Semiconductors at the heart of the China-US rivalry

Why are semi-conduc­tors so crucial ?

Mathieu Duchâ­tel. They are essen­tial to the func­tio­ning of both the auto­mo­tive indus­try, which is cur­rent­ly under­going a major trans­for­ma­tion, and the IT indus­try. The lat­ter is absor­bing high-end, high value-added pro­ces­sors and memo­ry chips for pro­duc­tion of smart­phones, com­pu­ters, and data centres. It is also worth noting that semi­con­duc­tors are essen­tial to the defence sec­tor from mis­siles to the field of cyber­se­cu­ri­ty – now a major fac­tor in mili­ta­ry ope­ra­tions – making their desi­gn and pro­duc­tion strategic.

The mar­ket of semi-conduc­tors is esti­ma­ted at $600bn ; with the major desi­gn and pro­duc­tion centres found in the USA, Chi­na, Europe, South Korea, Tai­wan, and Japan. Prin­ci­pal­ly, desi­gn com­pa­nies are Ame­ri­can (Broad­com, Qual­comm, Nvi­dia, Apple) and pro­duc­tion com­pa­nies Asian (TSMC, Sam­sung, SMIC). A dis­tinc­tion is made bet­ween the most advan­ced tech­no­lo­gies (with nodes equal to or less than 7nm ; today 5nm, tomor­row 3nm and then 2nm), which main­ly meet the high-end needs of infor­ma­tion and com­mu­ni­ca­tion tech­no­lo­gies, and the rest of the mar­ket (14, 28 or 55nm and beyond), which is more than suf­fi­cient for the auto­mo­tive and arms industries.

What are the rea­sons for the cur­rent shortage ?

There are two fac­tors : the dis­rup­tion of sup­ply fol­lo­wing the Covid cri­sis and Sino-Ame­ri­can com­pe­ti­tion, which has led Chi­nese players threa­te­ned with access res­tric­tions by the Uni­ted States to build up stocks. Regar­ding the Covid cri­sis, the phe­no­me­non star­ted at the end of 2020 in the auto­mo­tive indus­try. These dif­fi­cul­ties could last at least until mid-2022. Moreo­ver, the auto­mo­tive indus­try consumes $110bn-worth of semi­con­duc­tors per year. But the shor­tage has spread to some extent to the smart­phone and connec­ted object sector.

Final­ly, in terms of stock­pi­ling, we can men­tion Hua­wei, which pur­cha­sed 13 bil­lion semi­con­duc­tors in 2019. The beha­viour of other Chi­nese players threa­te­ned by the Uni­ted States from 2019–2020, such as ZTE or SMIC, is not quan­ti­fied but it is logi­cal that they also sought to build up stocks to anti­ci­pate pos­sible res­tric­tions that were adop­ted by the Depart­ment of Com­merce in the second half of 2020.

There is a depen­dence on a small group of coun­tries. What are the stra­te­gic risks and res­ponses of governments ?

There is a move to sup­port domes­tic pro­duc­tion to miti­gate inter­de­pen­dence. Trump gave a gol­den oppor­tu­ni­ty to Tai­wa­nese com­pa­ny TSMC, now buil­ding a huge fac­to­ry in Ari­zo­na. Biden is asking Congress for $50bn to sup­port the indus­try, too. The Euro­peans rea­li­sed the impor­tance of boos­ting pro­duc­tion on their own soil and will take action. But it is above all in rela­tion to Chi­na that states and com­pa­nies are posi­tio­ning themselves.

Chi­na is, for once, the big­gest loser because it is tech­no­lo­gi­cal­ly behind the Uni­ted States, Korea and Tai­wan, who are in alliance to keep Chi­na two or three gene­ra­tions behind. To explain this, we need to unders­tand the semi­con­duc­tor value chain. Semi­con­duc­tor desi­gn accounts for 47% of indus­try sales, and is domi­na­ted by Sili­con Val­ley, from Nvi­dia to Qual­comm. There is a TSMC duo­po­ly in Tai­wan and Sam­sung in South Korea for the most advan­ced foun­dry pro­cesses. Clo­sing off Chi­nese com­pa­nies’ access to indus­try lea­ders cuts them off from cer­tain seg­ments of the glo­bal com­pe­ti­tion. For example, without access to TSMC, Hua­wei can no lon­ger build high-end smartphones.

