PRC Pursues Chip Design Software Dominance

Executive Summary:

• US-China technology competition is no longer confined to only leading-edge semiconductors but is now moving to also include older so-called mature-node or legacy chips.
• Central and local level Chinese industrial and innovation policies have long pursued a goal of achieving self-sufficiency in not just the most advanced chips now submitted to US export controls but also to develop manufacturing capacity for legacy chips now the subject of a US Department of Commerce survey.
• To accomplish this, the PRC erected new R&D institutions and offered generous tax exemptions and subsidies to domestic companies.
• PRC progress in mature-node Electronic Design Automation (EDA) software self-sufficiency is a more likely prospect for the foreseeable future. Domestic companies in the PRC are publicizing initial successes but have not achieved a fully localized ecosystem of EDA products.

In December of last year, the US Department of Commerce announced it would launch a survey of America’s supply chains of mature-node semiconductors or so-called legacy chips (Department of Commerce, December 21, 2023). The People’s Republic (PRC) is poised to become a leading producer of mature-node chips and US national security experts are worried that industrial overcapacity in the PRC might lead to cheap Chinese chip imports, eroding the United States’ manufacturing base in these chips. This in turn could threaten the reliable sourcing of such chips for use by the US military.

The Global Times, one of the Chinese Communist Party’s more hardline mouthpieces, responded quickly to the Commerce Department announcement by quoting a Chinese telecoms expert who said that the United States was “citing national security just as a pretext to maintain US competitiveness in legacy chips” (Global Times, December 22, 2023). In a phone call with Gina Raimondo this January, Minister of Commerce Wang Wentao (王文涛) raised the issue of the survey as one of three major concerns (FMPRC, January 11; Huanqiu, January 11). Weeks later, Gina Raimondo celebrated the first anniversary of the CHIPS and Science Act by announcing a first batch of approved semiconductor projects including in legacy chips (CSIS, February 26).

Policymakers are now wrestling with a twin challenge. Washington seeks to deny the PRC technology at the very leading edge while at the same time allowing for a relatively normal economic relationship for less advanced technologies. Given the imposition of US export controls on high-end semiconductors in 2022, the investigation into legacy chip supply chains opens a new front in the US-China technology competition. This challenges efforts to restrict some chips and leave others more or less untouched.

The challenge is that PRC leadership set out to achieve self-sufficiency in both sets of semiconductors. Beijing is currently having more success in ramping up domestic capacity and grabbing a larger share of the global market for 28nm or larger node chips. One industry research company said that last year the PRC had captured 31 percent of global mature-node manufacturing capacity and was expect to increase that share to 39 percent by 2027 (TrendForce, January 16). [1]

Some Wins in Localizing EDA Software

Electronic design automation (EDA) software currently constitutes a weak link in the PRC’s efforts to build a leading domestic semiconductor value chain. EDA software is used by engineers to design the chip specs which are then sent to manufacturers such as TSMC who are producing the actual chips. Three companies dominate the global market: Cadence and Synopsys (both American), and Siemens EDA (a German company which acquired a US company formerly known as Mentor). The PRC wants to create versions of its own. These design tools were listed in a string of high-priority chip-related domestic breakthroughs needed in the 14th Five Year Plan (Xinhua, March 13, 2021), but are also referenced in older policies such as the “Made in China 2025” plan promulgated in 2015 (State Council, May 19, 2015).

The PRC may now be logging some initial successes. This time last year, Huawei claimed to have developed an EDA tool for 14nm node sizes (People’s Daily, March 24, 2023). At a conference announcing this breakthrough, Huawei’s deputy chairman Xu Zhijun (徐直军) claimed that the company had substituted 78 software and hardware items over the previous three years. If such reports are credible, then this constitutes at least one success for the indigenization of EDA software. In 2020, Chinese companies had captured 11.48 percent of the domestic EDA market (for both advanced and less advanced manufacturing processes), up from 6.24 percent two years earlier (21st Century Business Herald, August 15, 2022). Recently, Chinese tech media company TMT Post reported that some industry researchers estimate this number could increase to 14 percent by 2025 (TMTPost, January 22). However, almost all of the remaining market share will stay in the hands of the two US and one German industry leaders.

