Semiconductor Industry Challenges 2025 | CSIS Report

CSIS Semiconductor Report Overview and Strategic Context

The Center for Strategic and International Studies (CSIS) has published a comprehensive analysis titled “Growing Challenges for the Semiconductor Design Industry: The United States Cannot Take Leadership for Granted.” Authored by Sujai Shivakumar, Charles Wessner, and Thomas Howell as part of CSIS’s Renewing American Innovation program, this February 2025 report delivers a stark warning about the erosion of America’s semiconductor design advantage — the most valuable segment of the global chip industry.

The semiconductor industry challenges identified in this CSIS report carry profound implications for national security, economic competitiveness, and the future of artificial intelligence. Chip design accounts for over 50 percent of total value added in semiconductor production — more than manufacturing, packaging, or any other activity in the supply chain. US designers currently lead globally in every major segment of the industry, but this dominance faces unprecedented pressure from Chinese firms backed by billions in state support, a growing domestic talent gap, and the unintended consequences of export control policies.

The release of China’s DeepSeek AI app, which rattled Silicon Valley and financial markets, demonstrates the speed at which assumptions of US technological leadership can be upended by China’s rapidly growing innovation capabilities. For enterprise leaders, policymakers, and technology strategists, the CSIS semiconductor industry analysis represents essential reading for understanding one of the most consequential strategic competitions of the twenty-first century. Explore how interactive technology analyses help teams understand complex policy reports.

Chip Design Leadership and National Security Implications

The CSIS report establishes that semiconductor design leadership is fundamentally a national security issue, not merely a commercial concern. US-designed chips are embedded in virtually all American defense platforms, playing a key role in battlefield performance, information acquisition, and strategic evaluation. If a strategic adversary could design and deploy chips more advanced than those used by the United States, it could gain a commanding advantage in every aspect of military preparedness, up to and including a major conflict.

The national security implications extend across three critical dimensions. First, in defense systems, the quality and reliability of chips embedded in US military platforms directly determine combat effectiveness. Second, in artificial intelligence — the domain expected to determine both economic advantage and battlefield capabilities in the twenty-first century — most leading-edge AI chips are designed by US firms like Nvidia and AMD. Third, in cybersecurity, chip design leadership improves the ability to protect design information, trace and control intellectual property, and build security directly into hardware architectures.

The report highlights a particularly alarming vulnerability: the offshoring of US chip manufacturing means the most advanced US designs are fabricated primarily in Taiwan, concentrated at Taiwan Semiconductor Manufacturing Company (TSMC). While this manufacturing vulnerability is beginning to be addressed through CHIPS Act investments, a far greater vulnerability would emerge if the United States’ ability to create the most sophisticated chips were eclipsed by a strategic adversary. Should US defense and commercial sectors ever need to utilize chips designed in China because equivalent domestic alternatives were unavailable, the nation’s entire defense posture, cybersecurity, and counterintelligence operations could be fundamentally compromised.

CHIPS Act Manufacturing Focus Leaves Design Gaps

The CHIPS and Science Act of 2022, enacted as strongly bipartisan legislation to address semiconductor supply chain vulnerabilities, focused its $52.7 billion investment primarily on manufacturing capacity, equipment, and packaging. While this addressed the critical absence of leading-edge fabrication on US soil, the CSIS report argues it left the equally important chip design sector without adequate policy support — a strategic oversight that needs urgent correction.

Secretary of Commerce Gina Raimondo’s 2024 CSIS presentation on CHIPS Act implementation highlighted manufacturing milestones but underscored the legislation’s design sector gaps. The report notes that while CHIPS incentivized NIST and the National Science Foundation to expand semiconductor workforce programs, these efforts remain insufficient relative to the scale of the challenge. The design industry’s needs — including sustained R&D investment, talent pipeline development, EDA tool innovation, and competitive tax policies — require dedicated policy frameworks that the current CHIPS Act does not provide.

CSIS’s analysis of the CHIPS Act gaps is particularly relevant as policymakers deliberate over a potential “CHIPS Act 2.0.” The report argues that any successor legislation must recognize the critical contributions of the design industry and implement comprehensive measures to support continued US leadership in design alongside manufacturing. Without this balance, the United States risks building world-class factories that fabricate chips designed by foreign competitors — an outcome that would undermine the strategic intent of the original legislation.

