Experts agree that China will find the road to chip self-reliance challenging, not only because of worsening diplomatic relations, but also because the country faces a shortage of core tech skills despite the billions of dollars it has invested in semiconductor talent and new facilities.

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“The chip industry is a market-oriented and talent-intensive industry that requires technology accumulation. The large amount of capital investment is not equal to competitive products,” said Roger Sheng, a semiconductor analyst at Research firm Gartner. “I think Biden will continue the cards that Trump played against China and work with allies to drive [Beijing] into making more concessions.”

Will Hunt, a research analyst at the Centre for Security and Emerging Technology, a think tank at Georgetown University, said the Biden approach would likely be more targeted.

“I hope to see collaboration with Japan and the Netherlands on targeting [China] for linchpin technology like semiconductor manufacturing equipment rather than the much broader controls that we saw over the past few years,” Hunt said.

“In the long term, we will see continuity of Trump’s efforts to reshore semiconductor manufacturing to the US, and hopefully intensify it. Biden could also strengthen that effort with looser immigration restrictions, more investment in the domestic workforce and research and development [funding].”

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Semiconductors, also known as chips or integrated circuits (ICs), are the foundation of new technologies from artificial intelligence and 5G to smartphones and autonomous driving. The industry has also found itself at the centre of escalating trade friction between the world’s two largest economies.

The US has been cutting China’s access to US-origin technology in the field of semiconductors. In May, Washington expanded its sanctions against Huawei Technologies by requiring foreign chip makers that use US technology to apply for a license to sell chips to the Chinese telecoms champion.

In early December, the US added China’s top chip maker, Semiconductor Manufacturing International Corp (SMIC), to a blacklist of alleged Chinese companies with military connections, a move likely to escalate tensions with Beijing before President-elect Joe Biden takes office.

US export controls imposed on Chinese tech firms are not expected to be significantly relaxed under Biden, said Nick Marro, lead analyst of global trade at the Economist Intelligence Unit. China’s tech sector is likely to be kept “in the crosshairs of US policymakers,” he added.

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In response to the US sanctions, China has stepped up efforts to cultivate home-grown talent and introduced policies designed to accelerate the self-reliance process.

In August, the State Council granted qualified integrated circuit projects and enterprises a variety of tax benefits lasting for up to 10 years. The new policies also focus on developing domestic chip engineering talent, strengthening intellectual property protection, and encouraging firms to list on China’s technology-focused STAR Market.

However, “there’s a bigger risk that this policy push could worsen overcapacity and strain fiscal space at the local level, particularly in low- and medium-end manufacturing segments,” warned Marro.

That is already happening. The new government policies and subsidies have encouraged many companies – some with little or no experience in chip making – to jump on the bandwagon. According to Chinese company information provider Qichacha, of the more than 50,000 chip companies registered in China as of October, around 12,740 were formed this year.

Amid the frenzy, some poorly planned projects have already shown signs of failure. In May, a US$100 million factory set up by US chip giant GlobalFoundries and the Chengdu city government ceased operation after remaining idle for almost two years. Two months later, a US$2.8 billion government-backed chip plant owned by Tacoma Nanjing Semiconductor Technology went bankrupt after failing to attract new investors.

Then last month, domestic chip company Wuhan Hongxin Semiconductor Manufacturing (HSMC) was taken over by the Hubei provincial government after months of delays caused by funding shortages. The project was meant to be a showpiece in a US$20 billion investment designed to turn the city into a semiconductor manufacturing hub.

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Some analysts lay the blame for the failed projects on the central government’s top-down approach which reduces transparency and prioritises political motives over sound economic decisions.

“There’s still a fundamental lack of transparency and investment consideration that comes as a result of a top-down policy push,” said Marro. “This has worsened in recent years as private and foreign investors have been squeezed by the expansion of the state sector. This will always be the risk of attaching market development goals to political priorities; authorities are incentivised to prop up potentially weak projects, while companies have incentives to overplay their ability to get more money.”

Local governments also need to share the blame. “Some local governments often cannot clearly recognise the difficulty of developing the semiconductor industry and blindly trust some people with ulterior motives … too much money rushing into the chip industry may attract people [wanting] to cheat the local chip projects,” said Gartner analyst Sheng.

In the wake of the recent setbacks in the chip sector, Ministry of Industry and Information Technology (MIIT) vice minister Wang Zhijun last month called for close supervision of “short-sighted” investments and “abandoned projects”.

To be sure, semiconductor self-sufficiency was a priority for Beijing long before the US-China tech war brought the issue into sharp focus. China’s ambitions were clear as early as 2014 when the central government announced a National Integrated Circuit Plan, promising to invest US$150 billion in the domestic semiconductor manufacturing sector.

However, there is still a long way to go and achieving complete independence in chips may even be impossible, say analysts.

“Full chip self-reliance is hard to come by as no single country or region is capable of delivering everything required in the chip supply chain,” said Szeho Ng, managing director at China Renaissance in Hong Kong. “The chip ecosystem is genuinely global in nature and its development [has been] through global collaboration.”

While China has made progress in mainstream chip manufacturing such as wafer foundries and the back-end assembly-and-testing process, it remains behind in areas upstream such as electronic design automation (EDA) and synergistic processing element (SPE) tools, according to Ng.

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US-based companies like Synopsys, Cadence and Mentor Graphics account for more than 95 per cent of the EDA tools market, according to a note from Taiwan-based semiconductor industry research firm Isaiah Research.

On top of the large gaps in China’s semiconductor knowledge, Beijing has testy relations with chip leaders whose cooperation it would need to get up to speed in the technology.

“Beyond US-China tensions, it also has poor relations with Taiwan, and relatively strained relations with Japan and South Korea. Relations with the EU are now also under scrutiny,” said Marro at the Economist Intelligence Unit.

Taiwan companies like wafer foundry TSMC and fabless IC company MediaTek are powerhouses in their field.

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“Diplomatic friction will inherently have a spillover to trade and commercial policy, particularly if governments worry about the industrial or security implications of losing top talent, or valuable IP, to the Chinese market, which could result in investment or trade controls,” Marro said. “That’s something we’re already seeing with the US and Taiwan, and is something that we could see elsewhere, including Japan and South Korea, in the future.”

Yet some believe Sino-US tech cooperation under Biden could still happen at some point.

“At the same time that the United States stays resolute toward China, it will strive for more cooperation under Biden in comparison with Trump,” said Huang Kwei-bo, vice dean of the international affairs college at National Chengchi University in Taipei.

Additional reporting by Ralph Jennings in Taipei