The repeated misfiring of the global supply chain in recent years has prompted many of the world’s leading governing bodies to contemplate a major rethink of globalised industrial policy and a return to protectionist policies last considered at the height of the Cold War some 3-4 decades ago. As geopolitical tensions continue to rise fresh fault lines emerge. Nowhere is this more evident than in the field of semiconductors, the ubiquitous technological facilitator of modern everyday life. Described as “the tiny electronic switches that run computations inside our computers” (Heaven, 2019) semiconductors serve as an essential component of just about any contemporary good, material or otherwise. Without them “there would be no smartphones, radios, TVs, computers, video games, or advanced medical diagnostic equipment” (SIA, 2022). Semiconductors also serve as an essential tool in the development of the world’s most cutting edge technologies “artificial intelligence, machine learning, autonomous driving, cloud and edge computing, high-performance computing”, considered the key drivers of future economic growth (Laudicina, 2022). With global semiconductor markets facing a severe and ongoing shortage of supply, battle lines are being drawn as the world’s leading economic powers compete for technological supremacy. This article will aim to examine the overall condition of the global semiconductor market and some of the key geopolitical stratagems at play in determining its future.
Reasons for Shortage
There are several factors to consider with regard to the ongoing shortage across global semiconductor markets, firstly the complex nature of the commodity itself. The actual lead time for the production of a new semiconductor chip is multiple years if all relevant stages of development are taken into consideration. Research and Development alone can take one to three years. While “typical lead times can exceed four months for products that are already well established in a manufacturing line”, planning adjustments such as switching to a different manufacturing location or a different manufacturer can instantly add as much as 6 months to a year or more (Aboagye et al., 2022). The USA’s trade sanctions on China have served to further disrupt supplies of key production components, while the general havoc wreaked upon global shipping routes by Covid-19 restrictions, reduced carrier capacities (Vakil and Linton, 2021) and the rising costs of fuel has further compounded existing difficulties.
There are more nuanced reasons for the current shortage across individual industries. The automotive industry as a whole has been quite sorely impacted by what can easily retroactively be termed poor planning. The onset of the Covid-19 pandemic in early 2020 led to an immediate and “precipitous drop in vehicle sales” with producers adjusting their inventory planning accordingly. This resulted in an industry wide scaling down of “orders of all parts and materials — including the chips needed for functions ranging from touchscreen displays to collision-avoidance systems” with “Ford, Toyota, Nissan, VW, and Fiat Chrysler Automobiles” amongst the global auto manufacturers notably affected by the resulting shortfall (Vakil and Linton, 2021).
Crisis of course breeds innovation, with the world’s leading electric vehicle company Tesla offering a striking example of such catastrophe induced creativity. In the midst of the ongoing global semiconductor shortage Tesla have successfully managed to produce their own replacement chips from a new material technology known as Silicon Carbide (SiC) (Cohen, 2021). As a result of its superior stability and unique material composition SiC also happens to carry the additional benefit of reducing “energy loss by more than half compared with standard silicon wafers” (Ryugen, Yaoyu & Watanabe, 2021). Not every problem can be met with such an immediate and satisfying solution however, as Tesla themselves have repeatedly discovered. Ongoing parts shortages and shipping delays have become a routine part of industrial operations for Tesla and almost every other major global manufacturer with China’s ongoing zero covid policy proving a particular headache in this regard (Bloomberg, O’ Kane & Roeder, 2022).
Stuck in the Middle with U(SA)
While Semiconductors may stand at the forefront of human innovation they also now serve as the centrepiece of the ongoing trade war between China and the US. The Trade War as a whole was first initiated by former US President Donald Trump whose administration put in place legislation which heavily limited the exchange of sensitive information technologies and “sales of semiconductors to Huawei Technologies, ZTE, and other Chinese firms” (Vakil and Linton, 2021) (Mulligan and Linebaugh, 2021). In the final weeks of Trump’s term in office the US would go on to add “dozens of Chinese companies, including the country’s top chipmaker SMIC” to what it termed a “Trade Blacklist” (“U.S. blacklists dozens”, 2020) in an ongoing attempt to curb China’s technological progress.
During this time the US government also launched what is described as “an extensive campaign to block the sale of Dutch chip manufacturing technology to China” (Alper, Sterling and Nerris, 2000). This political leveraging was designed to specifically target the Netherlands based ASML “the only company in the world that can make so-called extreme ultraviolet (EUV), which is required to make the most advanced chips such as those manufactured by TSMC and Samsung” (Kharpal, 2021). In spite of calls from within the global semiconductor industry to reduce the extent of the trade sanctions currently in place against China (Freifeld, 2021), hostilities look set to continue. Current US president Joe Biden last year signed off on the “Secure Equipment Act of 2021” banning “Chinese tech companies like Huawei and ZTE from getting approval for network equipment licences in the country” (“Joe Biden signs”, 2021).
Despite a lack of public comment to date, reports suggest that the Biden administration have continued to pressure Dutch authorities not to allow ASML to do business with China (Woo and Jie, 2021). The US remains determined to prevent China from getting its hands on “mainstream technology essential in making a large chunk of the world’s chips”, having reportedly gone so far as to lobby the Dutch government to prevent the sale of some of ASML’s “older deep ultraviolet lithography, or DUV, systems” (Deutsch, Martin, King & Wu, 2022). Though no longer considered “cutting-edge” these machines remain “the most common method in making certain less-advanced chips required by cars, phones, computers and even robots.” (Deutsch, Martin, King & Wu, 2022).