But Chi­na retains advan­tages rela­ted to its scale. TSMC has cut its ties with Hua­wei, ins­tead pro­du­cing the top of the range for Apple in For­mo­sa but is inves­ting to expand its foun­dry in Nan­jing (Chi­na) to meet the needs of the auto­mo­tive indus­try. And, geo­po­li­ti­cal­ly, TSMC is an asset for Tai­wan. It is hard to ima­gine a US govern­ment ris­king the loss of access to the most advan­ced TSMC tech­no­lo­gies in a worst-case sce­na­rio where Chi­na invades Taiwan. 

What is pre­ven­ting Chi­na from cat­ching up ?

Chi­na has lea­der­ship ambi­tions, but it is far from that ; whil­st their tar­get of pro­du­cing 75% of their own semi­con­duc­tor needs by 2025, the coun­try is cur­rent­ly only hit­ting 15% of that. Also, Chi­na no lon­ger has access to forei­gn tech­no­lo­gies and faces bot­tle­necks in EDA (Elec­tro­nic Desi­gn Auto­ma­tion) and extreme ultra­vio­let litho­gra­phy. This second tech­no­lo­gy, which allows the 7nm thre­shold to be cros­sed, is the mono­po­ly of ASML, a Dutch com­pa­ny, the second lar­gest in Europe. It is impor­tant to unders­tand that the deve­lop­ment of semi­con­duc­tors is a race to minia­tu­ri­sa­tion. It fol­lows Moore’s law, and for others it is very dif­fi­cult to catch up tech­no­lo­gi­cal­ly when they are exclu­ded from the vir­tuous circles of inno­va­tion that exist bet­ween desi­gners, pro­du­cers, and their various sup­pliers – and you have fal­len behind. Chi­na would like to buy this tech­no­lo­gy, but the cur­rent situa­tion means they are total­ly depri­ved of it.

What is the Euro­pean strategy ?

Europe has high pro­duc­tion capa­ci­ties with a world lea­der, ASML, and are concen­tra­ting their forces on R&D. Around 20% of the Euro­pean reco­ve­ry plan is dedi­ca­ted to digi­tal trans­for­ma­tion, and a new Major Euro­pean Com­mon Inter­est Pro­ject for nanoe­lec­tro­nics is due to be vali­da­ted by the Euro­pean Com­mis­sion short­ly. Howe­ver, disa­gree­ments per­sist, nota­bly on the choice of mar­ket seg­ment. Thier­ry Bre­ton believes that Europe must pro­duce very high-end pro­ducts, whe­reas manu­fac­tu­rers do not see how they can com­pete with TSMC in this mar­ket, where they have a consi­de­rable lead.

What roles do coun­tries like Korea and Japan play in the geo­po­li­tics of semiconductors ?

Each has their own strengths. South Korea, with Sam­sung, is in the duo­po­ly of high-end engra­ving and can the­re­fore accom­pa­ny the major IT lea­ders in their pro­duc­tion of inno­va­tive pro­ducts. Of course, Samsung’s nano-elec­tro­nics branch feeds its offer to consu­mers. Japan is a mate­rials giant with com­pa­nies like Shin Etsu and JSR domi­na­ting cer­tain seg­ments of the sec­tor. They have dif­ferent stra­te­gies, South Korea is see­king a balance bet­ween Chi­na and the Uni­ted States while being for­ced to accept the res­tric­tions on tech­no­lo­gy trans­fers put in place in Washing­ton, Japan is much more open­ly playing the alliance card, and is loo­king to Europe to build the future.