Securing the Silicon: US-China Battle for Semiconductor Supremacy
What are the strategies and risks behind the US-Sino techno-rivalry that's reshaping global supply chains?
The United States is engaged in a strategic overhaul of its semiconductor supply chain, driven by a confluence of factors: geopolitical tensions, concerns over national security, and the ever-growing demand for advanced chips.
US Semiconductor Supply Chain Strategy
The CHIPS Act, a $53 billion investment in chip research, development, and manufacturing, stands as the cornerstone of this effort. Already, the Act has spurred $220 billion in private investment across 22 states, with plans for 70 new semiconductor ecosystem projects.
Notably, Intel's $20 billion Arizona plant and Samsung's potential $17 billion Texas facility exemplify this domestic push. Recognizing the limitations of overreliance on any single source, the US is actively forging partnerships with key Asian players. This includes collaborating with Japan's Tokyo Electron Limited, South Korea's SK Hynix, and Taiwan's TSMC to expand and deepen multilateral chip production.
The goal?
Building 2nm chip-producing facilities by 2025 and fostering joint university initiatives. Additionally, the US is exploring cost-effective options in Vietnam, Thailand, and Malaysia for chip assembly and packaging. TSMC is also looking to building a $7 billion chip plant in Kumamoto, Japan
Moreover, TSMC has announced plans for a second semiconductor fab in Kumamoto. This second plant, scheduled to start construction by the end of 2024 and become operational by the end of 2027, will bring TSMC's total investment in Japan to over $20 billion
Seeking to curb China's technological advancements, the US has imposed stringent export controls on specific advanced chips, particularly those with AI-interfacing applications.
This strategy extends beyond unilateral action, with the US coordinating with allies to restrict cross-border sales of strategic equipment like ASML's EUV machines which are crucial for chip production. Further collaboration with Taiwan, South Korea, and Japan aims to limit China's access to advanced chips and related equipment.
Mirroring the Strategic Petroleum Reserve for oil, the US is establishing a chip stockpile to mitigate potential supply disruptions. This initiative shares key features with the SPR: government-managed reserves, focus on national security (safeguarding critical infrastructure and defense systems), and addressing potential supply chain disruptions.
The stakes are high. The US-Taiwan Business Council highlights the current vulnerability, with Taiwan and South Korea holding 100% of the installed capacity for mass-producing high-end sub-7nm chips, leaving the US military supply exposed.
The White House is expected to award billions of dollars worth of subsidies to TSMC, Samsung, Micron Technology, Texas Instruments GlobalFoundries, and Intel in the next four weeks or so.
Gina Raimondo's Department of Commerce has begun issuing substantial grants as part of the CHIPS and Science Act to boost U.S. semiconductor manufacturing. TSMC has been awarded $6.6 billion to help build a third chip factory in Phoenix, Arizona, while Samsung will receive $6.4 billion to expand its facilities in Texas.
Additionally, the Commerce Department awarded $504 million in grants to 12 Tech Hubs, aimed at fostering innovation and improving economic competitiveness in critical tech sectors, including semiconductors.
These efforts are part of a broader strategy to make the U.S. a major player in global semiconductor production by the end of the decade.. The funding allocations are designed to address supply chain issues and enhance national security by increasing domestic chip manufacturing capacity
The funding mechanism for these awards may encompass grants, loans, and loan guarantees, potentially covering up to 15% of the expenses for these projects. Arizona and Ohio are two major cities semiconductor firms are looking to direct their capital and they carry notable electoral weight. Ohio in particular will likely receive a lot of funding; manufacturing is a major theme in the ongoing Senate race.
These efforts, however, are not without challenges. Complexities in subsidy programs, workforce development needs, and geopolitical tensions necessitate careful planning and ongoing adaptation.
Nevertheless, the US is making a bold move to secure its position in the global semiconductor game, playing a multi-pronged hand to achieve chip supremacy. Whether the US can pull it off remains to be seen, but one thing is certain: the global semiconductor landscape is being rewritten, and the US is determined to hold the pen.
