Axis alliance In the context of the US-China tech including mid- and low-priced
will promote 5G interoperability, rivalry, this Qualcomm-Samsung Axis models, which will appeal to
avoiding single player dominance. alliance is important for a variety of customers in both emerging and
reasons: developed markets.
• Qualcomm’s chips are also designed

• The alliance was announced at the to operate across a full spectrum of
time that Huawei was struggling 5G frequencies, which encourages
with a pending ban (currently connectivity with a broad range of
delayed) on its use of Google’s different devices, made by different
Android operating system for manufacturers, once again making it
Huawei smart phones, thus less likely that one dominant player
positioning Samsung and other will control the technology for an
international brands not only to end-to-end 5G value chain.
win market share but to influence
standards, in the future.
• Qualcomm’s chips have been

designed for a large, diverse 5G
ecosystem that will work on a
73
SPOTLIGHT
Taiwan: A Strategic
Semiconductor Hotbed
Taiwan is a global hotbed of semiconductor innovation and production. It is

TSMC may be caught in the crossfire strategically important to both China and the US on a number of levels, all of them
as a leading innovator and critical fraught with geopolitical consequences.
supplier to both US and Chinese
companies.
Source: Chien-Ying Chiu
TSMC been detailed, and will continue to

Taiwan is home to Taiwan create demand for TSMC and Taiwan’s
Semiconductor Manufacturing other semiconductor companies, such
Company (TSMC), the world’s largest as United Microelectronics Corporation
semiconductor foundry, which (UMC).
produces more made-to-order chips
than other company. In 2018, TSMC However, as TSMC, UMC and other
manufactured 10,436 different products Taiwanese firms increase their dealings
using 261 distinct technologies for 481 with Chinese buyers, they find
different customers.141 themselves caught in the middle of
the US-China tech war. For example,
In addition to being the world’s largest as sales to China increase, the Chinese
pure-play foundry, TSMC is also a government is pressing TSMC to move
leading innovator: it has crossed the key manufacturing operations from
7 nm threshold for microchips and Taiwan to China – something which
is producing them in commercial could incite countermeasures from the
quantities, most notably for Huawei’s US, which will be discussed, below.
wholly owned subsidiary, HiSilicon.
Simultaneously, proponents of the US
China’s Growing Market Demand techno-nationalist view are keen for
Huawei accounted for 11 percent of TSMC to stop providing leading edge
TSMC’s total sales in 2018. China’s technology to Huawei. This rationale is
microchip market is growing, as has based on the following assumptions:
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SPOTLIGHT: TAIWAN: A STRATEGIC SEMICONDUCTOR HOTBED
1) Cutting off sales to Huawei operations locally — even as China is

Both the US and Chinese government would slow down the transfer of also urging TSMC and UMC to move
have asked TSMC to move its technology and flow of human high-end operations into China.
operations to their jurisdictions. capital and resources to state-
backed Chinese entities. Taiwan and US Export Controls
Currently, from a US export controls
2) A significant scaling back of perspective, Taiwan is a “Group B”
commercial ties would mitigate the country. As such, in the semiconductor
risks of Chinese actors infiltrating space, most non-military items on the
TSMC’s manufacturing operations Commerce Control List are permitted
in Taiwan, which supply virtually to be exported to Taiwan under a
all of the major US semiconductor license exception. This has been very
companies and a large number of good for TSMC and its customers,
original equipment manufacturers. everywhere.
Therefore, severing ties with Huawei, The license exception has been
according to its proponents, would especially beneficial to TSMC
reduce the risks of espionage and the regarding the import of semiconductor
embedding of malicious technology in manufacturing equipment from
US-bound integrated circuits. Applied Materials and Lam Research,
both American companies, on which
US Leverage Over TSMC it relies for this critical technology
US pressure on TSMC is likely to – along with highly sophisticated
increase, however, as more than 60 inspection equipment.
percent of its revenue still comes
from American companies such as Similarly, for much of its business,
Apple, Qualcomm, Broadcom, and TSMC receives chip designs from its US
Nvidia — all of which are buying the customers and some of those designs
Taiwanese company’s most advanced are also on the Commerce Control List,
microchips.142 but enjoy export license exemptions.
For decades, US firms have considered What would happen, however, if

