Market Insights | The Geopolitical Chess Game: China and the US in Semiconductor Strife

By Cornelius Zeeman & Ashin Daya,
Fairtree Portfolio Manager & Equity Analyst

In the ever-evolving landscape of global geopolitics, one of the most intricate and consequential battles is unfolding in the realm of semiconductors. At the heart of this contest are China and the US, two economic and technological giants vying for supremacy in an industry that underpins the functioning of virtually every modern electronic device. This semiconductor geopolitical conflict is not just a competition for market share; it is a struggle for technological dominance, economic prowess and, crucially, national security.

The rise of China’s semiconductor ambitions.


In 2015, China introduced a comprehensive strategic plan to achieve technological self-sufficiency and reduce dependency on foreign-made semiconductors. The “Made in China 2025” initiative marked a significant turning point for China, which continues to heavily rely on foreign supply to meet its fast-growing consumption of semiconductors. According to Gartner estimates, China only produced 23% of its total domestic semiconductor consumption in 2023 (an increase from 10% in 2018).

Most of China’s progress has been seen in analog semiconductors, which are based on older technology increasingly used in automobiles, industrial automation, communication infrastructure and defence. China remains heavily reliant on foreign supply in areas such as graphics processing units (GPUs), central processing units (CPUs) and dynamic random-access memory (DRAM). These semiconductor chips are critical to mount a meaningful artificial intelligence (AI) challenge to US innovators such as Nvidia and AMD.

Table 1: China semiconductor self-sufficiency rate by segment

Source: Gartner, WSTS, Morgan Stanley Research estimates

The US’s concerns and export controls.


Recognising the strategic importance of semiconductors to both economic and national security interests, the US government has implemented stringent measures to curb the transfer of advanced semiconductor technologies to Chinese companies. Export controls have been a primary tool employed by the US to safeguard its technological edge. This has not only slowed down China’s progress but has also escalated tensions in the broader trade relationship between the two nations.

The most well-publicised example came in May 2019, when the US placed Huawei Technologies on its Entity List of export-restricted companies and effectively banned the global telecommunications and technology giant from accessing US technology. The primary justification behind the ban was national security concerns, with the US government citing fears that Huawei’s technology could be exploited for espionage by the Chinese government. The ban prohibited Huawei from acquiring crucial components, software and services from US-based suppliers, significantly impacting its ability to manufacture and sell smartphones and telecommunications equipment globally.

Graph 1: Huawei’s global smartphone shipments declined significantly after US export controls

Source: IDC, Morgan Stanley Research (e) estimates

More recently, there have been a series of new export controls imposed by the US to limit the export of AI-enabling chips to China. This included Nvidia’s prominent AI semiconductors. Given the strong demand and long lead times for Nvidia’s chips, this has not impacted their financial performance. However, Nvidia has introduced a series of new AI chips, which are less powerful than flagship AI chips, and whose specifications comply with the latest export controls. These chips continue to ship to Chinese customers.

Tit for tat.


In January 2022, China tightened the export of a group of 17 rare earth elements used for various high-tech applications, including electronics, renewable energy and defence systems. Due to the large base of mining processing capacity in China, the country produces approximately 80% of global rare earth minerals. China’s dominance in the production of rare earths has prompted other countries to explore diversified sources and develop alternative technologies to reduce dependency on Chinese supplies. These minerals are not, as the name suggests, rare. However, it takes time to develop production capacity and develop efficient supply chains. To date, China’s efforts to curb the supply of rare earth metals to the US have been largely ineffective.

In April last year, the Cyberspace Administration of China limited the sale of Micron’s memory semiconductors in China, citing national security risks. Micron, a US company, is the third-largest manufacturer of memory semiconductors and operates in an oligopolistic industry, which includes Korean giants Samsung Electronics and SK Hynix. This has negatively impacted Micron, which ships approximately 25% of its memory chips to China each year.

China’s recent progress.


China’s semiconductor journey has been characterised by a mix of domestic innovation, strategic acquisitions and government support. Companies like Semiconductor Manufacturing International Corporation (SMIC) have made strides in closing the technological gap with their Western counterparts. However, this ascent has not been without challenges, and a significant portion of China’s progress has been fuelled by access to foreign technologies, which has become a point of contention in the geopolitical arena.

Late last year, Huawei launched its new Mate 60 flagship smartphone which came as a surprise given its impressive specifications. The phone’s chips are produced on a 7nm manufacturing process made by SMIC. Previously, it was widely believed that China would not be able to successfully manufacture advanced 7nm chips without advanced US semiconductors manufacturing equipment, which has been banned for export to Chinese domestic manufacturers. Huawei’s chips used in the Mate 60 are technically remarkable. The performance and power consumption profile in a variety of tests bring it on par with one- to two-year-old Qualcomm chips. This has led to questions over the efficacy of US export controls, given that a significant amount of US equipment was likely used by SMIC to produce the chip.

Recently, we have seen very strong demand for US semiconductor equipment in China. While exporting the most advanced technology is prohibited, exports of older technology are still allowed. China’s demand for global wafer fabrication equipment has soared among all the leading semiconductor equipment manufacturers. This suggests that China’s capacity expansion plans have materially stepped up. Without access to ASML’s extreme ultraviolet equipment, it is unlikely that domestic Chinese semiconductor manufacturers will be able to manufacture chips to the same specifications as Taiwan Semiconductor Manufacturing Company’s most advanced 3nm chips. However, China has been vocal about its ambitions to become the global leader in the production of automotive, industrial automation and renewable energy technologies. These areas typically do not require the most advanced semiconductors.

Graph 2: Semiconductor equipment sales to China

Source: Company filings, Fairtree

Implications for the future.


As the semiconductor conflict continues to unfold, the implications are profound and far-reaching. The technological advancements and breakthroughs in the semiconductor industry will shape the future of innovation and determine which nations hold the keys to the most critical technologies. The winner of this geopolitical struggle will not only enjoy economic benefits but will also wield significant influence over global standards and security. While competition is inevitable, finding common ground on shared challenges, such as semiconductor shortages, is essential for global stability and progress.

In this geopolitical chess game, the moves made by China and the US in the semiconductor arena will not only shape the future of technology but will also influence the balance of power on the world stage.


Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices.

Recent Posts

Subscribe to receive our latest updates