In the present world computers, cars, phones, televisions, refrigerators have become commodities which are so present that it is difficult for many to imagine a life without them. All these items work thanks to tiny devices called semiconductors. But what are they? How are they produced? And how have they ended up at the center of the present US-China trade war? This article will attempt to give a brief account of the present US-China competition on semiconductors, how it is affected by external factors like the Covid-19 pandemic, and what it might entail for the future.
Before describing the evolution of US-China competition on technology in recent years and how the global supply chain for the production and distribution of semiconductors is organized, it might be useful to explain in a few words what this term actually means.
A semiconductor, otherwise called an integrated circuit, a microelectronic chip, or a computer chip, is a tiny electronic device composed of billions of components that store, move, and process data.
All these functions are made possible by the unique properties of semiconducting materials, which allow for the precise control of the flow of electrical current.
Semiconductors are used for many purposes in many types of products, for example to run software applications, to temporarily store documents and provide data storage and communication capabilities in countless devices, including mobile phones, gaming systems, aircraft avionics, industrial machinery and various types of military equipment and weapons.
They are also used in many products with roots in mechanical systems, like manufacturing equipment, and in the production and accessories of modern automobiles.
As for the semiconductor industry, it is not so simply described because the equipment and the materials used in the production, along with the final products themselves, are numerous and extremely varied.
However, we will provide, by referring to Calhoun (2021), the 4 basic steps in semiconductors production.
As Calhoun writes, the first step in the creation of an integrated circuit, as with almost any manufactured product, is to design it. Then there is the process of fabrication, which converts the design into a physical product, in this case called a “chip”. Subsequently, the device resulting from the fabrication needs to be assembled and packaged to connect the integrated circuit to the external environment and, at the same time, protect it from it. Finally, the fourth segment of the semiconductor industry doesn’t deal with the semiconductor itself, but with the production of the semiconductor manufacturing equipment.
Although there are still some companies (for example Intel), called Integrated Device Manufacturers (IDM), that directly perform the design, fabrication and packaging functions, the industry in the latest decades has been marked, according to Calhoun, “by a strong trend towards differentiation and specialization”, with IDMs gradually splitting in Design companies and Foundries.
Thanks to this process, today most semiconductors companies deal exclusively with a single segment of the supply chain.
Again citing Calhoun, there are the fabless IC companies, which are design companies that develop software and intellectual property but do not manufacture anything, then the Foundries, manufacturing companies which perform contract manufacturing on the product designed by the Fabless IC companies, the Assembly/Packaging/Test (APT) firms that package the IC into a chip, a form suitable for incorporation into a tech product (smartphones, TV sets, automobiles etc.), and finally the equipment manufacturing companies, which are completely separate from the other segments.
Currently, the leading countries in the semiconductor global supply chains are the US, Taiwan, Japan, and South Korea.
As Lewis (2021) writes, “the US leads in market share (45%), in advanced chip design and, with Japan, in the production of semiconductor manufacturing equipment with a 75% market share”, while Taiwan and South Korea respectively possess 20 and 25 percent market share and can boast the most advanced fabrication plants, using the so-called fabless production practice, which consist in the fabrication of chips designed by foreign companies.
China is the main global producer of technological devices that require semiconductors but as of now it isn’t a leading country in semiconductor production and its role in the different sectors is still very limited.
This is gradually changing, though. Over the last decade the Chinese government has consistently strived to overcome China’s dependence on foreign supplies in the sector, and as a result China’s market share in semiconductors has increased from 5 percent in 2010 to 13 percent in 2020, more than doubling in ten years (Varas and Varadarajan, 2020).
However, the data reported in Calhoun (2020) testifies that the “quality” of this market share remains low, it is focused on old types of chips and rather than cutting-edge technology and hence it will not be a real competitive threat to the US or other states in the near future.
Considering now China-US competition on semiconductors, we need to analyze how it has evolved in the latest decade by briefly describing the reasons and objectives of China’s push for self-reliance in the semiconductor sector, and the respective reactions of the Trump and Biden administrations.
As we mentioned before, China has always been largely dependent on foreign suppliers for the production and designing of semiconductors, particularly in the case of the most modern chips.
