The geopolitics of chips

(To Alessandro Rugolo)
12/09/22

For several years now we have been hearing about semiconductor geopolitics and for me it is time to deepen the subject.

To do this, let's start with a recent article from Johns Hopkins University: "Clash of the Chips: A Comparison of US-China Semiconductor Production Capacities", by Varda He and Jennifer Roberts, released May 7, 2022.

In the study, the authors analyze the semiconductor (chip) manufacturing process from a specifically geopolitical point of view and with a specific purpose: to analyze the US-China competition to ensure that US dominance in the sector continues.

The analysis aims to understand the risks and advantages of the current American production process, Chinese production and the critical issues that the US will have to face in order to bring some production processes back to its territory to avoid problems of supply chain and safety.

Talking about the USA-China comparison, as I think everyone is clear, means practicing the whole world, both in consideration of the raw materials needed for the manufacture of the chips, both for the places where they are manufactured, and for the policies of influence that aim to prohibit or encourage the use of components of either party in military or, more generally, high-tech products.

Broadly speaking, the chip manufacturing process can be divided into three parts: design, production, assembly. According to the authors, the United States is currently ahead in the chip design phase as its industries control 68% of the world market.

But to fully understand what the current challenge means and what it consists of, the authors analyze the Chinese production process by identifying the differences and strengths and weaknesses compared to the US. So, and in my opinion much more interesting, The main reasons for concern in the chip manufacturing industry are identified:

- the Taiwanese manufacturer "Taiwan Semiconductor Manufacturing Company" (TSMC), alone is responsible for the production of the 50% of the chips in the world;

- the second largest manufacturer in the world is Samsung, South Korean;

- the US is only a third party with Intel;

- the first two manufacturers mentioned above are the only ones capable of producing the chips of the new generations (5 nanometer technology).

To understand why both producers are to be considered strategic and geopolitically important, it is sufficient to consider that both North Korea and China are clearly identified by the US as "enemies" (for the US, China from 2022 is considered priority n.1 in 2022 National Defense Strategy) and this means that any conflict in the area would jeopardize the production of chips but above all the production in the rest of the world of "objects" dependent on them, such as computers, smartphones and all automotive industry, not to mention the military industry!

In 2020, in the midst of this economic war between the US and China, the US entered the Semiconductor Manufacturing International Corp. (SMIC), the largest Chinese chip company (holding about 5% of the world market) in the Blacklists, denying it access to American technologies.

This is why the US needs to bring part or all of the chip production chain back to American territory and this is why on April 6, 2022, the White House allocated $ 52 billion in subsidies for local chip makers.

Of course, the US-China economic war in the semiconductor industry affects the whole world. In Europe, for example, this is reflected in the impossibility of the company ASML Holding NV, with registered office in the Netherlands, to sell its technologies to the companies present in the Blacklists US, and coincidentally the ASML deals precisely with technologies related to the chip manufacturing industry.

Let us now take a step forward in understanding this global phenomenon related to semiconductors. To do this I use another article: "The geopolitics of semiconductors: implications for Australian business", published by KPMG on June 25, 2021. We talk about another aspect not yet touched on, relating to the production of the silicon used for the production of the chips. In fact, according to what has been published, China holds 64% of semiconductor silicon production, while Russia 9%, followed by Japan (7%) and the USA (5%) and Norway (5%). It is quite clear that if the US really wants to bring chip production back home, it has to start from the base and then from the production of silicon for semiconductors. Australia views the current semiconductor manufacturing confrontation as a high risk, despite being a major US ally.

If the United States sees China as a global competitor in all sectors and especially in new technologies, China is no different and has already understood for several years that globalization can be an advantage but also a risk. In 2015 it launched its new policy called "Made in China 2025" With the'goal of reaching and surpassing the West in emerging technologies and among these the production of chips.

As it is easy to understand, not all the problems in the sector are attributable to the clash between superpowers, let's consider for a moment what happened in 2020 and 2021 with entire production sectors blocked due to COVID 19. What were the implications of the lack of chip production ? Production blocks in the automotive sector with lost earnings of around $ 60 billion. It is clear that the globalization and wild relocation that we have seen in the past few years does not work except in the short term and in situations of relative peace.

To learn more:

Clash of the Chips: A Comparison of US-China Semiconductor Production Capacities - The SAIS Review of International Affairs (jhu.edu)

2 charts show how much the world depends on Taiwan for semiconductors (cnbc.com)

US blacklists dozens of Chinese firms including SMIC, DJI (cnbc.com)

TSMC increases production of 5 nanometer technology - tuttoteK

US blacklists dozens of Chinese firms including SMIC, DJI (cnbc.com)

The Geopolitics of Semiconductors - KPMG Australia (home.kpmg)

China Tops Threats in New Defense Strategy - Defense One

NDS Fact Sheet (defense.gov)

The US-China Conflict Over Chips Is About to Get Uglier - BNN Bloomberg

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