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Semiconductors at the heart of the China-US rivalry

Mathieu Duchatel
Mathieu Duchâtel
Director of the Asia programme at Institut Montaigne

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.

Interview by Clément Boulle

Contributors

Mathieu Duchatel

Mathieu Duchâtel

Director of the Asia programme at Institut Montaigne

Doctor in Political Science from the University of Paris, Mathieu Duchâtel was the Beijing representative of the Stockholm International Peace Research Institute, deputy director of the Asia programme of the European Council on Foreign Relations, Asia Centre researcher based in Paris and Taipei, and visiting fellow at the Japan Institute of International Affairs.