A report by the Semiconductor Industry Association (SIA) in late 2020 “criticised Trump’s export ban as being “overly expansive, covering non-sensitive commercial semiconductors and related technologies”, and specifically called for “a policy that is “narrowly targeted to specific items that advance clear national security and foreign policy objectives” (He, 2021). This sentiment has been echoed in a recent report by the US National Security Commission on Artificial Intelligence. The report suggests an overhaul of the current scattergun approach to Chinese technology exchange in favour of “The adoption of ‘targeted export controls focused on chokepoints’” (He, 2021).
A rudimentary analysis of Chinese technological capabilities in this area indicates that “Although China is catching up rapidly in terms of manufacturing, it still struggles to master the specialised production tools that are essential for developing high-end chips, such as Electronic Design Automation (EDA) and Semiconductor Manufacturing Equipment (SME).” (He, 2021). Both of these specific subsectors remain currently the almost exclusive remit of US and Japanese firms, alongside the aforementioned ASML. In spite of having made massive pubic sector investment in its semiconductor industry in recent decades (Thomas, 2015), “Chinese players remain decades behind in some of the most important manufacturing technology areas, such as lithography and the most advanced software design tools.” (Thomas, 2021). This leaves China in the precarious position whereby “without ASML’s most-advanced machines, Chinese chip makers can’t make leading-edge chips until domestically made tools catch up.” (Woo and Jie, 2021).
States of Play
Having once dominated in the field of global semiconductor manufacturing, the United States’ capabilities in this area have “been on a steady decline for decades, falling from roughly 40% in 1990 to around 12% in 2020” (Arcuri, 2022). In parallel with developments across the bulk of the global industrial supply chain over the past now 30 plus years, semiconductor manufacturing is at present almost entirely Asian dominated. The world’s two largest semiconductor manufacturers TSMC of Taiwan and Samsung Electronics of South Korea currently account for 55 and 18 percent of global manufacturing respectively. When other smaller scale producers are included “Taiwan and South Korea collectively have 81% of the global market in foundries” (Kharpal, 2021).
The passing of the “Creating Helpful Incentives to Produce Semiconductor (CHIPS) for America Act” (Bajarin, 2022) in January 2021 set in motion plans for a host of infrastructural projects aimed at restoring US manufacturing proficiency in this sector. Such plans include a new $20 billion Intel facility in Ohio, a “A $17 billion Samsung factory in Texas”, “A new Global Foundries factory in New York state” (The White House, 2022) as well as a $12 billion TSMC facility in Arizona (Laudicina, 2022). The manufacturing process for semiconductors remains incredibly complex, with the production of any given unit relying “on as many as 300 different inputs” while the standard inventory of equipment in operation in a modern semiconductor factory “represents the cumulation of hundreds of thousands of person-years of R&D development” (Thomas, 2021). Given that “funding and building a new semiconductor fab is at least a five-year process” (Vakil and Linton, 2021), restoring US manufacturing in this area is going to have to be a medium to long rather than short-term solution.
While the urgency of the US’ need to improve its semiconductor manufacturing capabilities should be readily apparent to all, the CHIPS act and the $52 billion in industry specific funding it promises remains in a state of limbo. Despite having been approved in January of 2021 with apparent widespread bipartisan support, funding has yet to be agreed upon by the United States Congress (Hur, 2022). Competition continues to rise internationally; “India, Japan and South Korea have all recently passed tax credits, subsidies and other incentives amounting to tens of billions of dollars for the industry” (Edmonson and Swanson, 2022). The “EU Chips Act” looks set to do the same for the European Union with an estimated €43 billion in investment funding set to be made available between now and 2030 (Cota, 2022), (“European Chips Act”, 2022)
China meanwhile has made increased digitisation of its economy a central pillar of its latest and 14th 5 year plan citing the specific aim of achieving ““technology independence” (Thomas, 2021). China’s industrial strategy of “creating national champions - a small set of leaders in each critical segment of the semiconductor market” (Orr and Thomas, 2014) has not yet perhaps yielded the results the Chinese Government may have hoped for. In spite of billions invested to date China remains at a long way from closing the gap on industry leaders (Woo and Jie, 2021). Dating back to 2018 the US accused China of “forcible or below-market transfer of technology from US intellectual property” (Bown, 2020). This was allegedly achieved through the mandating of a “joint venture policy” with local Chinese companies for US firms hoping to gain access to the highly lucrative and cost effective Chinese market. In the time since the US has repeatedly accused China of “state-sponsored industrial espionage and theft of intellectual property” (Bown, 2020, P. 38). If true, China’s frustrations in attempting and thus far failing to successfully innovate at the cutting edge of such an integral industry may go a long way to explaining such tactics. The increasingly aggressive stance of the US toward Chinese relations only serves to increase China’s technological insecurity, while its position is further complicated by the close political alliances the US enjoys with the world’s two leading semiconductor powers Taiwan and South Korea.
The Race Goes On
The US appears extremely likely to continue its attempts to destabilise China’s development in the field of semiconductor technology. This is set to involve the continued leveraging of both its own trade arrangements and those of its political allies to ensure that China remains at a disadvantage. It has also begun attempts to bolster its own knowledge base and to restore some of the manufacturing prowess it previously enjoyed. With proficiency in advanced technologies looking set to dominate nations’ future economic growth potential, China will not tolerate such a strategy lying down. With Chinese-Taiwanese relations already at a nervous ebb, Taiwan’s position as the world’s principle manufacturing power in the field of semiconductors is likely to further increase China’s determination to maintain its grip on its disputed island territory. As global alliances continue to flounder and reshape, the future of the semiconductor industry looks set to be as vital as any in determining the new world order.
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