Taiwan to be an IP safe-haven, a place the US government were to remove
to keep operations and technologies Taiwan’s “Group B” designation
safely out of the reach of Chinese and deny export licenses for these
state-backed actors. This perception components?
is now changing, as Huawei and other
Chinese firms pursue deeper ties with Apart from constituting a major policy
Taiwanese firms. change in US-Taiwan relations, there
would be immediate consequences.
Consequently, TSMC is being asked In the short term, TSMC’s ability
by the US government to move key to produce and sell its microchips
manufacturing activities to the US, to Huawei, for example, could be
in an attempt to ring-fence these substantially impaired.
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SPOTLIGHT: TAIWAN: A STRATEGIC SEMICONDUCTOR HOTBED
There would also be collateral damage. Communist China), the US Congress

Although not openly discussed, US American fabless semiconductor passed the Taiwan Relations Act143,
national security experts have drawn companies, for example, that have a document that was intentionally
up scenarios that include China’s relied on TSMC for the supply of ambiguous but allowed the US to
acquisition of all of Taiwan’s local finished wafers, would lose a vital provide Taiwan with “military arms of
semiconductor assets, through “forced supplier. This, in turn, would send shock a defensive character”. This recently
unification”. A scenario of this sort waves rippling throughout entire global played out in the sale of $8 billion
would represent the most extreme value chains and industries, disrupting worth of military technology, including
outcome of a techno-nationalist business for suppliers, service providers F-16 jets and advanced radar systems,
policy. and original equipment manufacturers. in 2019.144
Given the negative consequences of Although not openly discussed, US

such actions, removing Taiwan from national security experts have drawn
Group B status would most likely be a up scenarios that include China’s
decision to be avoided by the US, or acquisition of all of Taiwan’s local
only undertaken in unusual or extreme semiconductor assets, through “forced
circumstances. unification”. A scenario of this sort
would represent the most extreme
Instead, US policy makers will likely outcome of a techno-nationalist policy.
be tempted to increase pressure on
Taiwan’s political apparatus to restrict As such, the US-Taiwan special
sales to Huawei. relationship makes matters even more
complicated when it comes to Taiwan’s
US-Taiwan History and Military Ties semiconductor companies, given the
The US has maintained strong relations precarious balancing act that all parties
with Taiwan since 1979. At the same must maintain to avoid decidedly bad
time as US President Jimmy Carter outcomes.
unilaterally severed diplomatic relations
with the island and formally recognized
the People’s Republic of China (i.e.
HINRICH
HINRICH
FOUNDATION
FOUNDATION
REPORT
REPORT
– SEMICONDUCTORS
- SEMICONDUCTORS
AT THEAND
HEART
THEOF
US-CHINA
THE US-CHINA
TECH WAR
TECH WAR
Copyright
Copyright
(c)©by
byAlex
AlexCapri
Capri and Hinrich
HinrichFoundation.
Foundation.All
AllRights
Rights
Reserved.
Reserved.
76
Conclusion
The US-China tech war has led to a trade landscape

that is increasingly impacted by techno-nationalism.
After decades of globalization, this emergent state-
centric model is fundamentally changing value chains in
the semiconductor industry — and beyond.
After assessing the evolution of the the “de-Americanization” of supply

How can semiconductor value chains global semiconductor industry, this chains.
continue to benefit from access to report has explored the extent to
China’s market, while simultaneously which China’s ongoing government Finally, the report examined geopolitics
mitigating the escalating risks intervention in the semiconductor and possible US-China decoupling
associated with techno-nationalism? space has been countered by US scenarios where other strategic
policies such as export controls, semiconductor economies such as the
technology controls and other non- EU, Japan, South Korea and Taiwan
tariff measures. were involved.
The report posed questions about the The China Conundrum

ascendance of techno-nationalism’s
China’s market and trade opportunities
industrial policies – specifically whether
remain hugely attractive to foreign
the US, the EU and others would adopt
multinational companies. China and
their own industrial policies similar to
the US have systemic differences, but
those embraced by China, and what
after decades of cross-border flows of
those new policies might look like.
products, investment, ideas and human
The report then examined the
capital, the countries have become
fragmentation, restructuring and
unwitting strategic partners.
decoupling of global value chains,
and how these trends are impacting
This produces a conundrum for the
the world’s far-flung, highly complex
semiconductor industry. Specifically,
semiconductor global value chains – as
how can semiconductor value chains
well as how companies are deploying
continue to benefit from access to
new risk mitigation strategies.
China’s market, while simultaneously
mitigating the escalating risks
American and foreign firms are
associated with techno-nationalism?
grappling with the collateral damage
Going forward, for the US, EU and
created by US technology controls
others, determining the right balance
and they are looking to minimize that
between techno-nationalist objectives
damage. The report explored the legal
and an environment that allows a small
ways to circumvent export controls,
group of powerful non-state actors to
including the seeking of licensing
remain profitable and independent will
waivers from the US government and
77
CONCLUSION
be a contentious topic – perhaps even the automotive sector.

