The tumult experienced by semiconductor companies over the past year has intensified pressure to bolster domestic capacity in both the US and China. A surge in pandemic-related demand coupled with a crippling supply crunch for the automotive industry showed just how precarious the complex global chip supply chain is. With semiconductors an ever-more critical part of the global economy, this has only intensified the battle for technological supremacy between the world’s two largest economies.
“Now, policymakers are much more concerned with [those] global dependencies,” says Will Hunt, a research analyst at Georgetown’s Center for Security and Emerging Technology (CSET). “That’s being viewed as this real vulnerability in our supply chain because if we [the US] lost access to those chips that would be hugely disruptive.”
Currently, the US leads on high-end technology but, because of high domestic costs, most companies outsource chip production to other countries. Taiwan-based TSMC dominates the market for foundries, manufacturing the designs produced by many fab-less US producers. It controls a particularly large share of the production of high-end chips, making up more than 90% of the production of capacity for the smallest logic wafers (technology used for information processing) in 2019, according to SIA.
High-end chips are used in the most advanced technologies such as AI and machine learning as they combine strong performance and lower power consumption. The dependency on other regions of the world for the manufacturing of these chips leaves US companies much more vulnerable to supply-side disruption from events such as natural disasters, but also from mounting geopolitical tensions. So, while it is the shortages in automotive that are making the headlines, the dependency on Taiwan for high-end chips is the real concern for US producers, says Hunt.
“The automotive chips are generally a lot simpler to make — in a pinch, you could ramp up capacity within the United States or within an allied country,” he says. “The more urgent motivation should be this high-end logic chip dependence on Taiwan, these chips that you really can’t make anywhere else.”
Companies and government officials are waking up to this risk and have started to take action. The US Congress passed a landmark bipartisan measure — the CHIPS for America Act — last year to bolster domestic manufacturing capacity by providing grants for chip fabrication, testing and design. This is already shaping the production decisions made by US companies, with semiconductor behemoth Intel announcing a $20bn expansion in Arizona in March.
Geopolitical forces will certainly shape supply chains over the coming years, but given the vast investment demands and long lead times it is too early to tell how they will play out, says Michael Yang, research director at technology analytics and consultancy company Omdia.
“The element of geopolitical issues baked into the industry creates additional risks and opportunities for a lot of people,” he says. “This definitely makes for an interesting race in the next decade to see all the companies competing on technology and capability, but many things will dictate success and failure and at this point how do you predict that?”
Indeed, China has already spent astronomical figures on growing its domestic semiconductor industry, increasing the five-year investment target for the sector 40-fold in 2014 to around $19bn. Despite these “unprecedented” levels of spending, it has still struggled to break the US hold on high-end chip production, says CSET’s Hunt.
“At the lower end, China’s becoming this juggernaut that is investing a huge amount of money and that is bound to affect supply chains,” he says. “But at the higher end, which is more concerning from a national security perspective, you’re going to see relatively less movement.”
Both the US and China will struggle to dominate global semiconductor supply chains because of the complexity of the market. There are over 20 major semiconductor product categories and as many as 300 separate inputs, each requiring expensive technical equipment and vast amounts of R&D to stay at the frontier. Currently, the US only controls over 50 per cent of sales in two areas of the market — IP/electronic design automation and fab-less capacity — with China boasting a significantly smaller share of any part of the market, according to analysis from McKinsey.
Achieving self-sufficiency in any region of the world will require an astronomical upfront investment, in the region of $350bn to $420bn for the US, according to estimates from the SIA. The “staggering cost and questionable execution” of pursuing self-sufficiency means that it is ill-advised, according to a SIA report, ramping up semiconductor prices between 35% and 65%.
But there is a clear case for these global superpowers to pursue leadership, if not dominance, in the semiconductor industry. Chips are a critical linchpin in the growing digital economy and so possessing the most cutting-edge technology will have knock-on benefits for the adoption and development of many other emerging technologies.
“Semiconductor industry leadership is a tremendous economic and strategic asset that drives progress in AI and other critical technologies,” states a CSET white paper. “The United States leads the world in many parts of the semiconductor supply
chain [but] continued leadership is not assured.”
China is doubling down on its domestic semiconductor industry as a means of obtaining technological supremacy. While the US still leads on technology and R&D, much of its manufacturing has been outsourced to Asia due to cost pressures, which has allowed China to capture more of the production side of the market.
In the coming years, US companies cannot afford to be complacent about competition from China, writes Christopher Thomas.
“Vibrant, advanced, and innovative Chinese companies are increasingly determined to forge a new semiconductor ecosystem centred on China,” he says. “The repercussions of this shift in mindset will reverberate far longer than any short-term benefits derived from using access to semiconductors as a negotiating lever in the larger context of US-Chinese relations.”