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.