In-China-For-China ring-fencing more so in an era of rising populism Meanwhile, the lessons of Siemens and
strategies will be expensive, because and nationalism, where the technology Alstom, the high-speed rail companies
they cannot fully capitalize on global industry is increasingly viewed (at least that freely signed away their most
innovations and economies of scale. in the West) as elitist and detached precious IP for market access in China,
from main street. will not soon be forgotten. Doing
business in China is always going to be
Despite the fact that techno- a Faustian bargain.
nationalist policies can end up hurting
the very entities they aim to protect, An “In-China-For-China” strategy,
semiconductor companies will learn to therefore, will be expensive, as it
deal with the challenges of the China cannot capitalize on global economies
conundrum. of scale while local operations have
to be ring-fenced. There is also the
Under the uncertainties of techno- possibility that techno-nationalism will
nationalism, living dangerously will lead to various “Galapagos Syndromes”
become the new normal for US and in a world where global value chains
foreign semiconductor companies have fragmented and regionalized.
– and all tech-related businesses in Different technical standards may
general. emerge for different markets.
Looking for ways to legally circumvent This outcome certainly diminishes

export controls will become an the benefits of a fully connected and
accepted way of doing business. In collaborative global commons, where
general, foreign firms that continue to semiconductor companies can operate
do business in China must accept the with fully rationalized global value
risks involved. chains, and will affect both US and
Chinese firms.
The Ring-fencing Strategy
All of these issues represent a new
The world’s leading semiconductor
techno-nationalist reality. The US-China
companies have managed to stay
tech war will influence semiconductor
ahead in the race and keep their most
global value chains, and the global
valuable IP and technology safely
technology sector in general, for many
ring-fenced and out of the reach of
years to come.
malevolent actors. This approach
has worked so far, not only for the
semiconductor industry, but also for
78
Appendix A
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China’s Industrial Policies Work. So
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capital#section-overview Rulemaking to Change the RFS Point with Chinese Investments and
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notice-of-opportunity-to-comment- chinese-investments-and-acquisitions-
on-proposed-denial-of-petitions-for- in-the-united-states
rulemaking-to-change-the-rfs
80
APPENDIX A
Gsmarena. (2019). Samsung closes its KPMG. (2019). Global Semiconductor Nikkei Asian Review. Cheng Ting-Fang
last smartphone factory in China. Industry Outlook 2019. and Lauly Li. (2019). Sources: Fearing
https://www.gsmarena.com/samsung_ https://assets.kpmg/content/dam/ spies, Huawei redeploys US-linked
closes_its_last_smartphone_factory_ kpmg/tw/pdf/2019/04/tw-kpmg- executives.
in_china-news-39442.php semiconductor-report-2019.pdf https://asia.nikkei.com/Spotlight/
Holland Innovation Network China. Huawei-crackdown/Sources-Fearing-
Bart van Hezewijk. Los Angeles Times. Don Lee. (2019). spies-Huawei-redeploys-US-linked-
IC Insights. Electronic Design Major US research universities are executives
IC Insights. (2018). Company Filing cutting ties with Chinese telecom
IC Insights. (2018). Nine Top-15 2018 giant Huawei. Nikkei Asian Review. Rei Nakafuji.
Semi Suppliers Forecast to Post https://www.latimes.com/business/ (2019). Quarter of Japanese
Double-Digit Gains. la-na-pol-universities-ban-huawei- companies ready to reduce China
http://www.icinsights.com/ funding-donations-20190321-story.html footprint.
news/bulletins/Nine-Top15-2018- https://asia.nikkei.com/Economy/
Semi-Suppliers-Forecast-To-Post- Market Realist. Puja Tayal. (2019). Trade-war/Quarter-of-Japanese-
DoubleDigit-Gains-/ China Accelerates Its Semiconductor companies-ready-to-reduce-China-
Self-Sufficiency Efforts. footprint
Industry and Security Bureau. (2018). https://marketrealist.com/2019/06/
Review of Controls for Certain china-accelerates-its-semiconductor- Nikkei Asian Review. Shunsuke
Emerging Technologies. self-sufficiency-efforts/ Tabeta. (2019). Japan chip industry
https://www.federalregister.gov/ heavyweight joins China’s Unigroup.
documents/2018/11/19/2018-25221/ Ned Davies Research. (2018). https://asia.nikkei.com/Business/
review-of-controls-for-certain- Nikkei Asian Review. Shumei Yamada. Electronics/Japan-chip-industry-
emerging-technologies (2019). Huawei closes technology gap heavyweight-joins-China-s-Unigroup
with Apple on chip design. OEC. (2019). World profile China.
Information Technology & Innovation https://asia.nikkei.com/Business/China- https://oec.world/en/profile/country/
Foundation. Robert D. Atkinson and tech/Huawei-closes-technology-gap- chn/
Caleb Foote. (2019). US Funding for with-Apple-on-chip-design
University Research Continues to OECD. (2019-12-12). Measuring
Slide. Nikkei Asian Review. Shunsuke distortions in international markets:
https://itif.org/publications/2019/10/21/ Tabeta. (2018). Chinese companies The semiconductor value chain. OECD
us-funding-university-research- rush to make own ships as trade war Trade Policy Papers, No. 234.
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James A. Lewis. (2019). Learning tech/Chinese-companies-rush-to- OECD, FDI Regulatory Restrictiveness
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Barbarians, China’s Pursuit of Office of Foreign Assets Control.
Semiconductor Independence. Nikkei Asian Review. Cheng Ting-Fang Sanctions List Search.
https://www.csis.org/analysis/chinas- and Lauly Li. (2019). China memory https://sanctionssearch.ofac.treas.gov/
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SMIC_due_to_us_pressure_ASML_ companies-cfius-572413
response_of_photolithography_giant.
html
81
APPENDIX A
Quora. SIA. (2019). Trade Poster. Stella Chemifa. (2019). Financial

