Semiconductors Spark a New Era of Global Competition

Key Takeaways:

• Technological Backbone and Strategic Vulnerability: Semiconductors, the linchpins of modern electronics, encapsulate the dual nature of being both catalysts for innovation and points of strategic vulnerability. 

• Global Power Tug-of-War: The semiconductor industry has become a central battlefield in the US-China power struggle, reflecting broader themes of technological supremacy and economic security.

• Ambitious China:  China's ambitious plans to dominate semiconductor manufacturing by 2030 through entities like SMIC and Huawei signal a significant shift in global tech dynamics, directly challenging US hegemony and igniting the trade war tensions.

• The European Perspective: Amidst US-China tensions, Europe's attempt to assert its autonomy through the European Chips Act underscores a collective move towards technological self-sufficiency. While ambitious, this initiative faces long-term challenges, reflecting the complexities of realigning global semiconductor supply chains and production capabilities.

  
  

• Risks and Global Market Implications: The ongoing geopolitical skirmishes introduce substantial risks for businesses reliant on stable semiconductor supplies, potentially leading to production bottlenecks and regulatory hurdles. Additionally, military escalations, particularly in the Taiwan Strait, could exacerbate supply chain disruptions, echoing the global shortages experienced during the Covid-19 pandemic but with potentially far-reaching consequences for the semiconductor industry and beyond.

Semiconductors, colloquially known as 'chips', serve as the cognitive engines of contemporary electronics. This versatile technology holds paramount significance, enabling unprecedented capabilities in various domains, from everyday products to cutting-edge applications like artificial intelligence, electric cars, and hypersonic missile guidance systems. However, their widespread utility also underscores their strategic vulnerability. 

This vulnerability becomes increasingly pronounced in the current geopolitical context, where the control and supply of semiconductors have become key battlegrounds. Nations recognize these chips as not just components of technology but as pivotal assets in maintaining national security and fostering economic dominance. 

Consequently, semiconductors have transformed into critical focal points of international competition, highlighting their dual role as both enablers of innovation and potential Achilles' heels in the face of global tensions.

A fierce competition between the United States and China unfolds as they vie for dominance in acquiring endogenous chipmaking capabilities. This global power struggle significantly influences markets and promises to shape future trajectories in technology and geopolitics.

Chip Wars

The competition for domestic advanced chip manufacturing became a crucial aspect of the ongoing tensions between the US and China. These tensions were brought to the forefront as the American government and companies expressed growing concerns over China's expansion in the semiconductor market, allegedly through unfair subsidizing practices.

In a strategic endeavor to assert global dominance in the semiconductor industry, China inaugurated state-led efforts in 2014 aimed at securing leadership in semiconductor manufacturing by 2030, with an ambitious goal of fulfilling 70% of its domestic demand by 2025. 

Central to this strategy was the bolstering of the Semiconductor Manufacturing International Corporation (SMIC) as a pivotal foundry and the elevation of Huawei as its leading global brand for mobile devices and wireless infrastructure.

This assertive move by China was among the primary catalysts for the intensification of the "Trade War" with the United States. Beginning in 2017, the U.S. government commenced a series of sanctions targeting Chinese technology firms, notably Huawei and its affiliates. Despite these pressures, by 2022, China had carved out a significant niche for itself in the global semiconductor production landscape, accounting for 25% of the worldwide output, spearheaded by SMIC.

In response, the United States legislated a bipartisan measure, the CHIPS and Science Act of 2022, which epitomizes the nation's resolve to maintain its supremacy in research, development, and the domestic manufacturing of cutting-edge semiconductor technology. Additionally, the Act aims to curtail China's access to indispensable foreign designs and critical semiconductor manufacturing equipment, including advanced lithography machines essential for producing chips smaller than 10 nanometers. 

In defiance of these restrictions, SMIC made headlines with its announcement of entering mass production of 7nm chips for Huawei smartphones and its ventures into alternative methodologies for crafting high-end microprocessors.