Current US Semiconductor Design Dominance Under Threat

The United States currently maintains global leadership in semiconductor design across every major market segment. US fabless firms — companies that design chips but outsource manufacturing — dominate markets from high-performance computing and AI accelerators to mobile processors and networking equipment. This leadership translates into enormous strategic and economic leverage, as US-designed chips are superior in performance, sophistication, energy efficiency, and security.

However, the CSIS report identifies growing “clouds on the horizon.” Chinese design firms, backed by unprecedented state support, are gaining global market share at the expense of US designers across multiple segments. This is not limited to the leading edge: in many semiconductor categories not defined by component density, Chinese firms already possess the design talent, manufacturing capacity, scale, and resources to compete effectively with Western companies. The breadth of this competitive challenge extends far beyond the handful of cutting-edge AI chips that dominate headlines.

The report emphasizes that design industry competitiveness depends on a complex ecosystem including electronic design automation (EDA) tools, intellectual property libraries, testing infrastructure, and — most critically — highly skilled engineering talent. Erosion in any of these areas can cascade throughout the ecosystem, weakening overall design capability even where individual firms remain strong. The interdependence of these factors means that maintaining US semiconductor design leadership requires a holistic strategy, not piecemeal interventions targeting individual companies or technologies.

China’s Semiconductor Design Advances and State Support

China’s semiconductor design industry has achieved what the CSIS report describes as “startling” advances, driven by massive government support at central, provincial, and municipal levels. The most prominent achievement was Huawei’s 2023 introduction of the Kirin 9000S system-on-chip, manufactured on a 7 nanometer process by SMIC — a feat that occurred much sooner than US policymakers anticipated and demonstrated China’s determination to achieve chip design independence.

The scale of Chinese investment in semiconductor design capabilities is staggering. Government funding flows through multiple channels including national IC industry investment funds, provincial technology development programs, direct subsidies to design firms, preferential tax treatment, and guaranteed procurement from state-owned enterprises. This multi-layered support structure enables Chinese design firms to sustain competitive R&D spending even when their products cannot yet match Western alternatives on performance metrics.

The Huawei-SMIC partnership exemplifies the Chinese approach. Despite SMIC being generations behind leading-edge foundries in both processes and equipment, the partnership has reportedly stretched older-generation equipment to manufacture chips at the 5nm process — albeit with tremendous inefficiencies and at great cost. The CSIS report notes a sobering reality: this is a manufacturing capability that even the United States will lack until various CHIPS Act projects begin high-volume production. China’s willingness to absorb enormous costs to achieve strategic technology goals represents a fundamentally different competitive dynamic than traditional market-based competition.

Export Controls: Unintended Consequences and China’s Response

The CSIS analysis presents a nuanced assessment of US semiconductor export controls — acknowledging their necessity while documenting their significant unintended consequences. While the controls disrupted Chinese chip design firm operations in the short term, their imposition catalyzed an unprecedented state-backed effort to promote the self-sufficiency and international competitiveness of China’s design sector.

Recently tightened controls restricted not only the export of chip design software to “countries of concern” but also specific US-designed chips with advanced AI applications. China’s response has been to mount well-funded efforts to improve its design capability for AI chips, develop indigenous alternatives to Western EDA tools, and accelerate adoption of open-source architectures that bypass US intellectual property controls. As one Chinese observer quoted in the report stated, “we should have confidence that China will eventually win the AI war with the US.”

The export control paradox illustrates a fundamental challenge in technology competition policy. Controls that are too restrictive risk accelerating the very self-sufficiency they aim to prevent, while controls that are too permissive fail to protect strategic advantages. The CSIS report suggests that calibrating this balance requires sophisticated understanding of semiconductor industry dynamics, Chinese industrial policy capabilities, and the long-term consequences of technology denial strategies. Explore our interactive library for more analyses of technology policy challenges.