https://www.quora.com/Huawei- https://www.semiconductors.org/wp- Results for 2Q of FYE 3/2019.
assigns-10-000-engineers-to-work- content/uploads/2018/10/SIA-Trade- https://www.stella-chemifa.co.jp/files/
across-3-shifts-a-day-in-order-to- Poster-2019-Update-WEB.pdf IG_English_20181206.pdf
minimize-impact-from-US-restrictions-
It-makes-sense-they-can-write-more- SIA. (2019). WINNING THE FUTURE. A Stratfor. (2019). As the US-China
-lines-of-SW-code-but-how-do-they- Blueprint for Sustained US Leadership Tech war Rages on, the Electronics
get-around-a-lack-of-critical in Semiconductor Technology. Industry Braces for Impact
https://www.semiconductors.org/wp- https://worldview.stratfor.com/article/
Reuters. (2018). Pompeo says China content/uploads/2019/04/FINAL-SIA- us-china-tech-war-rages-electronics-
trade policies ‘predatory’. Blueprint-for-web.pdf industry-braces-impact
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Alper. (2019). US chipmakers quietly news/2019/10/22/trump-targets- world/asia/taiwan-f16.html
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SIA. (2019). GSR table. braces-profit-drop-china-slowdown-
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content/uploads/2019/07/May-2019- Review Commission. Sean O’Connor.
GSR-table-and-graph-for-press-release. South China Morning Post. Jodi Xu (2019). How Chinese Companies
pdf Klein. (2018). US lawmakers agree to Facilitate Technology Transfer from
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SIA. (2019). Factbook. Donald Trump. https://www.uscc.gov/research/
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content/uploads/2019/05/2019-SIA- china/economy/article/2156712/us- technology-transfer-united-states
Factbook-FINAL.pdf lawmakers-reach-deal-scale-back-zte-
ban
82
APPENDIX A
US Department of Commerce. (2019). Wall Street Journal. Kate O’Keeffe and

