Chip Wars Could Lead To Oversupply As China Increases Domestic Capacity

China’s chip manufacturing capacity is expected to more than double within the next 5 to 7 years, according to TrendForce, and this could lead to a market oversupply that would spell trouble for semiconductor companies elsewhere.

While imports of semiconductors into China were down 10.8 percent in volume over the last year, as reported this week, Beijing is looking to ramp up its own internal production in order to cut its reliance on foreign chips. Washington’s policy of using trade restrictions to try and halt China’s tech progress could therefore be about to backfire.

According to TrendForce, China currently has 44 wafer fabrication plants, with 25 of these producing 12in wafers, 15 being 8in facilities, plus a further 4 producing 6in wafers.

The Taiwanese research outfit claims that a further 22 fabs are already under construction in the country, with 15 of these to be 12in facilities and 8 set to produce 8in wafers. There are also a further 10 fabs planned, bringing the total to 32 large-scale wafer fabs, all of which are set to focus on making chips with mature production node processes, it said.

These mature production processes (typically meaning 28nm or above) have long been left behind by fabrication plants making advanced semiconductors such as the latest processors, but are still widely used to produce chips for applications such as household appliances and the automotive industry.

TrendForce claimed that its analysis of the production facilities in China suggests that 60 percent of the expected additional capacity could come online within the next 3 years, possibly as early as 2026.

That could potentially spell trouble if Chinese chipmakers want to use their increased production capacity to sell into the wider global market, as well as serving the huge domestic demand - China was said to be consuming more than 50 per cent of all semiconductors made worldwide a few years back.

With China’s mature process capacity expected by Trendforce to rise from 29 percent to 33 percent of global capacity by 2027, the company warns that this could potentially see a flood of chips coming onto the global market and lead to a price war.

This would be good news for customers of those commodity chips, at least to start with. But the response from semiconductor companies in other countries would likely be to cut their losses and stop making such chips and move to more profitable products instead.

This assumes, of course, that buyers would be happy to source semiconductors from China, amid the current atmosphere of suspicion over security risks. As Richard Gordon, former practice vice president for semiconductors at Gartner told us last year: "If China becomes a dominant player in legacy semiconductors, would you have them as a second source if the supply could be cut off without warning?"

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In China itself, state-owned media was clear that the Biden administration’s chip wars would only strengthen the country and boost its efforts for technological self-sufficiency.

The Global Times, a newspaper said to be under the auspices of the ruling Communist Party, said in an editorial that China's chip self-sufficiency rate may reach 70 percent by 2025.

The country has already made progress on low-end chips, it states, and claims that the technological gap between China and Western chipmakers is narrowing for more advanced silicon such as NAND flash and DRAM.

“Washington's ill-intentioned chip war will further increase China's chip self-sufficiency rate, encourage China to accelerate independent innovation, and further enhance our chip strength,” it concluded. ®