From Catching Up to Forging Ahead? China's New Role in the Semiconductor Industry

China has become the largest and fastest growing semiconductor market in the world, absorbing 40% of the worldwide semiconductor shipments. For US semiconductor firms, nothing compares to the China market. China however faces a fundamental dilemma. As the world's leading exporter of electronic products, it remains heavily dependent on imports of semiconductors and technology, primarily from the US, but also from Japan, Korea, Taiwan and Europe. At least 80 percent of the semiconductors used in China's electronics manufacturing are imported and virtually all leading-edge devices like multi-component semiconductors (MCOs). As a result, China's trade deficit in semiconductors has more than doubled since 2005 and now exceeds the huge amount it spends on crude oil imports. To correct this unsustainable imbalance, China's new strategy to upgrade its semiconductor industry seeks to move from catching up to forging ahead in semiconductors through progressive import substitution. The "National Semiconductor Industry Development Guidelines (Guidelines)" and the "Made in China 2025" (MIC 2025, 中国制造2025) plan were published by China's State Council in June 2014 and May 2015, respectively. Both policies seek to strengthen simultaneously advanced manufacturing and innovation capabilities in China's integrated circuit (IC) design industry and its domestic IC fabrication, primarily through foundry services.Based on a review of policy documents and interviews with China-based industry experts, this paper explores how realistic these objectives are, and how this might affect international firms and the global semiconductor industry