Commerce Control List (CCL). Jeremy Page. (2019). China Taps Its
https://www.bis.doc.gov/index.php/ Private Sector to Boost Its Military,
regulations/commerce-control-list-ccl Raising Alarms.
https://www.wsj.com/articles/china-
US Department of Commerce. (2016). taps-its-private-sector-to-boost-its-
Top Markets Report Semiconductors military-raising-alarms-11569403806
and Semiconductor Manufacturing
Equipment Country Case Study. Wassenaar. (2019). Website.
https://www.trade.gov/topmarkets/ https://www.wassenaar.org/
pdf/Semiconductors_China.pdf
Wikipedia. Belt and Road Initiative.
US Department of the Treasury. https://en.wikipedia.org/wiki/Belt_
(2018). Title XVII—Review of Foreign and_Road_Initiative
Investment and Export Controls.
https://home.treasury.gov/ Wikipedia. Taiwan Relations Act.
sites/default/files/2018-08/The- https://en.wikipedia.org/wiki/Taiwan_
Foreign-Investment-Risk-Review- Relations_Act
Modernization-Act-of-2018-FIRRMA_0.
pdf WSTS. (2019). WSTS Semiconductor
Market Forecast Spring 2019.
US International Trade Commission https://www.wsts.org/76/103/WSTS-
Journal of International Commerce Semiconductor-Market-Forecast-
and Economics. John VerWey. (2019). Spring-2019
Chinese Semiconductor Industrial
Policy: Past and Present.
https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=3441951
US News. (2019). Originally from

Associated Press. Huawei Giving
Employees Bonus for Coping with US
Sanctions.
https://www.usnews.com/news/
business/articles/2019-11-12/huawei-
giving-employees-bonus-for-coping-
with-us-sanctions
US Trade Representative. (2018).

Findings of the Investigation into
China’s Acts, Policies, and Practices
Related to Technology Transfer,
Intellectual Property, and Innovation
Under Section 301 of the Trade Act of
1974.
https://ustr.gov/sites/default/files/
Section%20301%20FINAL.PDF
83
Researcher Bio:
Alex Capri
Alex Capri is a Senior Fellow and Alex has been a panelist and workshop
lecturer in the Business School at the leader for the World Economic Forum.
National University of Singapore. He He writes a column for Forbes Asia,
also teaches at the NUS Lee Kuan Yew the Nikkei Asian Review and other
School of Public Policy. publications and is a frequent guest on
global television and radio networks.
From 2007-2012, Alex was the Partner He holds a M.Sc. from the London
and Regional Leader of KPMG’s School of Economics, in International
International Trade & Customs Practice Political Economy. He holds a B.Sc.
in Asia Pacific, based in Hong Kong. in International Relations, from the
Alex has over 20 years of experience University of Southern California.
in global value chains, business
and international trade - both as an
academic and a professional consultant.
He has advised clients on cross-border

projects in more than 40 countries and
he has worked in some of the most
challenging regulatory environments in
the world.
He advises governments and