European Chip Programs
In a strategic echo of the United States, the European Union is charting a similar course in semiconductor policy, mirroring initiatives like the CHIPS Act to bolster its own chip production.
The EU's ambition to expand its global semiconductor market share to 20% is underpinned by substantial national efforts: Germany, France, Italy, and Belgium are actively courting investors to establish new chip fabrication plants. This transatlantic alignment is not without geopolitical underpinnings.
Both the EU and the US are engaging with familiar players in Asia, a move indicative of their shared strategic interests and mutual apprehensions regarding China. This common stance is partly driven by security concerns, leading both entities to seek a 'de-risking' from Chinese supply chains – a diplomatic euphemism for decoupling.
Yet, despite these parallels, the EU trails significantly behind the US in chip design and production capabilities. The intricate bureaucracy of Brussels, coupled with the diverse economic and political landscapes of its member states, often impedes swift, large-scale technological initiatives.
Consequently, the EU's progress in the semiconductor sector is markedly slower. Nevertheless, the EU's endeavors in this field are not insignificant. Infineon has committed to a €5 billion investment in a new facility in Dresden, Germany, while Intel is exploring a partnership with STMicroelectronics for a potential chip factory in Italy.
Additionally, the EU has reached an agreement with Japan to collaborate on cutting-edge chip R&D. In this global semiconductor chess game, the US remains the more dominant player, often setting the pace for European techno-foreign policy.
In the Crosshairs: Taiwan and TSMC
TSMC, the Taiwanese semiconductor titan, finds itself strategically poised between its largest market, China, and its primary arms supplier, the United States. It is the largest contract chipmaker, accounting for 54% of the global chip foundry market as of 2023. It is also one of the few companies capable of producing 5-nm (and smaller) chips.
Major global tech companies, including Apple, Qualcomm, and Nvidia, rely heavily on TSMC for their semiconductor needs. This reliance underscores Taiwan's critical role in the global tech supply chain, as any disruption in Taiwan's semiconductor production can have a ripple effect across various industries. These include aerospace, automotive, defense, medical, and many sub-industries within these fields.
As the global demand for advanced AI-interfacing chips escalates – driven by the widespread adoption of AI technologies across various sectors – TSMC's strategic importance is set to soar.
Despite a slackening demand for chips in the smartphone and electric vehicle sectors, the company is projecting a robust revenue growth exceeding 20% in 2024. This growth trajectory is partly fueled by TSMC's plans to ramp up production of high-end chips, countering China's market saturation with mature-node (14nm-7nm) semiconductors and reclaiming its market share.
At the forefront of this expansion is TSMC's implementation of the groundbreaking 2-nanometer node technology using Gate-All-Around (GAA), a development that holds significant interest for China and the global semiconductor market.
The burgeoning AI industry, characterized by a substantial demand yet insufficient supply of necessary infrastructure, has far-reaching security implications. This dynamic has spurred governments and leading private sector entities in the AI arena to form strategic alliances, aptly termed the “AI Industrial Complex”.
The driving force behind this global phenomenon is a shared international anxiety over security, particularly the potential impact of Taiwan's annexation on the worldwide chip supply chain. TSMC's pivotal role in this landscape is underscored by its contribution to 70% of the world's computing power.
This dominance is not lost on companies like AMD, which is actively seeking to lessen its reliance on TSMC's manufacturing capabilities. Amid these strategic shifts, TSMC is expanding its global footprint, notably planning two factories in Arizona. However, this expansion is marred by delays and hinges critically on government incentives, particularly tax credits.
The company's ambition to build 4nm and 3nm fabrication plants is contingent on these incentives, reflecting the steep capital expenditure required for advanced chip manufacturing. The most advanced fabrication facilities (fabs) can cost upwards of $20 billion to build and equip, much like TSMC’s upcoming Arizona fab. For perspective, the latest US aircraft carriers, like the Gerald R. Ford-class, have a unit cost of around $13.3 billion.
