How Deglobalization Boosts China’s Position in Legacy Chips

Tariffs, export controls, stimulus efforts, reshoring, and nearshoring—all these efforts have one common goal: deglobalizing electronics production to reduce dependence on foreign trade—specifically trade with China.

However, warning signs are flashing that the very same initiatives designed to curb China’s supply-chain leverage could actually allow the nation to establish greater dominance in the critical market for chips produced using trailing-edge manufacturing processes.

Ongoing Trends Point to Deglobalization

In light of China’s continued hegemony in electronics assembly and its ongoing efforts to attain semiconductor self-sufficiency, the country is expected to emerge as a global powerhouse in legacy process nodes essential for the critical automotive market, as well as for industrial, medical, aerospace, and defense applications.

The deglobalization phenomenon kicked off in October 2022, when the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced restrictions on exports to China of equipment that could be used to produce logic chips using 14nm or smaller geometries.

With the world’s most advanced process now at just 4nm and 3nm, these export controls were designed to slow China’s development of cutting-edge chips for AI and other demanding applications.

However, the repercussions of this initiative illustrate the dangers involved when countries attempt to decouple their supply chains. China remains the world’s manufacturing hub, accounting for 36% of global electronics production, according to the U.S. Semiconductor Industry Association (SIA). Moreover, China represents the second largest end market for electronic devices using semiconductor technology.

The country’s critical position as both an electronics supplier and consumer means that the decoupling process will likely take considerable time to complete. In the meantime, China isn’t sitting still, taking advantage of the lack of restrictions on older process technologies to focus on mature geometries.

Even before the U.S. sanctions, China accounted for a plurality of global wafer capacity for logic processes of 28nm and larger, with a 33% share in 2022, according to the SIA.

China’s Investments in Semiconductor Production

During the past five years, Chinese companies invested $63 billion in 73 fabs that mainly focus on older processes. These trailing-edge processes are used extensively for automotive-grade chips, ranging from MCUs to discretes.

While growth has decelerated in the automotive semiconductor market, sales are still expected to rise in the 10% range in the coming years, according to market watchers. Meanwhile, investment in mature processes outside of Asia is limited.

These factors indicate that China is on track to expand its leadership in trailing-edge processes.

Moreover, as part of China’s self-sufficiency drive, the country’s government unveiled its latest round of funding for its domestic chip industry in May, totaling $47.5 billion. While the fund is expected to focus heavily on advanced semiconductor processes, some of the money could go toward developing equipment for trailing-edge chips.

Meanwhile, the deglobalization process goes on, with the U.S. set to place onerous tariffs on imported Chinese semiconductors. Citing China’s rising presence in legacy chip manufacturing technologies, the White House said that the tariff hike is intended to reduce overreliance on sourcing parts from a few markets, a situation that contributed to supply chain disruptions in recent years.

The combination of Chinese dominance, U.S. sanctions and the global decoupling trend is set to produce more challenging purchasing conditions for certain components made using legacy processes. These factors will aggravate the already fraught supply chain conditions for buyers of certain parts.

The Commodity IQ Lead Time Index for power MOSFETs is set to total 134.2 in May, significantly above the baseline. Power MOSFETs pricing is also inflated, with the Commodity IQ Price Index set to amount to 327.13 in May, also far above the baseline level.

What’s on the Horizon?

Buyers outside China should prepare for a potential worsening in cost and availability trends and seek to identify non-Chinese sources for parts made using legacy processes – a challenging task given the weak investment in other countries.

The current situation reflects the hard reality that decoupling interrelated national supply chains is hard and takes considerable time to achieve. The net impact on the global supply chain is that the effort to limit China’s progress in advanced semiconductor processes has fueled the country’s rising dominance in trailing-edge nodes essential to critical markets like automotive and industrial.