From smartphones and cellular technology to social media and artificial intelligence, the United States and China are engaged in a technological arms race. But a fresh front in the conflict is opening up that penetrates a level deeper: the parts that fuel our smartphones, computers, cars, and home appliances.
To address a persistent shortage of computer chips and lessen reliance on other nations, like China, for manufacturing, President Joe Biden signed the new legislation on Tuesday aimed at supporting the US semiconductor industry.
With more than $50 billion in funding and additional investments in the National Science Foundation, the Department of Commerce, and the National Institute of Standards and Technology, the CHIPS and Science Act offers incentives for domestic semiconductor manufacturing as well as research and development.
Companies like Apple (AAPL), Google (GOOG), and Microsoft (MSFT) heavily rely on China for the production of their devices and the components that go into them.
China has long been a dominant force in the tech manufacturing industry. According to a recent analysis by the Center for Strategic and International Studies, China has also made significant progress in the semiconductor market, taking the top three global spots in wafer fabrication, packaging, and testing, and ranking fourth overall.
Due to US restrictions on some of its largest semiconductor companies, China has likely increased its focus on domestic manufacturing.
The Semiconductor Industry Association (SIA), a trade group whose members include IBM (IBM), Intel (INTC), AMD (AMD), Qualcomm (QCOM), and Nvidia, reported that China’s semiconductor sales increased by more than 30% in 2020 to reach nearly $40 billion (NVDA).
However, this year’s strict Chinese lockdowns, which stopped factories and damaged supply chains, made the Covid-19 pandemic-related shortage in chip supply even worse.
To increase independence and lessen reliance on Chinese manufacturing, many regions are currently reevaluating how they approach the sector.
To further shield the tech sector from China, US Treasury Secretary Janet Yellen has emphasized the value of “friend-shoring,” or routing supply chains through US allies like South Korea and Japan.
Meanwhile, to support the continent’s semiconductor industry, legislators in Europe have suggested spending tens of billions of dollars over the next few years.
As part of a five-year plan unveiled last year, China continues to make efforts to expand its semiconductor industry.
“There is growing recognition on a global scale that these are the technologies that will determine who ‘wins’ in the future global economy,” said Kenton Thibaut, Resident China Fellow at the Digital Forensic Research Lab of the Atlantic Council in Washington, DC, to CNN Business.
The layers of technology and specialized knowledge required, she continued, make it more difficult to be completely self-sufficient in chipmaking. In the semiconductor supply chain as a whole, “it’s really not possible to gain a top spot.”
Taiwan, a self-governing island off the coast of China, complicates matters further by becoming a diplomatic and military flashpoint between Washington and Beijing. Following US Speaker of the House Nancy Pelosi’s visit to Taiwan last week, tensions, which the Chinese Communist Party views as its own territory despite never having had control of the island, have risen sharply.
With many of the top manufacturers in the world headquartered there, including Apple suppliers Foxconn and Pegatron, Taiwan is crucial to the world’s semiconductor industry.
90% of the most sophisticated computer chips in use today are produced by Taiwan Semiconductor Manufacturing Company, or TSMC, one of those chipmakers.
The company’s chairman, Mark Liu, recently told CNN that “nobody can control TSMC by force.” “If you take a military force or invasion, you will make TSMC factory non-operational, because this is such a sophisticated manufacturing facility [that] depends on the real-time connection with the outside world — with Europe, with Japan, with the US.”
With construction set to start on a semiconductor fabrication facility in Arizona in 2024, TSMC has already committed at least $12 billion to the project.
GlobalWafers, a further Taiwanese manufacturer, recently announced a $5 billion commitment to the construction of a silicon wafer plant in Texas, and earlier this year, South Korean conglomerates Samsung and SK Group announced plans to invest tens of billions of dollars to expand their US tech manufacturing presence.
Zachary Collier, an assistant professor of management at Virginia’s Radford University who specializes in risk analysis, notes that although TSMC’s investment predates the CHIPS and Science Act, the legislation is likely to encourage more businesses to bring factories to the United States.
Building a large manufacturing facility requires a lot of capital, and anything that can help offset some of those costs will greatly encourage businesses to bring those products home, he said.
The bill includes $1.5 billion for telecommunications companies that compete with Chinese businesses like Huawei and allocates nearly $53 billion over the following five years to increase US semiconductor manufacturing. A 25% tax credit will also be given to businesses that invest in semiconductor manufacturing.
Beyond the immediate benefits, businesses might be eager to establish a presence in the US manufacturing sector due to the nation’s relative stability, security, highly educated working class, and, perhaps most importantly, sheer demand.
However, only 12% of the world’s semiconductors are manufactured in the United States, according to Collier. Additionally, TSMC claims that generally speaking, 65% of its revenue comes from North America, with the remaining 10% and 5% coming from China and Japan, respectively.
To meet that demand, businesses “would try to rush in,” Collier said. However, it won’t be simple to replace China overnight—or possibly ever.
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Right now, Thibaut asserted, “China has an advantage because it has a concerted strategy around pitching its technologies and supplying crucial infrastructure to nations that need them.
The US and other democracies must create a technology strategy that is proactive in addressing real needs rather than just focusing on competing with China.
It will probably be nearly impossible for nations to break away from the global supply chain, especially for goods as crucial and complex as semiconductors, no matter how hard they try to strengthen their domestic manufacturing bases. Chip manufacturing, design, fabrication, and even raw materials are spread across several different nations and regions.
Collier said, “It’s really a huge web, and no matter how much countries try to localize production, a certain amount of interdependence is inevitable. One way or another, “It’s global.”
