Leading chip-making nations, including the US, are forming alliances, in part to secure their semiconductor supply chain and prevent China from rising to the forefront of the industry, analysts told CNBC.
Places like the United States, South Korea, Japan, and Taiwan, which have strong semiconductor industries, have sought to forge partnerships around critical technology.
“The immediate reason for all of this is definitely China,” said Pranay Kotasthane, chair of the High-Tech Geopolitics Program at the Takshashila Institution, referring to the alliances.
The association underscores the importance of chips to economies and national security, while also highlighting countries’ desire to curb China’s advancement in critical technology.
Kotasthane was a guest on the latest episode of CNBC’s Beyond the Valley podcast released Tuesday, which looks at the geopolitics behind semiconductors.
Why chips are in the geopolitical spotlight
Semiconductors are a critical technology because they are part of so many of the products we use, from smartphones to cars to refrigerators. And they are also crucial for artificial intelligence applications and even for weaponry.
The importance of chips came into the spotlight during the ongoing shortage of these components, which was triggered by the Covid pandemic, amid a surge in demand for consumer electronics and supply chain disruptions.
That alerted governments around the world to the need to secure chip supplies. The United States, under President Joe Biden, has pushed to reorient manufacturing.
But the semiconductor supply chain is complex: it includes areas from design to packaging to manufacturing and the tools required to do so.
For example, ASML, based in the Netherlands, is the only company in the world capable of building the highly complex machines needed to make the most advanced chips.
The United States, while strong in many areas of the market, has lost its dominance in manufacturing. Over the past 15 years, Taiwan’s TSMC and South Korea’s Samsung have come to dominate the manufacture of the world’s most advanced semiconductors. Intel, the largest US chipmaker, fell far behind.
Taiwan and South Korea account for about 80% of the global foundry market. Foundries are facilities that make chips that are designed by other companies.
The concentration of critical tools and manufacturing in a small number of companies and geographies has unnerved governments around the world, as well as pushed semiconductors into the realm of geopolitics.
“What’s happened is there are a lot of companies spread out around the world doing a small part, which means there’s a geopolitical angle, right? What if a company doesn’t provide the things you need? What if, you know, one of the countries puts stuff about espionage through chips? So those things make it a geopolitical tool,” Kotasthane said.
The concentration of power in the hands of a few economies and companies presents a business continuity risk, especially in places of contention such as Taiwan, Kotasthane said. Beijing considers Taiwan a renegade province and has promised a “reunification” of the island with mainland China.
“The other geopolitical importance is related to Taiwan’s central role in the semiconductor supply chain. And as tensions between China and Taiwan have risen, there are fears that since much of the manufacturing is done in Taiwan, what would happen if China were to occupy or just that there are tensions between the two countries?” Kotasthane said.
Alliances are built that exclude China
Due to the complexity of the chip supply chain, no country can do it alone.
Countries have increasingly sought out chip partnerships in the past two years. On a trip to South Korea in May, Biden visited a Samsung semiconductor plant. Around the same time, US Commerce Secretary Gina Raimondo met with her then-Japanese counterpart Koichi Hagiuda in Tokyo and they discussed “cooperation in fields such as semiconductors and export control “.
Last month, Taiwanese President Tsai Ing-wen told visiting Arizona state Governor Doug Ducey that she hopes to produce “democracy chips” with the United States. Taiwan is home to the world’s most advanced chipmaker, TSMC.
And semiconductors are a key part of the cooperation between the United States, India, Japan and Australia, a group of democracies known collectively as the Quad.
The United States has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, the details of this have not been finalized.
There are a few reasons behind these associations.
One is about bringing countries together, each with their “comparative advantages,” to “join alliances that can develop safe chips,” Kotasthane said. “It doesn’t make sense to go it alone” because of the complexity of the supply chain and the strengths of different countries and companies, he added.
US President Joe Biden met with South Korean President Yoon Suk-yeol in May 2022 on a visit to the Samsung Electronics Pyeongtaek campus. The United States and South Korea, along with other countries, seek to form alliances around semiconductors, with the goal of eliminating China.
Kim Min Hee | fake images
The drive for such partnerships has one common trait: China is not involved. In fact, these alliances are designed to isolate China from the global supply chain.
“From my point of view, I think that in the short term, China’s development in this sector will be severely limited. [as a result of these alliances]Kotasthane said.
China and the US see each other as technology rivals in areas ranging from semiconductors to artificial intelligence. As part of that battle, the US has sought to cut off China from critical semiconductors and tools to make them through export restrictions.
“The goal of all this effort is to prevent China from developing the capacity to produce advanced semiconductors domestically,” Paul Triolo, technology policy lead at consultancy Albright Stonebridge, told CNBC, referring to the goals of the various partnerships.
China’s ‘cutting-edge’ chips in doubt
So where does that leave China?
In recent years, China has pumped a lot of money into its domestic semiconductor industry, with the aim of boosting self-sufficiency and reducing its dependence on foreign companies.
As explained before, that would be incredibly difficult due to the complexity of the supply chain and the concentration of power in the hands of very few companies and countries.
China is improving in areas like chip design, but that’s an area that relies heavily on foreign tools and equipment.
Manufacturing is China’s “Achilles’ heel,” according to Kotasthane. China’s largest contract chipmaker is called SMIC. But the company’s technology still lags significantly behind TSMC and Samsung.
“It requires a lot of international collaboration… which I think is now a big problem for China because of the way China has antagonized its neighbors,” Kotasthane said.
“What China was able to do three or four years earlier in terms of international collaboration will not only be possible.”
That leaves China’s ability to come to the forefront of chipmaking in question, especially as the United States and other major semiconductor powers form alliances, Kotasthane said.
“In the long term, I think [China] they will be able to overcome some of the current challenges … but they will not be able to get to the forefront that many other countries have,” Kotasthane said.
tensions in alliances
Still, cracks are beginning to appear between some of the partners, notably South Korea and the United States.
In an interview with the Financial Times, Ahn Duk-geun, South Korea’s trade minister, said there were disagreements between Seoul and Washington over the latter’s continued export restrictions on semiconductor tools to China.
“Our semiconductor industry has a lot of concerns about what the US government is doing these days,” Ahn told the FT.
China, the world’s largest chip importer, is a key market for global chip companies, from US giants like Qualcomm to Samsung in South Korea. With the mix of politics and business, the stage could be set for further tension between the nations in these high-tech alliances.
“Not all US allies are eager to sign up to these alliances or expand controls on China-bound technology, as they have large shares in both manufacturing in China and selling in the Chinese market. majority do not want to conflict with Beijing. these issues,” Triolo said.
“A major risk is that attempts to coordinate parts of the global semiconductor supply chain development will undermine the market-driven nature of the industry and cause significant collateral damage to innovation, driving up costs and slowing the pace of product development.” new technologies”.