This has always been a sore point for China, which sees self-sufficiency in the technological field as a necessary condition for reaching the status of a wealthy, developed nation, which represents the largest market for this technology in the world.
This is the context behind the promulgation by the State Council of the “Guidelines for the Promotion and Development of the National Integrated Circuit Industry” in 2014 and its integration into the “Made in China 2025” plan of 2015.
As written in the Guidelines, their objective was to formulate a series of priorities “to accelerate advancement of the National Integrated Circuit Industry” in each of the four sectors previously cited (chip design, manufacturing, packaging and equipment manufacturing) in order to reach an advanced international level by 2030 “with some enterprises entering the ranks of international frontrunners and achieving development by leaps and bounds”.
The Guidelines also recommended the creation of political structures and policies necessary to implement massive investment in the sector needed to achieve those objectives, by 2015. This was achieved with the formulation of the “Made in China 2025” plan, which provided a precise schedule for the whole project by distinguishing three phases.
According to the plan, the first phase should see China gaining more self-sufficiency in the sectors, with Chinese suppliers meeting 70 percent of the country’s needs in semiconductors and becoming a relevant component of the global chain of production by 2025. During the second phase, by 2035, Chinese manufacturing should reach “an intermediate level among world manufacturing powers” assuming a leading role in the innovation of the industries where it is most competitive. Finally, in the third phase of the plan, China’s ambition is to become the “leader among manufacturing powers” by 2049, the centennial of the founding of the PRC.
In order to achieve this, as written in the Semiconductor Industry Association (SIA) white paper of 2021, the Chinese government made several big investments: in 2014, it instituted the National Integrated Circuits Industry Development Investment Fund (or, as it is known, the “Big Fund”) which by 2021 had invested $39 billion in the sector, most of which went into manufacturing with the goal to increase China’s share in global semiconductor production.
To that we must add, again according to the SIA white paper, $25 billion in IC investments by local governments and more than $50 billion accounting for “government grants, equity investments, and low interest loans”.
The Chinese plan has shown results and Chinese semiconductor firms are making progress particularly in chip design and fabrication which, as written in Varas-Varadarajaran (2020), might cause China to “meet 25% to 40% of its domestic demand with locally designed semiconductors by 2025, more than double its current level but still below its own 70% ambition”.
Others, for example the October 2020 report of the US Congressional Research Service, are more conservative in their estimates and posit that “China semiconductor production could meet 20% of China’s demand by 2025”.
Additionally, in order to improve its role in the production of leading edge chips, Chinese corporations are trying to buy foreign firms and acquire experts and technology through a variety of means.
Though China is racing toward semiconductor self-sufficiency, it might not yet put US supremacy in the sector in jeopardy for the foreseeable future, it has caused reactions by both the Trump and Biden administrations which began to impose sanctions and take measures to gradually make the US less dependent on the global market in the sector.
As explained by Ghosh (2021), the US attempts to stop the Chinese from acquiring and developing superior technology was one of the main reasons behind the start of the still ongoing “US-China Trade War”, along with the issue of the China-US trade deficit.
Of particular relevance in this case is the 2018 banning of Huawei and other Chinese firms in the sector from trading with the US federal government under allegations, later contested by British and German intelligence agencies, of industrial espionage, which provoked Chinese retaliation and was one of the first shots in the trade war.
The US-China trade war was started, according to Ghosh (2021), by President Trump in January 2018 and reciprocal tariffs were immediately imposed on a variety of products.
The conflict was briefly interrupted by the January 2020 trade deal, which “proposed cuts in US tariffs on imports from China in return for assurance by China to reduce the U-China trade deficit (…) along with redress of US complaints against China on the grounds of intellectual property rights”.
The negotiations, however, proved a failure because of China’s inability to fulfill the requirements in time but also as a result of the SARS-COV-2 pandemic, particularly of Trump allegations about China’s role in the spread of the virus and of US sanctions on China over the events in Hong- Kong.
The Biden administration largely continued the Trump policy of sanctions toward China, with the U adding dozens of Chinese companies and persons to its “Entity List”, the trade restriction list published by the Bureau of Industry and Security (BIS) of the United States Department of Commerce, and China responding in kind.
