Major chipmaking nations, including the United States, are forming alliances, in part to secure their semiconductor supply chain and to prevent China from reaching the forefront of the industry, analysts told Reuters. CNBC.
Countries like the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have sought to forge partnerships around this critical technology.
“The immediate reason for all of this is undoubtedly China,” said Pranay Kotasthane, chair of the Takshashila Institution’s high-tech geopolitics program, in reference to the alliances.
The association stresses the importance of chips to economies and national security, while stressing countries’ desire to stem China’s advances in critical technology.
Kotasthane was the guest of the last episode of CNBC’s Beyond the Valley Podcast published on Tuesday, which examines the geopolitics behind semiconductors.
Semiconductors are an essential technology because they go into many of the products we use, from smartphones to cars and refrigerators. And they are also crucial for artificial intelligence applications and even weaponry.
The importance of fleas was highlighted during a persistent shortage of these components, triggered by the Covid pandemicamid rising consumer electronics demand and supply chain disruptions.
This alerted governments around the world to the need to secure chip supplies. The United States, under President Joe Biden, pushed to relocate manufacturing.
But the semiconductor supply chain is complex – it includes areas from design to packaging to manufacturing and the tools needed to do it.
The United States, although strong in many market sectors, has lost its dominance in manufacturing. Over the past 15 years or so, Taiwan TSMC and South Korea Samsung have come to dominate the manufacture of the world’s most advanced semiconductors. Intelthe largest chipmaker in the United States, is far behind.
Taiwan and South Korea account for approximately 80% of the global foundry market. Foundries are facilities that manufacture chips designed by other companies.
The concentration of critical tools and manufacturing in a small number of companies and geographies has put governments around the world on edge, as well as propelled semiconductors into the realm of geopolitics.
“What’s happened is that there are many companies spread across the world that are doing a small part of it, which means there’s a geopolitical angle, right? What if a company doesn’t provide the things that you need? What if, you know, one of the countries kind of puts things on espionage through chips? So those things make it a geopolitical tool,” Kotasthane said.
The concentration of power in the hands of a few economies and companies poses a risk to business continuity, especially in places of contention like Taiwan, Kotasthane said. Beijing regards Taiwan as a renegade province and has promised a “reunification” of the island with mainland China.
“The other geopolitical importance is simply related to Taiwan’s central role in the semiconductor supply chain. And because China-Taiwanese tensions have increased, there’s a fear that, you know, like a lot of manufacturing is happening in Taiwan, what would happen if China were to be occupied or even if there were tensions between the two countries? said Kotasthane.
Due to the complexity of the chip supply chain, no country can go it alone.
Countries have increasingly sought out chip partnerships over the past two years. During a trip to South Korea in May, Biden visited a Samsung semiconductor factory. Around the same time, US Secretary of Commerce Gina Raimondo met with her then Japanese counterpart, Koichi Hagiuda, in Tokyo and discussed “cooperation in areas such as semiconductors and export control”.
Last month, Taiwan President Tsai Ing-wen told US Arizona Governor Doug Ducey that she looking forward to producing “democracy chips” with America. Taiwan is home to the world’s most advanced chipmaker, TSMC.
And semiconductors are a key part of cooperation between the United States, India, Japan and Australia, a group of democracies collectively known as the Quad.
The United States has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, details on this have not been finalized.
There are a few reasons behind these partnerships.
One is to bring countries together, each with their “comparative advantages”, to “link alliances capable of developing secure chips”, Kotasthane said. “It doesn’t make sense to go it alone” due to the complexity of the supply chain and the strengths of different countries and companies, he added.
US President Joe Biden met South Korean President Yoon Suk-yeol in May 2022 during a visit to the Samsung Electronics Pyeongtaek campus. The United States and South Korea, along with other countries, are seeking to form alliances around semiconductors, with the aim of eliminating China.
Kim Min Hee | Getty Images
The push for such partnerships has one thing in common: China is not involved. In fact, these alliances are designed to cut China off from the global supply chain.
“In my opinion, I think that in the short term, China’s development in this sector will be severely limited. [as a result of these alliances]“, said Kotasthane.
China and the United States see each other as technological rivals in areas ranging from semiconductors to artificial intelligence. As part of this battle, the United States sought to cut off China from critical semiconductors and tools to get them through export restrictions.
“The goal of all these efforts is to prevent China from developing the capacity to produce advanced semiconductors domestically,” Paul Triolo, head of technology policy at consultancy Albright Stonebridge, told CNBC, referring to the objectives of the various partnerships.
So what about China?
In recent years, China has pumped a lot of money into its domestic semiconductor industry, aiming to boost its self-sufficiency and reduce its dependence on foreign companies.
As explained earlier, this would be extremely difficult due to the complexity of the supply chain and the concentration of power in the hands of very few companies and countries.
China is improving in areas such as chip design, but it is an area that relies heavily on foreign tools and equipment.
Manufacturing is China’s “Achilles heel”, according to Kotasthane. China’s largest contract chipmaker is called SMIC. But the company’s technology is still significantly behind the likes of TSMC and Samsung.
“It requires a lot of international collaboration…which I think is a big deal now for China because of how China has kind of antagonized its neighbors,” Kotasthane said.
“What China could do three, four years ago in terms of international collaboration will not just be possible.”
That casts doubt on China’s ability to reach the forefront of chipmaking, especially as the United States and other major semiconductor powers form alliances, Kotasthane said.
“In the long term, I think they [China] will be able to overcome some of the current challenges…but they will not be able to reach the vanguard that many other countries are,” Kotasthane said.
Yet cracks are beginning to appear between some of the partners, notably South Korea and the United States.
In an interview with the FinancialTimesAhn Duk-geun, South Korea’s commerce minister, said there were disagreements between Seoul and Washington over the latter’s continued export restrictions on semiconductor tools to China.
“Our semiconductor industry is very concerned about what the US government is doing these days,” Ahn told the FT.
China, the world’s biggest chip importer, is a key market for chip companies around the world, from US giants like Qualcomm to South Korea’s Samsung. With the political and commercial mix, the stage could be set for more tension between nations in these high-tech alliances.
“Not all of the US allies are keen on signing these alliances or extending controls on technology to China, because they have significant shares in both manufacturing in China and selling in the Chinese market. Most don’t want to clash with Beijing on these issues,” Triolo said.
“A major risk is that attempts to coordinate parts of the global semiconductor supply chain development will undermine the market-driven nature of the industry and cause major collateral damage to innovation, driving up costs and slowing the pace of development of new technologies.”