In Depth: Sanctions Spark Race to Bottom for China’s Lower-End Chipmakers

A comprehensive price war has erupted in China's chipmaking industry, significantly impacting companies and prompting strategic shifts in production. This conflict stems from the U.S. sanctions halting exports of advanced semiconductors and related equipment to China, leading Chinese firms to focus on producing mature process chips instead. These chips, developed with technologies older than 28 nanometers (nm), have seen an oversupply, driving a cutthroat price competition among domestic manufacturers [para. 1][para. 3][para. 4].

Major Chinese semiconductor companies such as Semiconductor Manufacturing International Corporation (SMIC), Hua Hong Semiconductor, Nexchip Semiconductor, China Resources Microelectronics, and CanSemi Technology have all increased their output of these legacy chips. This enhanced production has been met with dwindling demand, as the global economy remains sluggish, particularly in sectors like smartphones, personal computers, home appliances, and peripherals [para. 5][para. 6].

SMIC, the largest chipmaker in China, was included in the U.S. Commerce Department’s trade blacklist in late 2020. In response, the company shifted its focus to ramping up legacy chip production, opening new fabs in Shenzhen, Shanghai, and Tianjin since 2021. They reported shipping 7.2% more wafers in Q1 2023 versus the previous quarter and saw a 19.7% year-on-year revenue increase to $1.75 billion, despite a 3% drop in average chip prices from the prior quarter. SMIC’s Co-CEO Zhao Haijun acknowledged that while shipment volumes were predicted to rise, prices were likely to continue their decline due to increasing competition and aggressive pricing tactics from rivals [para. 9][para. 10][para. 11][para. 12].

Signs of an impending price war became evident in Q3 2022 as prices of mature process wafer foundry services began to fall. By 2023, smaller foundries in China had decreased their prices, attracting customers away from larger manufacturers with competitive rates. By the end of 2023, the pricing pressure compelled international foundries like U.S.-based GlobalFoundries and Samsung Electronics to cut their prices by 10%-30% or even withdraw from certain markets. The financial impact was severe; Hua Hong saw a 79.1% year-on-year profit decline in Q1 2024, and SMIC reported a 68.9% drop [para. 15][para. 16][para. 21].

Despite the market's challenges, Chinese foundries continue to expand their capacity. By the end of 2023, new production lines were underway, focusing primarily on 40 nm and 55 nm technologies, with 28 nm being less attractive due to high investment costs and U.S. export restrictions. SMIC, for example, has majorly invested in new facilities in Shenzhen, Shanghai, and Tianjin, while newer companies like CanSemi are also scaling up. However, capacity utilization remains a concern amid declining demand, with global utilization rates predicted to stay between 70%-80% throughout 2024 [para. 25][para. 26][para. 27][para. 28][para. 33].

Interestingly, the expansion of capacity could strategically favor China in the long run. The demand for mature process chips is rising in evolving sectors like artificial intelligence (AI) and electric vehicles (EVs). As these industries grow, China's legacy chip production, despite trailing behind top-tier leaders like Taiwan Semiconductor Manufacturing Co. (TSMC), is becoming increasingly competitive against second-tier players and could fill the gap left by global underinvestment in mature processes over the past three years. This may provide China with a strategic advantage in the intelligent EV market [para. 35][para. 36][para. 38][para. 40].

To counteract this strategic positioning, the Biden Administration announced new tariffs on May 14, 2024, placing additional pressure on China's semiconductor industry by doubling tariffs on $18 billion worth of imports from China, including semiconductors, by 2025 [para. 45].