Escaping Chokeholds Via New Institutions

The PRC has established centers of research excellence to boost the domestic semiconductor industry. These are meant to bring together disparate actors in industry, academia, and other institutions. In 2018, Fudan University, together with Chinese semiconductor manufacturers SMIC and Huahong Group launched the National Integrated Circuit Innovation Center (国家集成电路创新中心) (Xinhua, July 3, 2018). The center’s general manager hailed its importance in an article for a magazine established by the Management Committee of the Shanghai Zhangjiang High-tech Park (where center is located) (Zhangjiang Science and Technology Review, June 6, 2019). Zhang Wei (张卫), who also served as Executive Dean of the School of Microelectronics at Fudan University, suggested that the National IC Innovation Center was China’s answer to SEMATECH in the United States and IMEC in Europe. Zhang credits SEMATECH, a research consortium established in 1987 and funded in part by member companies and the US federal government, with helping the United States regain the upper hand in a tense period of semiconductor competition with Japan that lasted into the mid-1990s. Similarly, the Belgian government created IMEC in 1984 to facilitate a European center of semiconductor excellence. Zhang highlights the role of consistent European government investments into IMEC R&D as a critical ingredient to its success.

The PRC government appeared to see the country’s particular weakness in EDA software as requiring the establishment of a distinct Chinese version of IMEC or SEMATECH. In June last year, the vice-governor of Jiangsu Province and the Mayor of Nanjing opened the National EDA Innovation Center, which now employs just under 100 researchers (Jiangbei New Area Propaganda and United Front Work Department, June 30, 2023). Several months earlier, Yang Jun (杨军), a professor at Southeast University, who was charged with leading the innovation center, said that the center would undertake the critical work of breaking the United States’ chokehold in EDA software (The Paper, May 13, 2023). In 2020, Chairman Liu Weiping (刘伟平) of Empyrean Technology, PRC’s leading EDA provider, said that PRC’s late arrival to the semiconductor industry meant that it had difficulties building domestic versions of EDA software. Such software typically require significant R&D investment and had already clustered around a global triopoly of Synopsys, Siemens EDA (formerly Mentor), and Cadence (PRC Electronic News, September 1, 2020). In 2022, EDA software, especially for some of the most advanced chips based on so-called gate-all-around (GAA) transistors, became subject to US export controls (US Federal Register, August 15, 2022). It is these tools that Yang Jun singled out as core elements of focus for the center’s work.

The center has been undertaking several projects and activities to create such tools. These include the leveraging of three joint key laboratories, the promotion of EDA competitions such as the Integrated Circuit EDA Elite Challenge with the goal of “increasing domestic market share of Chinese EDA players,” and the establishment of an independent EDA ecosystem by coordinating the participation of companies such as Empyrean (华大九天), GWX (国微芯), or X-EPIC (芯华章) (EDA ICISC Website, March 13).

Central and Local Initiatives Aim for Self-Sufficiency

In a 2018 series of S&T Daily articles, a Chinese expert in EDA development named Xia Gang (夏刚) weighed in on what the impact of a sanction or ban on US or German EDA tools would mean for domestic innovation. He suggested that a long-term ban on the scale of several decades would move Chinese actors to develop their own version. By contrast, a relatively short or intermittent ban would impose significant costs on Chinese chip designers but not trigger meaningful indigenization efforts as they would likely wait out the embargo (S&T Daily, May 17, 2018; see also CSET, May 2022). Regardless of whether such a ban was actually coming, Chinese policy makers pushed ahead. The National EDA Innovation Center, while established in June of 2023, had been announced almost three years earlier, in September of 2020, two years before EDA controls (Southeast University, September 17, 2020).

