China’s Formal Bid for Global Dominance of the Semiconductor Supply Chain
In an April 2021 report from the Congressional Research Service (CRS), the CRS summarizes the August 2020 China State Council issued “Notice on Several Policies to Promote the High-quality Development of the Integrated Circuit Industry and Software Industry in the New Era”, which provides a framework for building competitive advantage in the semiconductor industry. In March of 2021 implementation measures were announced by the Chines government, policies that encourage, according to the CRS, “U.S. and foreign semiconductor companies—including those from Taiwan, Hong Kong, and Macau—to transfer certain technology, intellectual property (IP), talent, and research and development (R&D) to operations in China. These policies offer preferential terms over the next ten years—including tax, tariff, financing, and IP protection—for firms willing to establish capabilities, including production facilities, in China.”
Is This Threat Over-Hyped? The CRS Says a Definitive No.
While this governmental framework and implementation measures are impressive in their specificity, is this threat too hyped? Do we need a villain? And, if so, is China that villain? Some elements of this Chinese effort mirror the Japanese economic threat of the 1980’s, which possessed similar state doctrine, state-run activities, and state policy structures: assertions of intellectual property theft and the manipulation of currency, industrial policy that contributed to the gutting of U.S. manufacturing, and trade deficit imbalances. This era was marked by the Japanese purchase of prominent Fortune 500 companies in the U.S. and over half of the high-rise buildings in downtown Los Angeles – and ended with the Japanese experiencing prolonged stagnation going into the turn of the century, a gradual loss of competitive advantage in a variety of industry verticals and Japan’s current pandemic induced recovery woes.
The CRS report concludes that the current Chinese semiconductor efforts are troubling, definitely worthy of Congressional attention, and historically singular:
“…the scope and scale of China’s state-led efforts are unprecedented when considering the amount of state funding involved, the Chinese government’s ambitions to lead across the entire semiconductor value chain, the targeting of U.S. and foreign capabilities, and the particular methods that China is using, which appear to challenge current global rules and norms.”
The Long View
As the CRS highlighted in their October 2020 report Semiconductors: U.S. Industry, Global Competition, and Federal Policy:
“Semiconductors are a uniquely important enabling technology. They are fundamental to nearly all modern industrial and national security activities, and they are essential building blocks of other emerging technologies, such as artificial intelligence, autonomous systems, 5G communications, and quantum computing. For more than six decades, consistent growth in semiconductor capabilities and performance and concurrent cost reductions have boosted U.S. economic output and productivity and enabled new products, services, and industries.”
Decision-making and Strategic Implications
Issues for your business or organization when considering these Chinese measures in the semiconductor industry include:
China as Megatrend. Combine this Chinese semiconductor industrial supply chain initiative with Great Power competition with China and Russia, for which DoD has actively embarked on a strategic transformation – and the People’s Liberation Army’s (PLA) Military-Civilian Fusion (MCF), which “seeks to harness the sophistication and output of China’s civilian economy for the benefit of defense supply chains.” How are your operations and capabilities tethered and vulnerable to the impact of Chinese military/industrial activities?
Explore Supply Chain Security Initiatives: Embark on “awareness and minimization” efforts vis-a-vis the reliance on foreign components, subcomponents, materials, and software. Supply chain security concerns have also been reinforced by the Biden Administration’s Supply Chain Disruptions Task Force, which has recently delivered its final report. In the next year, supply chain security assessments are due for a variety of industry sectors.
A War Footing? In an October 2020 OODAcast conversation, Rear Admiral Paul Becker noted that “from a Chinese perspective, they are in an information war with the United States right now. Their authoritative writings and speeches declare it to be so. They have interim objectives along the way. Information warfare, cyber warfare, media warfare, intimidation, psychological warfare. Any kind of warfare when it comes down to it. It is just trying to bend an adversary to your will.” As the Chinese maxim goes: Crisis equals opportunity. If China is already operating at a war footing, how are they taking advantage of the current traditional supply chain slow down wrought by the pandemic to enhance their semiconductor dominance, tactically and/or strategically? Should your business or organization explore a ‘war footing’ mental model, operations, or strategic mindset? If so, what are the military-inspired management tools which may apply? Use scenario planning and foresight strategy to game it all out.
Perform an Advanced Innovation and Exponential Technology Assessment: If you are focused on advanced technology product innovation, such as autonomous systems and 5G communication, or “exponential technologies” – such as quantum computing, artificial intelligence, robotics, additive manufacturing, and synthetic or industrial biology – do an assessment of the risks and vulnerabilities in your development cycle and current programs.
The CRS reports cited:
For more on the Great Power competition, see OODA Loop – What the C-Suite needs to know about a Return to “Great Power Competition” and DoD Capabilities
For more on the PLA MCF, see OODA Loop – The People’s Liberation Army (PLA), Global Supply Chains and Chinese Military-Civil Fusion (MCF)
For a strategic conversation on China and other related geopolitical threats and risks, see OODA Loop – Richer and Becker on Domestic Terrorism, Cyber, China, Iran, Russia, and Decision-Making
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