China’s Influence Through Manufacturing

China’s Influence Through Manufacturing
April 2, 2018 admin
In Semiconductors, Trends

Mainland China’s government has made several provocative declarations and investments seemingly designed to turn the Eastern nation into a world-dominating manufacturer. But the mechanics of a key industry and a hyper-competitive global marketplace – the foundation of China’s past success – might well be their Waterloo.

China, GDP and manufacturing

Once China abandoned most pretenses to their communist past, they took advantage of the greatly improved economies in international shipping (compliments of intermodal transport) and China’s cheap and abundant labor supply. Combined, these allowed China to do what Japan had done before it – grow rapidly by becoming the world’s outsourcer. China only recently scooted past Japan to become the world’s second largest economy, about 61% the size of the United States economy.

Part of China’s equation for long-term manufacturing dominance is semiconductors, the industry within which I founded and led Micrel for 37 years. China is now trying to vertically integrate electronics manufacturing, which includes expanding their footprint in the global semiconductor industry. Discontented with importing chips from manufacturers around the world, and especially from their feuding cousin Taiwan, Beijing has lobbed huge sums of money, via the National IC Industry Investment Fund and other vehicles, to build a semiconductor industry. To this end, China has set aside over $18 billion to acquire semi technology and companies.

The problem with Chinese dominance in chips

Should they succeed, it will eventually cause everyone a great deal of grief. The world runs on semiconductors. They are in whatever device you are using to read these words, and all the routers, repeaters and servers from there to the Forbes headquarters. They are in your wristwatch, your toaster, your dashboard, your television, and you home security camera.

They are also in our fighter jets, military satellites and guided missiles.

Had the PRC an unblemished history with unwavering respect for everything from intellectual property to human rights, it might not cause the average Joe to flinch when thinking of China having manufacturing or semiconductor hegemony. But they hold 22% of the global manufacturing market share. Given this, their government-led and financed drive to go even bigger on semiconductors should be enough to give policymakers pause.

Change is perpetual

Policy may be necessary in the short term to ensure core technology either remains in the United States, or stays distributed across allied nations. But in the long run, economic forces will halt China’s manufacturing growth in general and its advancement in semiconductors in particular.

Half of the semiconductor industry’s revenue is earned by five major players, and they all have their own fabrication facilities. Smaller companies choose to outsource in no small part because building their own fabs is pricey – it costs over $1 billion to build a state of the art fab. The main economic hurdles facing semiconductor companies in the US are the cost of land, infrastructure, and utilities, and tons of local and state regulatory requirements. China is the low-cost provider, in no small part due to the Chinese government subsidizing their development. The United States is in effect exporting semiconductor technology and revenues in exchange for artificially low semiconductor prices (which may be sufficient to justify trade actions from our own government).

Manufacturing is labor intensive, using many unskilled hands. Semiconductors require skilled labor, both in design and manufacturing. Advances in artificial intelligence and basic economics may well shift manufacturing and semiconductor work elsewhere.

The assembly and packaging of goods can be performed by robots, and a great deal of semiconductor manufacturing is already automated. But from iPhones to televisions, assembly by human hands still makes sense if labor is cheap enough. Due to China’s wage inflation (manufacturing wages have more than doubled since 2008) they are becoming a relatively expensive place to build things. China ranks 106th among 230 nations in terms of per capita income. Income in India, ranked at 160 on the list, is 58% lower. And there are many viable nations down the wage scale who could do at least as well as China in manufacturing.

This may be why China has prioritized semiconductors. Since they are in everything, if China has hegemony in chips, they could limit supplies to companies outside of China, using semiconductors as a throttle against draining away their current dominance in manufacturing.

This is where robotics and AI enter the picture. Making semiconductors is not trivial. It currently takes a great deal of design work up front, and a complex manufacturing process on the back end. Humans are involved in practically every step. But software and the Internet have already made chip design a global process; and AI will likely soon automate some design functions.

One objective, then, is to reduce the human costs, and other associated costs (power consumption and rates, regulation, manpower) of semiconductor manufacturing. If that is done, semi manufacturing becomes profitable anywhere – India, Latin America, even the United States – because the requisite manpower needed to churn out chips falls. If China invests heavily today in technology that will be obsolete tomorrow, they will find themselves in a position of dwindling manufacturing dominance as such work migrates to other countries who are free to buy semiconductors from sources globally.

Originally published at Forbes

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