businesses on matters involving
“upskilling” and developing human
capital. Some areas of focus include Alex Capri
mobile financial services, peer-to-peer
Visiting Senior Fellow,
lending scenarios, AI and e-commerce
The NUS Business School
strategies.
84
Footnotes
1
SIA. (2019). GSR table.
2
OEC. (2019). World profile China.
3
Adapted from WSTS. (2019). WSTS Semiconductor Market Forecast Spring 2019.
4
Adapted from OEC. (2019). World Profile China.
5
Congressional Research Service. (2019). The Made in China 2025 Initiative: Economic
Implications for the United States.
6
ABC net. (2018). Made in China 2025: Beijing’s manufacturing blueprint and why the world
is concerned.
7
Technode. (2019). China’s ‘Big Fund’ raises RMB 200 billion to fuel chip industry.
8
Crunchbase. (2019). Tsinghua Holdings Capital.
9
Covington. (2019). Export Control Reform Act Is Finalized in Congress.
10
Industry and Security Bureau. (2018). Review of Controls for Certain Emerging Technologies.
11
US Department of Commerce. (2019). Commerce Control List (CCL).
12
Wassenaar. (2019). Website.
13
US Department of the Treasury. (2018). Title XVII—Review of Foreign Investment and
Export Controls.
14
Author’s compilation: “Semiconductors: at the Core of all Future Industries”
15
US International Trade Commission Journal of International Commerce and Economics.
(2019). Chinese Semi conductor Industrial Policy: Past and Present.
16
(2019). Chinese Semi conductor Industrial Policy: Past and Present.
17
(2019). Chinese Semi conductor Industrial Policy: Past and Present
18
Adapted from SIA. (2018). Beyond Borders.
19
20
Named after Gordon Moore – an engineer who co-founded Intel – who, in 1965, predicted
that the capacity of an integrated chip would double approximately every two years
while costs stayed the same or, decreased. This theory has held true for almost fifty years,
but now, as the state-of-the art ICs reach 7-5 Nanometers, the theory appears to have
reached its end.
21
Copyright by Stratfor. (2019). As the US-China Tech war (880) Rages on, the Electronics
Industry Braces for Impact
22
SIA. (2016). Beyond Borders.
23
US Census, NAIS Related Party Database, 2017
24
Adapted from SIA. (2019). Trade Poster.
25
26
Copyright by Stratfor. (2019). As the US-China Tech war (880) Rages on, the Electronics
Industry Braces for Impact
27
Adapted from SIA. (2019). Factbook.
28
Amsden and Chu. (2013) Beyond Late Development. Taiwan’s Upgrading Policies.
29
SIA. (2018). Factbook.
30
Adopted from IC Insights. (2018). Nine Top-15 2018 Semi Suppliers Forecast to Post Double-
Digit Gains.
31
Author’s compilation, Adopted from SIA, Factbook, (2019).
32
SIA. (2019). GSR table.
85
FOOTNOTES
33
South China Morning Post. Li Tao. (2018). How China’s ‘Big Fund’ is helping the country
catch up in the global semiconductor race. & US International Trade Commission Journal
of International Commerce and Economics. John VerWey. (2019). Chinese Semiconductor
Industrial Policy: Past and Present.
34
US Department of Commerce. (2016). Top Markets Report Semiconductors and
Semiconductor Manufacturing Equipment Country Case Study, page 2
35
Market Realist. Puja Tayal. (2019). China Accelerates Its Semiconductor Self-Sufficiency
Efforts.
36
Stratfor. (2019). As the US-China Tech war Rages on, the Electronics Industry Braces for
Impact
37
CKGSB Knowledge. (2018). Betting All the Chips: China Seeks to Build a World-Class
Semiconductor Industry.
38
IC Insights, Electronic Design
39
PWC, China’s Impact on the Semiconductor Industry: 2016 Update, P.20
40
Nikkei Asian Review. Shumei Yamada. (2019). Huawei closes technology gap with Apple on
chip design.
41
Nikkei Asian Review. Shumei Yamada. (2019). Huawei closes technology gap with Apple on
chip design.
42
Techspot, October 21, 2019, “TSMC will up Capital Expenditure by $4B to Meet Raising
Demand for 7 nm and 5 nm chips
43
Semiconductor Engineering, Mark Lapedus, “China’s Foundry Biz Takes a Big Leap Forward”,
January 28, 2019, P 1
44
However, no timeline has been provided.
45
https://semiengineering.com/chinas-foundry-biz-takes-big leap/ Page 5 * this project is
currently on hold.
46
https://semiengineering.com/chinas-foundry-biz-takes-big leap/ Page 5
47
http://www.taipeitimes.com/News/biz/archives/2018/08/21/2003698874
48
https://semiengineering.com/chinas-foundry-biz-takes-big leap/
49
Company Filing, IC Insights (2018), https://asia.nikkei.com/Business/China-tech/
Chinese-companies-rush-to-make-own-chips-as-trade-war-bites
50
Asia Watch. (2019). Chinese memory chip production reaches 5% of world total.
51
Electronics Weekly. David Manners. (2019). China to run 4% of world’s memory wafers in
2020.
52
Nikkei Asian Review. Cheng Ting-Fang and Lauly Li. (2019). China memory chip output
zooms from zero to 5% of world total.
53
Stella Chemifa. (2019). Financial Results for 2Q of FYE 3/2019.
54
OECD (2019 12-12), Measuring distortions in international markets: The Semiconductor
Value Chain, OECD Trade Policy Papers, No. 234
55
US Chamber of Commerce. (2017). Made in China 2025: Global Ambitions Built on Local
Protections.
56
ABC net. (2018). Made in China 2025: Beijing’s Manufacturing Blueprint and Why the World
is Concerned.
57
Chart, McKinsey analysis, 2018
58
https://en.wikipedia.org/wiki/Belt_and_Road_Initiative
59
McKinsey Analysis, 2018
60
Technode. (2019). China’s ‘Big Fund’ raises RMB 200 billion to fuel chip industry.
61
US International Trade Commission, Journal of International Commerce and Economics,
Verwey, ohn, July 2019, 13
62
SIA,org, 2019
63
Crunchbase. (2019). Tsinghua Holdings Capital.
64
OECD, FDI Regulatory Restrictiveness Index, May 16, 2018
86
FOOTNOTES
65
US Trade Representative. (2018). Findings of the Investigation into China’s Acts, Policies,
and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under
Section 301 of the Trade Act of 1974.
66
US-China Economic and Security Review Commission. Sean O’Connor. (2019). How Chinese
Companies Facilitate Technology Transfer from the United States.
