China's Subsidies Expand Legacy Chip Production, Stoking US and EU Fears

(Image credit: SMIC)

In response to U.S. restrictions on China's access to advanced chip production technologies, Chinese companies began to invest in the expansion of production capacities that process wafers using legacy nodes, such as 28nm, 45 nm, and older. This has raised concerns in the U.S. and Europe about China potentially flooding the market with mature chips, thus driving competitors out of business and then using chips as leverage, leading to discussions on further restraining China's influence in the semiconductor sector, Bloomberg reports.

The expansion of capacities capable of making chips on 28nm, 45nm, and older technologies, as well as various specialty nodes by companies like Semiconductor Manufacturing International Corp. (SMIC) and Hua Hong, is making American and European officials nervous. Older chip fabrication technologies are still critical for various industries, which is why politicians fear that chips made on mature nodes might become a strategic advantage for China, which raises significant security risks.

U.S. Commerce Secretary Gina Raimondo expressed concerns over China's large-scale investments in legacy chip production capacity, highlighting the importance of cooperating with allies to address this challenge. The European Commission emphasized its goal to minimize Europe's reliance on foreign companies for both advanced and legacy chips.

"The amount of money that China is pouring into subsidizing what will be an excess capacity of mature chips and legacy chips — that is a problem that we need to be thinking about and working with our allies to get ahead of," Raimondo said.

There's fear that China could flood the global markets with chips made on 28nm and thicker nodes, thereby driving foreign competitors to bankruptcy, as seen in the solar industry. If there is such a plan, companies like TSMC, Intel Foundry Services, Samsung Foundry, and perhaps GlobalFoundries may largely remain unaffected, but for players like UMC, Vanguard, ST Microelectronics, and PSMC, the move presents significant risks.

This scenario could result in Western countries becoming overly dependent on China for these essential semiconductors, introducing potential national security threats, especially if these chips are used in military devices. A study from Stanford University's Hoover Institution underscores the potential risks, stressing that the U.S. and its allies should be vigilant against China's semiconductor firms' non-market behaviors. 

The importance of legacy chips was accentuated by the supply disruptions during the peak of the COVID pandemic, leading to substantial financial strains for many companies. There is a catch, though. While these chips made on mature nodes play a pivotal role in devices ranging from consumer electronics to automotive and from industrial applications to military hardware, the latter tend to have very long lifecycles. Makers of cars, CE, and military devices are not really inclined to buy chips made in China to save pennies on each unit and then revalidate and requalify it for hundreds if not thousands of devices. Then again, if Chinese companies drive traditional chipmakers who make semiconductors on mature and specialty nodes out of business, American and European companies will either have to make their ICs in China or ask governments to subsidize chip production in the U.S. and Europe.

Chinese companies are rapidly constructing new facilities, with projections indicating the establishment of 26 new fabs by 2026. Despite the political friction between the U.S. and China, Chinese firms, such as SMIC, have maintained their supply chains, with a significant portion of their sales coming from U.S. clients, according to Bloomberg.

Anton Shilov
Freelance News Writer

Anton Shilov is a Freelance News Writer at Tom’s Hardware US. Over the past couple of decades, he has covered everything from CPUs and GPUs to supercomputers and from modern process technologies and latest fab tools to high-tech industry trends.