This was to be the decade that China was to dominate the world. The marvels of its new gigantic factories were to dominate the markets of many countries. The wares from their distended supply chain were to disrupt many new areas of commerce, and we saw the evidence of this in Chinese prowess in making everything from mobile phones to electric vehicles (EV’s) and yet the Chinese miracle has hit a huge problem in a tiny packet, namely the Integrated Circuit (IC).
An IC is the fundamental building block of all modern electronic devices. As the name suggests, it’s an integrated system of multiple miniaturized and interconnected components embedded into a thin substrate of semiconductor material. Integrated circuits are used in the production of other goods. They can be made from a variety of materials, including silicon, gallium arsenide, and gallium nitride.
Using a large dataset, we at decypher have tried looking at the Product Complexity Index (PCI). Integrated Circuits Rank 54 in Product Complexity Index (PCI).
According to the OEC (Observatory of Economic Complexity) 2021, Integrated Circuits were the world’s 2nd most traded product, with a total trade of $823B. Between 2020 and 2021 the exports of Integrated Circuits grew by 23.8%, from $665B to $823B. Trade in Integrated Circuits represent 3.91% of total world trade. Thereby hangs a tale of the Asian choke-hold which is a concern for new technologies but also geo-strategists, diplomats, and people generally wishing to avoid unpleasantness in the Asian straits. Before we analyse the geo-strategic implications let us look at the data around ICs from the prism of Product Complexity Index (PCI).
The Product Complexity Index (PCI) is a measure of the relative knowledge intensity of an economy or a product. It is also important to consider all aspects of the product, including how it functions, how it is manufactured and assembled, and how it is marketed and sold. Product with high PCI Value are the most complex products that only a few countries can produce.
At present, Nvidia and AMD are among a small set of chip designers in the world with sufficiently advanced technology to make chips. Nvidia has announced a modification of its flagship H100 chip to create a version that complies with export regulations for the Chinese market. This move comes after US regulators imposed rules that prevented Nvidia from selling its most advanced chips, the A100 and H100, to Chinese customers, citing national security concerns.
A record number of Chinese chip firms have also gone out of business. About 10,000 chip companies went out of business during 2021–2022 due to the impact of the chip war and the general economic gloom around the high-tech startup and SME scenario.
On 24 August 2024, Taiwan’s cabinet passed a record-high defense budget bill of $19.1 billion for 2024. This is in response with the mounting tension of Taiwan with China. One reason is China’s dismissive attitude towards Taiwan and the rising high technology chip war.
Integrated circuits and microassemblies imports are higher than the exports by China. Both imports and exports of China declined in the year 2022.
China’s AI industry continues to rely largely on powerful chips manufactured in the US to conduct computing activities. As China’s technology and industrial capabilities continue to fall behind, rising tensions with the US have prompted worries in both technology and commercial development.
According to data published by the General Administration of Customs, China’s imports of integrated circuits declined to 227.7 billion units during the first half of 2023, a significant decrease from the 279.6 billion units recorded in the corresponding period in the previous year.
Through investment, incentives, talent development, and risk management, many countries have devised AI policies to increase their capabilities. Machine learning and its more complicated offspring, deep learning, are the foundations of the majority of AI technologies, including sophisticated and specialised applications like computer vision and natural language processing.
Private Investment in Artificial Intelligence in China was highest in the year 2021 ($22.8B) and it dropped in the year 2022 ($12.4B). There is an opportunity that this decline opens for India, South Korea, Japna, and Vietnam but the trouble is with the partner in this enterprise namely the United States. In the 1980’s Japan accounted for more than 50% global semiconductor production. Wary of this stronghold of Japan the US passed a series of legislations and a deal to the detriment of the Japanese industry and creating rival chip-powerhouses in the South Korea, and Taiwan. Eventually the Chinese also were beneficiaries of the incredible demand of IC related product and the Chinese boom years were the stuff of the legend partly fuelled by the economic demand of the rest of the world.
In China the consequence of the chips being down is going to create a sense of hyper-nationalism, but the fallout will not just be limited to a shadow on the economic front and will be a reason to be cautious around this and many other developing factors. This is an area in Asia where nuclear warheads are forever looming over the smallest disagreements.
Thank you for reading, China Observatory.