At least one investment firm in the PRC echoed Xia’s argument that restrictions would help Chinese EDA companies. In a 2022 research note published only months after the US controls on EDA, Haitong Securities (海通证券), a Hong Kong-based financial-services company, wrote that it believed that US action to restrict EDA tools made companies such as Empyrean more attractive investment targets (Haitong, October 19, 2022). What Xia Gang did not mention (though it appears in the Haitong note) is that Chinese policymakers are helping. Haitong pointed to a recently released promotion policy issued by the Shenzhen Municipal Reform and Development Commission aimed at lifting the semiconductor space. (Shenzhen Municipal Reform and Development Commission, October 8, 2010). The Shenzhen policy is merely one example of a much broader industrial policy in support of self-reliance that has been a priority of the central government for many years.

In 2020, the State Council issued a significant policy aimed at boosting domestic semiconductor and software development (State Council, August 4, 2020). Among the 40 measures it lists were tax exemptions for companies, the most generous of which went to those working on nodes below 28nm. Slightly less generous exemptions went to firms producing chips with nodes in the 28-65nm range, while special exemptions also applied to chip design software companies.

Local administrations followed up with similar policies. The Shanghai Municipal Government devised additional local measures such as innovation coupons that also target EDA with a preference for 28nm or below (Shanghai Pudong New District Government, March 1, 2022). To keep pace, the Chongqing Municipal government released an “Electronic Design Plan” that sets a target for 2027 of growing the industry size to a valuation of 12 billion RMB (Chongqing Municipal People’s Government, December 29, 2023). This plan also articulated hopes to anchor any R&D around its local universities—Chongqing University and Chongqing University of Posts and Telecommunications. It also intends to bring mature-node foundries to the city (fabricating chips with nodes in the 28-55nm range) alongside the EDA companies that design these chips. Not to be outdone, the Guangzhou city government envisions that it will be home to five companies with revenues of 100 million RMB by the end of 2024 (Guangzhou City People’s Government, March 18, 2022). The Shenzhen government, meanwhile, is host to an Integrated Circuit Design Application Industrial Park (圳集成电路设计与应用产业园) and related industrial bases (Industry and Information Technology Bureau of the Shenzhen Municipal Government, May 22, 2019; National IC Design Shenzhen Industrial Center, accessed March 15). This is not to mention the already widely reported on state-directed investments into the semiconductor industry, through which the government poured billions into the sector, with mixed results (Reuters, September 5, 2023).

Significant hurdles and gaps remain, despite this plethora of official support. In a recent research report, Shanghai-based Topsperity Securities (德邦证券) elucidated the challenges Empyrean—the PRC’s leading EDA maker—is facing (Topsperity Securities, October 30, 2023). Citing the company’s own prospectus, the report notes that Empyrean could not yet cover the full digital circuit process on its own, even if many of its offerings were now approaching international standards. The report includes “unsustainable tax incentives and government subsidies” in a subsection on risks for investing in Empyrean equities, a sign that some industry observers had been growing concerned that government support would not continue indefinitely and take localization efforts only so far.

Lessons for Leverage

PRC policymakers have assessed the need to localize a much broader set of technologies than just those targeted by US export controls. This distinction is especially salient if one considers two sub-classes of EDA software—leading-edge versions which US export controls do target and mature-node design software that they do not target.

It is more likely in the medium term that the PRC will make headway in EDA tools for processes at the 14nm level or above. The PRC government and industry players will cite those as successes in the overall drive for self-reliance, even if they do not help the country acquire leading technology denied by the United States through export controls. Longstanding Chinese industrial and innovation policies aim to displace foreign players across both groups of EDA tools. This makes it more difficult to leave one area free for relatively open trade while placing restrictions on the other.

The author would like to thank Martin Catarata for valuable feedback on earlier drafts of this article.

Notes

[1] “Mature node” generally (though not exclusively) refers to chips that rely on wafer feature sizes larger than 28nm.