Over recent months, the semiconductor industry has witnessed a significant downturn, marked by widespread production cuts and reductions in order volumeThe repercussions of these changes are starkly visible in the plummeting prices of chips, which, in some cases, have seen reductions exceeding 80%. For instance, the price of certain chips that once commanded over 3,500 yuan has nosedived to about 600 yuanSuch dramatic shifts prompt a closer examination of the dynamics within this crucial sector.

The trend is particularly pronounced in companies like Texas Instruments (TI). Their power management chips experienced a price surge, climbing to around 45 yuan per unit back in May 2021. Fast forward to today, and those prices have dramatically decreased to approximately five to six yuanThis change reflects a broader market trend, demonstrated by several other chips from TI that maintained a market value of about 100 yuan in March, but have since dropped to roughly 20 yuan.

And it doesn't stop there; the price of driver chips has also declined by nearly 40%. To illustrate, an analog chip that previously sold for five dollars has seen its price fall to just 0.80 dollars

The downturn extends across the board, including memory chips, which have begun to decline in price; the average contract price for DRAM in the second quarter has dropped by 10.6% year-over-year, marking the first decline in recent years.

Previously synonymous with scarcity, components such as driver chips, analog chips, consumer MCUs (Microcontroller Units), storage chips, and GPUs are now being subjected to price reductions, underscoring an industry-wide shift.

Intel, a key player in the sector, has also signaled a contraction in orders, anticipating a reduction of flagship mobile chip prices by 30% to 40% by the end of the yearMeanwhile, Samsung has ceased its procurement of LCD panels from suppliers and plans to lower storage chip prices in the latter half of the year.

Many observers might argue that these price drops are a positive development, as the once critical shortage of chips appears to be easing

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While this perspective holds validity for those in need of chips, it casts a shadow of concern for Chinese manufacturers, who are now navigating a price war seemingly orchestrated by American and European companies.

Scrutinizing the nature of these price drops reveals that most products, bar GPUs—which require a fabrication process below the 14-nanometer standard—are concentrating around more accessible fabrication techniques often exceeding the 40-nanometer thresholdNotably, several Chinese companies have made strides towards achieving 12-nanometer chip manufacturing capabilitiesLonghua Storage’s 128-layer 3D NAND flash memory has already entered mass production, boasting some of the highest storage density per unit area globally, thereby outpacing established leaders like Samsung, Micron, and Hynix in terms of technology.

The implications are clear: China has reached a point of self-sufficiency in producing low-end chips, with manufacturing standards surpassing some of those in developed nations

This newfound autonomy is already influencing demand for imported low-end chips, evidenced by a reported decrease of 11.4% in integrated circuit imports during the first four months of this year compared to the same period last year.

The warning from Intel about weakening demand highlights the precarious position of many semiconductor firms, particularly in light of aggressive pricing strategies from international competitors aimed at courting the low-end chip marketThe current climate indicates a concerted effort to undercut Chinese suppliers, which has led to dramatic price dropsHowever, it’s essential to note that high-end chips, including those utilized in the automotive and power grid sectors, remain in short supply and command premium prices.

Exacerbating these market dynamics, the U.Sis contemplating restrictions on the export of semiconductor manufacturing equipment to Chinese manufacturers, which adds another layer of complexity to the challenge confronting China's semiconductor ambitions

Without access to necessary tools, the development of advanced chips could be stymied.

Throughout history, China has faced and overcome various forms of economic pushback from foreign entities, often emerging more robust as a resultTo illustrate this point, let’s consider the example of Vitamin CIn 1933, Swiss chemist Tadeus Różycki invented a method for the industrial production of Vitamin C, which was subsequently patented by Swiss firm RocheUtilizing this technology, Roche dominated the market, seeing the price of Vitamin C surge from four dollars per kilogram in 1973 to eighteen dollars in 1994.

To circumvent Roche’s technological stronghold, China developed its own production method, significantly reducing costsBy 1994, Chinese production of Vitamin C reached 26,000 metric tons, with a hefty portion allocated for export, creating a dominant share of the global market

Seeing the rise of China’s Vitamin C sector, global producers initiated a price war to undermine Chinese enterprises, driving prices down from eighteen to four dollars per kilogram.

Roche eventually faced substantial penalties from the EU and U.Sfor antitrust violations, which significantly weakened its market positionConsequently, Chinese firms gradually supplanted Roche and others in the Vitamin C market, displaying the resilience and adaptability of Chinese enterprises.

Similar scenarios have unfolded in other sectors as wellFor example, the German firm Bosch had priced its brake systems at 2,000 yuan until China's BYD developed its own competing version, driving prices down to 800 yuanThe emergence of Shanghai Microelectronics’ 28-nanometer lithography machine prompted ASML to change its pricing strategy as well.

Furthermore, when Hefei Changxin introduced DDR4 memory sticks, competitors like Samsung swiftly reacted by slashing their prices