China's Thirsty Chips
For nearly a decade, China has worked to ramp up the domestic production of semiconductors needed to make electronic chips. New export controls are expected to be imposed on China in 2024 to further curb its access to advanced chips. However, water scarcity may be a more difficult obstacle for China to overcome than trade roadblocks.
President Xi Jinping has sought 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. “Great scientific and technological capacity is a must for China to be strong and for people's lives to improve,” Xi stated.
For some years, Chinese officials have been concerned about “technological chokepoints” which might constrain their country’s advancement in chip innovation and production. Since 2016, the US has implemented a policy to block China’s access to advanced foreign chip technology and ultimately its ability to indigenize such production. This culminated in a set of new restrictions on October 7, 2022, on exports of advanced chips to China to prevent their use in military technology, and was further expanded in August by related restrictions on US outbound investment into China. In January 2023, Japan and the Netherlands agreed to US requests to tighten restrictions on sales of technology that could be used in producing advanced chips. In October 2023, the Biden Administration imposed additional checks on China's ability to procure advanced semiconductors for use in AI and military technology.
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.
Enormous quantities of ultrapure water are needed in semiconductor production. A semiconductor plant (known as a fab) typically requires about five million gallons per day, and ten million for large foundries, equivalent to the consumption rate of 300,000 households. In comparison, an Olympic-size swimming pool contains 660,000 gallons. Large quantities of ultra-pure water must be processed so that all impurities are removed before it is used to rinse each chip and remove any contaminating debris. Semiconductor production also requires large amounts of energy, mostly fossil fuels. Chinese researchers estimate that the energy required to power the domestic semiconductor industry annually is equivalent to the annual energy consumption of a city of 25 million people such as Shanghai or Beijing.
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. Other countries that face water stress, like South Korea and Singapore, reuse a much higher percentage of the water involved in semiconductor production.
All semiconductor plants in Singapore, for example, recycle their water, with an industry average of 45%, and the country prioritizes desalination and new technologies like NEWater (NEWater program recycles wastewater for industrial use and drinking after further treatment) to manage scarce water resources. Taiwan, facing water management issues and periodic droughts, recycles nearly 85% of the water used for semiconductor production. Compared to other producers, China recycles a relatively small amount of water needed for semiconductor production. One study found that Chinese fabs used three times more water than US plants in the rinsing process and power generation. By some estimates, China’s semiconductor sector accounts for 27 percent of the country’s total industrial water use.
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. 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).
Many of the Chinese cities that are investing in new semiconductor plants such as Beijing, Tianjin, Shenzhen, and Shanghai face water constraints. Jiangsu Province, the heart of China’s semiconductor industry, is considered to be one of the most vulnerable to the effects of climate change, which will make water availability even less predictable. They are already drawing heavily on dwindling groundwater, which agriculture, the primary water user in China, also requires. Despite a policy effort to improve water quality in China, especially of surface water, pollution of groundwater remains a serious problem. In 2022, the percentage of groundwater unsuitable for industrial use increased from 20.6% to 22.4%, according to China Water Risk, a Hong Kong-based non-profit.
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. 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.
Since ancient times, Chinese leaders have seen water management as central to their governance and mandate to maintain social stability. Xi is no exception, as the recent publication of his In-depth Study and Implementation of Xi Jinping's Important Discussions on Water Control attests. Xi set aims to create an “ecological civilization” and lead “a global green industrial revolution,” but climate change creates an unpredictable environment that resists his efforts at control. Xi has continued and enhanced a massive state project to divert water domestically to its parched areas, but this is an infrastructural solution that does not address deeper issues of inefficient and unsustainable water use.
Climate change will only exacerbate these challenges, especially in Jiangsu province, where severe weather risks from droughts, typhoons, and flooding are slated to increase. 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.
This article was originally published by the Hinrich Foundation in a slightly different version https://www.hinrichfoundation.com/research/article/sustainable/china-thirsty-chips/ and another shorter version was republished at https://www.cna.org/our-media/indepth/2024/01/china-thirsty-chips.
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