RISC-V Architecture and Indigenous EDA Tool Development

Two technological developments pose particularly significant structural challenges to US semiconductor design leadership: the rise of RISC-V open-source chip architecture and China’s push to develop indigenous electronic design automation (EDA) tools. Together, these represent pathways through which China could achieve meaningful design independence from Western technology infrastructure.

RISC-V is an open-source instruction set architecture that allows designers to create processors without licensing fees from Western companies — most notably ARM Holdings, whose proprietary architecture underpins the vast majority of mobile and embedded processors worldwide. China is aggressively adopting RISC-V across government, academic, and commercial sectors, viewing it as a strategic pathway to reduce dependency on Western intellectual property. The CSIS report identifies this as a fundamental structural challenge because, unlike export-controlled proprietary technologies, open-source architectures cannot be restricted through traditional policy mechanisms.

The EDA tool challenge is equally significant. Electronic design automation software — dominated globally by US firms Synopsys, Cadence, and Mentor Graphics (now Siemens EDA) — is essential for designing modern semiconductors. China’s efforts to develop indigenous EDA alternatives, while still in early stages, represent a long-term strategic priority. Success in this area would remove one of the most powerful leverage points that US export controls currently possess. The combination of RISC-V adoption and indigenous EDA development, even if each progresses incrementally, could fundamentally alter the competitive landscape within a decade.

Talent Crisis in Semiconductor Design Engineering

Perhaps the most critical vulnerability identified in the CSIS semiconductor industry report is the growing shortage of semiconductor design engineering talent in the United States. The report argues that a long-term, well-financed effort on talent development is essential to sustaining US chip design leadership — and that current efforts fall significantly short of what is needed.

The talent challenge operates on multiple dimensions. US universities produce far fewer semiconductor engineering graduates than demand requires, with many programs having reduced or eliminated hardware-focused curricula in favor of software engineering over the past two decades. International talent pipelines, historically a strength of the US semiconductor ecosystem, face increasing restrictions from immigration policies and growing competition from attractive opportunities in China, Europe, and other regions investing heavily in chip capabilities.

China’s inherent advantages in talent development compound the challenge. With a larger population base, massive government investment in STEM education, and growing prestige of semiconductor engineering careers within China, the CSIS report identifies talent as a domain where China’s structural advantages may prove most difficult for the United States to counter. The report calls for comprehensive workforce development strategies spanning K-12 STEM education, university semiconductor programs, immigration reform for skilled workers, and industry-government partnerships for mid-career reskilling. Without decisive action on talent, no amount of manufacturing investment or export control enforcement will sustain US semiconductor design leadership over the long term. For deeper insights, explore our interactive library of industry analyses.

Policy Recommendations for Sustaining US Chip Leadership

The CSIS report concludes with a comprehensive set of policy recommendations for sustaining US semiconductor design leadership. Central to these is the argument that any CHIPS Act 2.0 legislation must explicitly include design industry support alongside manufacturing incentives, recognizing that design accounts for over half the value in the semiconductor supply chain.

Specific policy recommendations include sustained federal investment in semiconductor design R&D, expanded workforce development programs targeting design engineering talent at all levels, strategic calibration of export controls to balance security objectives with avoiding counterproductive acceleration of China’s self-sufficiency, competitive tax policies for domestic design firms, support for EDA tool innovation to maintain US leadership in design software, and strengthened international partnerships with allied nations’ semiconductor design ecosystems.

The report emphasizes that these policies must be implemented as an integrated strategy, not as isolated interventions. The semiconductor design ecosystem depends on the reinforcing interactions between talent, tools, IP, and market access — weakening any single element cascades throughout the system. CSIS argues that the United States must approach semiconductor design policy with the same urgency and scale that it has brought to manufacturing through the CHIPS Act, recognizing that without design leadership, manufacturing investments alone cannot secure America’s strategic position in the global chip industry.

The semiconductor industry challenges documented by CSIS demand attention from enterprise leaders, policymakers, and technology strategists. In an era where semiconductor capabilities increasingly determine both economic prosperity and national security, complacency about design leadership is a luxury the United States cannot afford. The window for decisive policy action is narrowing, and the consequences of inaction will be measured not in quarterly earnings but in decades of strategic advantage or disadvantage.