67
US-China Economic and Security Review Commission. Sean O’Connor. (2019). How Chinese
Companies Facilitate Technology Transfer from the United States.
68
Enright, Michael. (2019). Developing China: The Remarkable Impact of Foreign Direct
Investment, Page 33.
69
John VerWey. (2019). Chinese Semiconductor Industrial Policy: Past and Present.
70
Source: Bart van Hezewijk, Holland Innovation Network China
71
Ned Davies Research, 2018
72
Business Insider. Lisa Eadicicco. (2019). A California-based chip company just took a $2
billion hit following Trump’s Huawei ban.
73
Ned Davies Research, 2018
74
75
US Trade Representative. (2018). Findings of the Investigation into China’s Acts, Policies,
and Practices Re lated to Technology Transfer, Intellectual Property, and Innovation Under
Section 301 of the Trade Act of 1974.
76
POLITICO. Cory Bennet and Bryan Bender. (2018). How China acquires ‘the crown jewels’ of
US technology.
77
US technology.
78
US technology.
79
Reuters, “Pompeo Says China’s Trade Policies Predatory”, June 19, 2018
80
Covington. (2019). Export Control Reform Act Is Finalized in Congress.
81
Industry and Security Bureau. (2018). Review of Controls for Certain Emerging
Technologies.
82
US Department of Commerce. (2019). Commerce Control List (CCL).
83
Author’s compilation, 2019
84
Forbes. Alex Capri. (2018). How A Growing US-China Rivalry is Reshaping the Global Tech
Landscape.
85
Wassenaar. (2019). Website. 
86
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photolithography giant.
87
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Landscape, Dec. 9, 2018
88
Author’s diagram
89
Author’s compilation, From BIS Designated Entity Lists.
90
US Department of the Treasury. (2018). Title XVII—Review of Foreign Investment and
Export Controls.
91
Committee on Foreign Investment in the United States. (2019). Annual report to the
Congress.
92
Congressional Research Service. (2019). The Committee on Foreign Investment in the
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93
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Investments and Acquisitions in the US.
94
Reuters, Trump Bars Chinese -backed Firm from Buying US Chip Maker, September 13, 2017
87
FOOTNOTES
95
Congressional Research Service. (2019). The Committee on Foreign Investment in the
United States (CFIUS).
96
Bloomberg. Jonathan Stearns. (2018). EU Screening of Foreign Investment Approved by
Negotiators.
97
Negotiators.
98
Negotiators.
99
Note that the application of arbitrary discounts or non-arm’s length pricing in the
calculation would be unacceptable and would risk violating the de minimis principle.
100
Cybereason. Fred O’Conner. (2018). China increases attacks against US companies as trade
war looms.
101
Reuters. Stephen Nellis, Alexandra Alper. (2019). US chipmakers quietly lobby to ease
Huawei ban.
102
South China Morning Post. Jodi Xu Klein. (2018). US lawmakers agree to pull back from ZTE
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103
Federal Register. (2016). Notice of Opportunity to Comment on Proposed Denial of
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104
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105
Office of Foreign Assets Control. Sanctions List Search.
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107
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108
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109
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110
Bloomberg. David Fickling. (2019). Alstom and Siemens Show How Not to Deal with China.
111
112
Mays, Rapid Advance, 2013, Cited from VerWey, July 2019, above.
113
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114
115
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116
Council on Foreign Relations. Adam Segal. (2019). Keeping Our Edge. Overview of the
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117
Quora, https://www.quora.com/Huawei-assigns-10-000-engineers-to-work-across-3-
shifts-a-day-in-order-to-minimize-impact-from-US-restrictions-It-makes-sense-they-can-
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118
US News. (2019). Originally from Associated Press. Huawei Giving Employees Bonus for
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119
Information Technology & Innovation Foundation. Robert D. Atkinson and Caleb Foote.
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120
Information Technology & Innovation Foundation. Robert D. Atkinson and Caleb Foote.
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121
SIA,org, 2019
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EETimes. Rick Merritt. (2018). Moore’s Law, China vs. Team USA.
123
EETimes. Rick Merritt. (2018). Moore’s Law, China vs. Team USA.
124
Wall Street Journal. Kate O’Keeffe and Jeremy Page. (2019). China Taps Its Private Sector to
Boost Its Military, Raising Alarms.
125
Semiconductor Industry Association. (2016). Beyond Borders: The Global Semiconductor
Value Chain – How an Interconnected Industry Promotes Innovation and Growth.
126
Financial Times. (2019). Trade war forces Chinese chipmaker Fujian Jinhua to halt output.
88
FOOTNOTES
127
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128
Nikkei Asian Review. Cheng Ting-Fang and Lauly Li. (2019). Sources: Fearing spies, Huawei
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129
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redeploys US-linked executives.
130
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131
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Chinese telecom giant Huawei.
132
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133
Nikkei Asian Review. Rei Nakafuji. (2019). Quarter of Japanese companies ready to reduce
China footprint.
134
Nikkei Asian Review. Shunsuke Tabeta. (2019). Japan chip industry heavyweight joins
China’s Unigroup.
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89
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JANUARY 2020