On the American front, the CHIPS Act has introduced additional incentives for international and domestic companies to expand their manufacturing presence within the United States. Notably, it has encouraged firms like the Taiwan Semiconductor Manufacturing Company (TSMC) to initiate factory lines in states such as Arizona, alongside bolstering American industries with the means to produce larger, albeit less sophisticated semiconductors (up to 28nm), in locations like New York. 

Analysis

The global semiconductor landscape is deeply influenced by a complex web of geopolitical considerations, underpinned by a supply chain that spans continents, intricately woven together by economic imperatives and the legacies of historical developments. This multifaceted nexus has, over time, crafted a scenario where the strategic maneuvering around these critical components reflects broader tensions and alliances on the international stage, marking a new chapter in the geopolitics of technology. 

In the early stages of the microchip era, the United States set the benchmark for research and development within the semiconductor industry, a prowess honed during the Cold War's technological race. A pivotal strategic maneuver then saw production shift to East Asia, a move driven by the allure of cost efficiencies through outsourcing. This decision entrenched a global dependency on foreign manufacturing entities, weaving the initial threads of what would become a complex, global supply chain.

Today, this landscape is characterized by a specialized geographical division of labor: lithography machines are predominantly produced in the Netherlands, design innovation remains largely anchored in the US, and the majority of semiconductor manufacturing takes place in East Asia. Here, about 75% of the world's semiconductors are produced, with TSMC emerging as a titan, responsible for nearly 70% of advanced chip fabrication.

Yet, as the United States' attention diverged to other global concerns, such as the Wars on Terror—redirecting over eight trillion dollars in resources—this shift in focus allowed emerging rivals, most notably China, to make significant inroads into the semiconductor sector. By attracting engineering talent, investment, and designs from around the globe, China began to close the gap in high-end semiconductor design, a domain once dominated by the United States.

China's burgeoning role in the semiconductor market initially alarmed American corporations, which perceived a threat to their profitability and market share in both infrastructure and consumer electronics. This economic concern quickly escalated to a national security issue for the US government, which recognized the critical importance of maintaining technological supremacy. The strategic underpinnings of semiconductor technology, vital for powering advanced technologies, made the prospect of falling behind a strategic vulnerability for the United States.

This scenario underscores the intricate interplay of economic, technological, and geopolitical dynamics shaping the semiconductor industry. Both China and the United States are now deeply engaged in a strategic contest to bolster their domestic chipmaking capabilities. This drive is motivated by the need to safeguard against supply chain disruptions and to secure a competitive edge in this crucial sector, reflecting a broader strategy to align technological prowess with national security objectives.

Implications 

This dynamic landscape introduces a spectrum of risks that businesses must navigate to thrive in the semiconductor market. In terms of risks, the ongoing geopolitical tensions and Trade War between the U.S. and China raise the specter of potential disruptions in the global semiconductor supply chain. Businesses that depend heavily on an uninterrupted supply of semiconductors might face significant challenges, resulting in production delays and increased operational costs. 

Moreover, the implementation of stringent regulations and export controls by both nations adds a layer of unpredictability to the regulatory landscape. At the same time, market access restrictions arising from geopolitical tensions pose a significant threat to companies aiming for global expansion, affecting not only high-end microprocessor manufacturing (smaller than 28nm) but also broader sectors. This intricate scenario has prompted responses such as the European Chips Act.

The act is a response to the need to break free from the dependency on external semiconductor sources, highlighting a global shift in priorities to secure technological self-sufficiency. Experts, however, point out that Europe is still decades away from such a goal. 

From a geo-economic perspective, it is crucial to highlight the potentially severe disruptions to the semiconductor supply chain that could arise from military escalations in the Taiwan Strait. It is reasonable to suggest that the two leading factories, located in China and Taiwan, might face significant interruptions.

One could assert that the two predominant factories, situated in China and Taiwan, might experience substantial interruptions. The repercussions of such events could transcend on a global scale, resulting in a shortage that could be deemed comparable, if not more pronounced, than the disruptions witnessed during the Covid-19 pandemic.