China’s thirsty chips

For nearly a decade, China has worked to ramp up the domestic production of semiconductors needed to make electronic chips. This supports the goal that President Xi Jinping has set to establish China as a leading power in global science and technology by 2049, the 100th anniversary of its founding.

Though today China accounts for nearly three-quarters of global demand for semiconductors, Chinese plants only produce about 15% of the world’s output, largely of lower-end commodity chips.¹ “Great scientific and technological capacity is a must for China to be strong and for people's lives to improve,” Xi stated.²

Almost a decade before these export controls were imposed, the Chinese government has been allocating massive amounts of subsidies — more than US$46 billion — to develop semiconductor technology through the National Integrated Circuit Industry Investment Fund (known as the Big Fund). With the imposition of broader sanctions on the Chinese semiconductor sector, Chinese companies are now seeking to switch to domestically made components, even for chips that are not subject to Western controls. A new infusion of funds will add another US$40 billion to China's effort. Before we get too alarmed about China as a future semiconductor competitor, it’s worth looking at a major overlooked constraint on the sector’s development in China — water, or, rather, the lack of it.

The impact of China’s industrial goals on water resources is among the factors measured by the Hinrich-IMD Sustainable Trade Index. The Index measures the relative capacity of 30 key economies across Asia, Europe, and the Americas to achieve sustainable growth through global trade.

Among other indicators, the index measures and ranks economies on wastewater treatment and energy intensity. These indicators are part of the economic and environmental "pillars" that the index use to evaluate how governments manage trade-related externalities.

China faces a geographic mismatch in terms of the location of the water supply (mostly in the southwest of the country) and the areas with the greatest demand for water (mostly in the north and east coast). Most of China’s industry – including key semiconductor fabs – is located along its eastern coast, where water quality is poor. The north, where some of these fabs are located, is challenged both by high water demand from agriculture and industry, and water pollution. Though Chinese leaders recognize the challenges that water scarcity and water pollution pose and have taken measures to address them in recent years, water-intensive economic priorities like the development of the semiconductor sector typically are set without regard for available resources or competing demands on them.

While China is not alone globally in avoiding hard choices in priority sectors, the country faces an especially severe lack of water availability and a struggle to improve quality. Surface water, municipal water, groundwater, and third-party supplies typically are the primary sources for chip production.⁶ Other countries that face water stress, like South Korea and Singapore, reuse a much higher percentage of the water involved in semiconductor production.

China’s top 10 semiconductor firms are located in places where there are water challenges. Take Semiconductor Manufacturing International Corporation (SMIC), China’s largest chip producer. SMIC stunned the world last year by producing its own 7-nanometer chips, even without the world’s most advanced semiconductor manufacturing equipment — this took SMIC two years, a much faster leap from the lower-performance 14-nanometer predecessor than widely thought possible. Questions remain among analysts over the SMIC chip’s yield, cost of production, and how much it relied on copying Western and Taiwanese technology.¹⁰

However, SMIC’s main locations are all in areas with high water stress. A new plant is being built in Tianjin that will produce 12-inch wafers and chipmaking equipment, but this city has the lowest water per capita availability in China (115.6 m3 per person).¹¹

Beijing, which has severe water stress (163.2m3 per capita), also is prone to dust storms which pose an additional challenge to a production process that must remove all impurities.¹³ Other cities with semiconductor production such as Wuxi have sufficient water but face significant pollution issues which challenge the availability of clean water for semiconductor producers like Wingtech Technology, which has facilities in Wuxi.

Even in areas that usually have adequate water, climate change has led to drought, for example in the central China city of Wuhan, where China’s flagship state-owned Yangtze Memory Technologies Corp. (YMTC) was founded in 2016 to reduce China’s dependence on foreign chips. In the past, Wuhan typically was subject to flooding and consequently was included in a state experimental program launched a decade ago to create “sponge cities” which would use natural approaches to drainage. In 2022, however, Wuhan and other cities along the Yangtze river basin experienced the worst drought since modern records began in the 1960s, which lowered the water level — usually plentiful in the summer — to levels not usually seen outside the end of the winter dry season. Semiconductor firms complained that energy shortages, caused by disruptions to hydropower plants, adversely affected their production.

