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.