China's semiconductor industry, including Huawei - little prospect of reaching global innovation
Chapter 7: Growth, Upgrading, and Limited Catch-Up in China’s Semiconductor Industry by Douglas B. Fuller
The rapid evolution of cutting-edge product characteristics and manufacturing processes typical of global semiconductor leaders means that large-scale investment and substantial upgrading in follower countries may fail to reduce the gap separating domestic producers from global leaders. This summarizes Chinese experience. MNCs have built production facilities in China, but generally refrained from committing to cutting- edge production and research operations, partly through concerns about protection of intellectual property (IP). Despite massive expansion and strong government backing, domestic state-owned firms have generally failed to generate the technological dynamism that official policy seeks. Among China-based semiconductor firms, only the hybrids, which, like favored state firms, see China as their technological home base, but unlike state firms, face tough financial discipline from offshore backers, have delivered substantial technological advance.
Recent policy initiatives continue to lavish resources on sluggish state- owned firms. Rival investments by central and provincial governments create further difficulties. Government influence limits the capacity of potentially more innovative hybrid and domestic private operators to expand and upgrade. Growing domestic demand has encouraged domestic output growth, for example in chipsets for smartphones in which Chinese manufacturers have recorded massive gains. Although Huawei, a leading maker of telecom equipment, shows signs of leveraging its manufacturing prowess to elevate its semiconductor design capability, domestic design and production operations cluster in lagging process technologies and mature or maturing product areas that leading MNCs are abandoning in favor of new processes and products with innovative features and potentially higher profitability.
As a result, China’s semiconductor industry appears locked into a path that combines quantitative expansion with low financial returns and limited qualitative improvement. This trajectory offers little prospect for attaining China’s long-term objective of propelling domestic semiconductor manufacture toward the global frontier of technology and innovation. (p263)
In Policy, Regulation and Innovation in China’s Electricity and Telecom Industries. Loren Brandt and Thomas G. Rawski, eds. Cambridge University Press, 2019.