Climate change will only exacerbate these challenges, especially in Jiangsu province, where severe weather risks from droughts, typhoons, and flooding are slated to increase.¹⁵ Much of China’s response to climate change involves shifting to green technologies to reduce its global greenhouse gas emissions. It is a great irony that many of the thirsty chips the semiconductor companies produce will be used to power green technologies such as wind turbines, solar panels, and electric cars. Yet the fabs that produce the chips not only compound China’s water scarcity, they also require a lot of energy and generate large quantities of greenhouse gases. The enormous investments in the semiconductor sector in China highlight the priority of technological self-reliance, but come at a high environmental cost.

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[1] David Jacob, “If the US Doesn’t Thwart China’s Effort to Become Semiconductor Self-Sufficient, Climate Change Might,” South China Morning Post, March 28, 2023, https://www.scmp.com/comment/opinion/article/3214995/if-us-doesnt-thwart-chinas-efforts-be-semiconductor-self-sufficient-climate-change-might.
[2] Cited in Li Yuan, “Xi Jinping’s Vision of Technological Reliance Runs into Reality,” New York Times, August 29, 2022, https://www.nytimes.com/2022/08/29/technology/china-semiconductors-technology.html?auth=login-google1tap&login=google1tap.
[3] Gregory C. Allen, “China’s New Strategy for Waging the Microchip Tech War,” Center for Strategic and International Studies, May 3, 2023, https://www.csis.org/analysis/chinas-new-strategy-waging-microchip-tech-war.
[4] Nir Kshetri, “The Economics of Chip War: China’s Struggle to Develop the Semiconductor Industry,” Computer, Vol. 56, June 2023, https://www.computer.org/csdl/magazine/co/2023/06/10132020/1NnHezc8uqs. 
[5] Qi Wang, Nan Huang, Zhuo Chen, et al., “Environmental data and facts in the semiconductor manufacturing industry: An unexpected high water and energy consumption situation,” Water Cycle, Vol. 4 2023, https://www.sciencedirect.com/science/article/pii/S2666445323000041. 
[6] Idem.
[7] Chris Jones and Edwards Vacuum, “Water Challenges for the Semiconductor Industry,” Semiconductor Digest, October 22, 2022, https://www.semiconductor-digest.com/water-supply-challenges-for-the-semiconductor-industry/. 
[8] Qi Wang, Nan Huang, Hanying Cai, et al. “Water strategies and practices for sustainable development in the semiconductor industry,” Water Cycle, Vol. 4 2023, https://www.sciencedirect.com/science/article/pii/S2666445322000277 
[9] Elizabeth Wishnick, “Water with your Chips? Semiconductors and Water Scarcity in China,” The Diplomat, August 13, 2021, https://thediplomat.com/2021/08/water-with-your-chips-semiconductors-and-water-scarcity-in-china/. 
[10] Arran Hope, “China’s Top 10 Semiconductor Firms,” The China Project, February 3, 2023, https://thechinaproject.com/2023/02/03/chinas-top-10-semiconductor-firms/. 
[11] The most recent data was for 2021. “Water Consumption: City: Daily per Capita: Residential: Tianjin,”
https://www.ceicdata.com/en/china/water-consumption-daily-per-capita-residential/cn-water-consumption-city-daily-per-capita-residential-tianjin. 
[12] China Water Risk, “2022 China State of the Ecology & Environment Review,” July 21, 2023, https://chinawaterrisk.org/resources/analysis-reviews/2022-state-of-ecology-environment-report-review/ 
[13] The latest data was from 2021. “Water Consumption: City: Daily per Capita: Residential: Beijing,”
https://www.ceicdata.com/en/china/water-consumption-daily-per-capita-residential/cn-water-consumption-city-daily-per-capita-residential-beijing. 
[14] “深入学习贯彻习近平关于治水的重要论述》出版发行”[In-Depth Study and Implementation of Xi Jinping’s Important Discussions on Water Control Published], July 19, 2023, http://paper.people.com.cn/rmrb/html/2023-07/19/nw.D110000renmrb_20230719_2-01.htm 
[15] Jacob.

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