Semiconductors at the Heart

2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS 20

5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS 39

Wassenaar and the International Application of Export Controls 41

6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS 49

7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES 58

8. THE DECOUPLING OF US-CHINA VALUE CHAINS 68

The Hinrich Foundation focuses on Merle Hinrich

This includes a focus on China’s

At stake is supremacy in the industries As will be revealed in this study, China

Graph I – Global Semiconductor Sales Revenue from 1987 to 2020

Source: WSTS (2019) Sales revenue (in billion U.S. dollars)

its dependence on foreign producers.

The US has passed a slew of laws

U.S. Counter-Measures propose that the ECRA’s newly added

As the US-China tech war escalates, Key Sections of the Report

• Is US-China decoupling for This is followed by an examination of

trade flows. Finally, the report concludes by looking

Graph III: Semiconductors: At the Core of all Future Industries14

Artificial Quantum Wireless Internet of

VR/AR Medical devices

Laptops and computers Planes

Power equipment Military devices

Additive Autonomous Smart Storage and

The fabrication of a state-of-the Only a small number of multinational

What are Semiconductors? Integrated circuits are the most

How are Semiconductors can be managed. There are four basic

Graph IV – The Semiconductor Ecosystem18

Intelectual Property Raw Material

Provide IP cores Raw wafer, Lead frames

RESEARCH & DESIGN MANUFACTURING ASSEMBLING, DISTRIBUTION

Electronic Design Equipment

Source: SIA Beyond Borders

Semiconductor Value Chains Foundries - So-called “foundries”

Table I – Operating Models: Semiconductor Industry19

Integrated Device Manufacturer (IDM)

Source: SIA Beyond Borders

Graph V – Rising Costs of Keeping up with Moore‘s Law

TECHNOLOGY NODE (nm)

Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019

Semiconductor Manufacturing Cost According to the Semiconductor

Graph VI – Highly Integrated Semiconductor Value Chains24

3 8 7 Cut silicon ingots into

Dies are assembled,

Source: SIA (2019)

Graph VII – Geographic Dispersion: Semiconductor value chains25

Research and Design

Testing Intel Micron Toshiba Samsung Infineon NXP

A closer look at where semiconductor of key production activities for leading

Graph VIII – Location of Semiconductor Companies, by step in

U.S. 51% U.S. 62% U.S. 10% U.S. 17%

EUROPE 7% SINGAPORE 12%

Design, manufacturing, Design, no manufacturing Manufacturing Assembly, testing

Graph IX – Global Market Share (Sales: Company Nationality

The Asian late-comers benefited and foreign direct investment. 28

The Large Gap between China Graph X, below, provides a snapshot

Graph X – Top Semiconductor Companies 201830

COMPANY HEADQUARTER LOCATION OPERATING MODEL 2018 REVENUE

Samsung Electronics South Korea IDM $65.90

Source; IC Insights (2018)

Dominance of American This also means that should the

Graph XI – Global Semiconductor Sales and American Semiconductor