The trade war also overlapped with the international attention on the alleged human rights violations by China related to the treatment of Uyghurs in Xinjiang and the recent clamp down by the central government on opposition forces in Hong Kong, with the US (and Europe) imposing sanctions and bans on Chinese companies located in Xinjiang or Hong Kong over these issues.
Recent signs of relaxation in relations between the two countries, like the meeting between Biden and Xi Jinping in December, risk being put aside by the international crisis sparked by Russian invasion of Ukraine, since Russia is one of China’s main allies.
Finally, we cannot conclude our analysis without considering the effects of the Covid-19 pandemic on the semiconductor supply chain and trade relations. As we already mentioned, allegations on the responsibility for the spreading of Covid-19 were one of the main reasons for the failure of the January 2020 trade deal between the US and China, but this certainly wasn’t the only way in which the pandemic affected international competition and the semiconductors supply chain.
Indeed, the Covid-19 pandemic was one of the main causes, alongside climate change and geopolitical tensions, of what journalists have called “Chipageddon”, a massive chip shortage disrupting the semiconductor industry throughout 2021 and possibly lasting until 2023, according to Gooding (2021).
Safety measures such as lockdowns and smart-working helped drive a surge in demands for electronics since consumers and businesses started buying laptops and servers en masse in order to cover the needs of people working and studying at home, all of this while causing disruptions in the chain of production and factory closures.
According to Gooding, the effects were so marked that sales grew exponentially in 2020 and 2021, while they were in decline in earlier years.
Suppliers struggled to keep pace with demand, and the shortage hit a wide range of sectors, but the automotive industry was particularly affected because “it scaled back its orders at the beginning of the pandemic as demand for vehicles dropped, and then found itself at the back of the queue when it wanted to restart production at scale”.
Since the semiconductor supply chain is extremely slow to adapt to sudden and unexpected market changes this resulted in the auto industry having to shut down production lines around the world for weeks.
In practice, the Covid-19 pandemic exposed how the semiconductor industry is particularly susceptible to crisis, and this factor contributes to the pressure for nations like the US and China to push for more and more independence in the production of semiconductors, gradually decoupling from the international supply chain.
Considering the tensions between the US and China and the susceptibility of international supply chains to external crises, that may become more frequent as the world increasingly suffers the effects of climate change, it is safe to assume that we are marching toward a future where states will put less and less trust in economic international cooperation, striving to be more self-sufficient particularly in sectors, like semiconductor production, pivotal to technological development.
The data on which this article is based have been gathered trough a number of sources. Between them:
–> Calhoun G., “Which Companies Add The Most Value In The Semiconductor Industry? (Part 1)”, “The U.S. Still Dominates In Semiconductors; China Is Vulnerable (Pt 2)”, “Semiconductors: More U.S. Leverage, More Bad News For Beijing (Part 3)”, “In Semiconductors, China Is In Commodity Hell (Part 4)”, Forbes, 2021.
–> Global Times, “GT Voice: China has leverage in semiconductor contest despite US pressure”, Global Times, November 4 2021.
–> Gooding M., “Here’s what we know about the global chip shortage”, TECHMONITOR, updated 18 November 2021.
–> Lewis J.A., “China, In Search of Tech Supremacy Through Chip Production”, Ispi, 2021.
–> Ortega A., “The U.S.-China Race and the Fate of Transatlantic Relations”, Center for Strategic and International Studies, 2020.
–> SIA, “SIA Whitepaper: Taking Stock of China Semiconductor Industry”, Semiconductor Industry Association, July 2021.
–> Platzer M., M.Sutler K.,F.Sargent Jr. J., “Semiconductors: U.S. Industry, Global Competition, and Federal Policy”, Congressional Research Service, 2020.
–> Kamasa J., “Chip Shortages in the light of Geopolitics and Climate Change”, CSIS, February 9 2022.
–> Varas A., Varadarajan R., “How Restrictions to Trade with China Could End US Leadership in Semiconductors”, Boston Consulting Group, 2020.
Cover Photo: Illustration of a computer motherboard with microchips, transistors and semiconductors (Eduard Muzhevskyi / Science Photo Library via AFP).
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