TSMC's global expansion is a response to both commercial imperatives and foreign pressures. While the United States is intent on bolstering its semiconductor production through onshoring and near-shoring strategies, TSMC's technological prowess ensures its continued indispensability to U.S. national security.
The scale of this endeavor is monumental: replicating TSMC's capacity domestically would require a decade and an investment of $1 trillion. From the US perspective, Taiwan needs to maintain its chipmaking lead, further open its market to US players, and collaborate on bolstering the supply chain's resilience through diversification and joint research. However this will require careful steps to avoid upsetting China.
Taiwan, seeking its own harmony, craves explicit US security guarantees to deter Chinese aggression and ensure its operational freedom. Additionally, economic support for infrastructure upgrades and diversification beyond China is vital.
A seat at the international table and global recognition complete the desired notes. The Taiwan Relations Act and the Chip and Science Act represent instruments used by the US to provide security and economic support. Regular dialogues like the US-Taiwan Economic and Commercial Dialogue serve as platforms for synchronized discussions on navigating this intricate choreography.
A Bumpy Ride: Strategic Restrictions
The US is launching a comprehensive restriction regime on China's semiconductor industry, driven by concerns over unfair competition, national security risks, and geopolitical tensions.
The U.S. Department of Commerce launched a survey in January 2024 to investigate the impact of approximately $150 billion in Chinese government subsidies on the global semiconductor market. This survey aimed to assess how these subsidies have distorted the market, particularly disadvantaging U.S. firms and raising national security concerns regarding legacy chip production.
The survey's results highlighted several critical points. It confirmed that China's subsidies have indeed created a non-level playing field for U.S. and other foreign semiconductor companies. The findings underscored the urgent need for increased domestic semiconductor production to mitigate these disadvantages and enhance national security.
Additionally, the results indicated a significant supply and demand mismatch in the semiconductor market, with median demand for chips rising by 17% from 2019 to 2021, but supply not keeping pace. The survey also found that the median inventory of semiconductor products had drastically decreased, exacerbating supply chain vulnerabilities.
The Commerce Department's Bureau of Industry and Security (BIS) will team up with major trade associations like the Semiconductor Industry Association (SIA) and the American Electronics Association (AeA) to gather vital information.
The US is likely to continue its restrictions on the cross-border sales of advanced, AI-interfacing chips to China. This reflects a bipartisan consensus on taking a tough stance, regardless of the administration in power.
However, China has been exploiting a loophole through Singapore, a neutral trading nation not part of the US-led export restriction regime. The US might pressure Singapore to adopt stricter controls, aligning with allied nations, but faces challenges due to Singapore's economic interests and neutral stance.
Having said that, they do have a tendency to align with Washington in areas concerning national security. For example: despite initial hesitation, Singapore eventually opted to restrict the use of Huawei equipment in its 5G network infrastructure, aligning with similar decisions by the US and its allies due to security concerns.
This decision, announced in 2020, came after extended consultations with both the US and China but ultimately favored US-aligned security concerns. In the area of semiconductors, Singapore actively collaborates with the US on various chip initiatives, including research and development projects and infrastructure development.
However, accessing a few chips through loopholes doesn't translate to replicating mass production. While China might acquire some American chips, acquiring the technical know-how remains a significant hurdle.
However, the possibility of a "decoupling" similar to Germany's response to Russia's aggression towards Ukraine lingers, potentially causing short-term pain and eroding US leverage. This multi-pronged approach reflects the complex strategic considerations surrounding the US-China chip rivalry.
Navigating this high-stakes game effectively requires addressing unfair competition, mitigating national security risks, and avoiding actions that inadvertently bolster China's self-sufficiency in the long run. Given the current circumstances, the US is poised to outperform China technologically in a global funding environment much more receptive to Washington’s interests than Beijing’s.