The US semiconductor industry is in pretty good shape, argues the Cato Institute, while the Chinese semiconductor industry is struggling to gain traction.

Cato quotes Bureau of Economic Analysis (BEA) data which show U.S. “Semiconductor and other electronic component manufacturing” to have increased substantially in recent years, topping $113.4 billion in real gross output and $88 billion in real value-added in 2018 (the last year for which detailed data are available).

Real gross output for “Semiconductor and related device manufacturing” alone reached $64.9 billion.

The SIA further notes that there are fabs in 18 states, employing more than 240,000 Americans, and that the United States has 12.5% of global semiconductor manufacturing capacity.

And while the U.S. industry does indeed utilize fabs around the world, the largest share (44.3%) of that work remains in the United States while only a small portion (5.6%) is in China.

The US is also a top-5 global exporter of semiconductors and related equipment, shipping almost $47 billion in goods last year.

These and other data led the SIA to conclude in its 2020 “State of the U.S. Semiconductor Industry” report that “the semiconductor manufacturing base in the United States remains on solid footing.”

In terms of sales (not just manufacturing), moreover, the SIA reports that the U.S. industry is the global leader in market share, with “nearly half” of the entire world semiconductor market – a share that has been remarkably steady (ranging from the mid-40s to low-50s) since the late 1990s – and sales leadership in every major regional market, including China.

Sales by U.S semiconductor firms also grew from $76.7 billion in 1999 to $192.8 billion in 2019 – a CAGR of almost 5%.

Beyond output and sales, the U.S. semiconductor industry has been a global leader in capital spending (“capex”) and research and development – a testament to not only their business acumen but also U.S. capital markets.

The SIA notes that total R&D and capital expenditures by U.S. semiconductor firms (including “fabless” companies) was $71.7 billion in 2019, growing steadily between 1999 and 2019 at a 6.2% annual rate.

R&D expenditures hit $39.8 billion last year, constituting 16.4% of the industry’s total sales last year – a “R&D intensity” second only to pharmaceuticals in the United States and the highest in the world.

The U.S. industry’s capex has been similarly world-class: SIA reports that 2018 capital expenditures reached “an all-time high of $32.7 billion” and constituted 12.5% of sales in 2019, with only Korea having a larger global share of semiconductor capex last year.

According to the U.S. National Science Board’s 2020 report on R&D Trends, U.S. computer and electronic (including semiconductor) companies spent more on R&D in 2016 (the last year available) than any other country surveyed – often many times more – with only South Korea’s sector having greater share of total or manufacturing R&D than the United States.

The BEA further calculates that foreign multinational corporations in 2017 spent $7.3 billion and $2.2 billion on R&D and capex, respectively, for their U.S. affiliates in the “semiconductors and other electronic components” sector, up from $4.4 billion and $1.9 billion in 2007.

And U.S. semiconductor companies’ stock prices have steadily climbed over the last decade. As a result of this investment, the SIA notes that in 2019 the United States remained at or near the “leading edge” of current semiconductor technology (“essentially neck-and-neck [with Korea and Taiwan] in logic process technology as all three nations have raced to bring leading-edge 7/10 nm technology to market”).

Taiwan’s TSMC has reportedly begun production of 5 nm chips, but these are just now hitting the market. U.S.-based Intel, meanwhile, is racing to catch up after making what appears to be a bad bet on 10 nm wafers a few years ago.

In short, the U.S. semiconductor industry may have temporarily lost its global manufacturing lead, but it’s still quite healthy – in many ways still globally dominant – and is investing billions of its own dollars to stay at or near the top in the future (something the companies’ shareholders seem to think they will accomplish).

China, on the other hand, remains years behind industry leaders in the United States, Korea and Taiwan, and it might never catch up, despite (or perhaps because of) boatloads of subsidies and industrial planning.

In fact, a detailed 2019 report on China’s semiconductor industry by the United States International Trade Commission showed that it is precisely this planning and subsidization, along with human capital constraints and international competition, holding back China’s industry.

China’s semiconductor industrial plans have lacked defined goals and clear implementation strategies, and have been hampered by bureaucratic redundancies.

Relying heavily on state-owned enterprises (SOEs), these plans have been hindered by poor management, production inefficiencies, and a level of support from the state that resulted in profligate spending.

In particular, the SOEs lack absorptive and innovative capacity, producing chips that fail to gain commercial traction.

China’s current plans look more sustainable, but still rely heavily on well-funded but poorly directed SOEs that benefit from a market that lacks true competition.

At the same time, some of the larger challenges that hindered previous development, such as a dearth of human capital, remain unaddressed.

The report thus concludes that China’s industrial planning efforts – the express basis for new U.S. government subsidies – “will not achieve their desired success,” a conclusion shared by many other industry experts.

In fact, analysts recently told the Wall Street Journal that China’s national champion, Semiconductor Manufacturing International Corp. (SMIC), “is still around five years behind TSMC and the gap will likely remain in the foreseeable future.”