The Battle for Global Semiconductor Supremacy

15 Aug 2022 The Battle for Global Semiconductor Supremacy
The recent visit of the Speaker of the United States House of Representatives, Nancy Pelosi, to Taiwan was amongst other things, to reassure Taiwan of US support in the event of an invasion from mainland China. Taiwan has been governed independently of China since 1949, but Beijing views the island as part of its territory and has a desire to reintegrate it. The reason that Taiwan is so important to the USA and subsequently the rest of the world, is its dominance in manufacturing processors. The production of processors is a highly complex affair which Taiwan has been developing for almost forty years, largely monopolized by one giant; the Taiwan Semiconductor Manufacturing Company (TSMC). 
The fragility of the world economy was felt during the pandemic where semiconductor supply chains were severely affected, and that sent shockwaves throughout the world. Semiconductors processors are used in everything, from daily electronic items, airplanes, sophisticated defense systems, modern cars and everything in between. Our modern society is unable to function without this highly important innovation, which ranges in sophistication depending on where they are going to be used. The shortage of semiconductors that started during the pandemic rang alarm bells across the world, which has hiked the prices of all goods that require such processors.
 Throughout the  years, TSMC held tens of thousands of innovative patents, within world-class research and development facilities, continually upgrading processes to produces ever smaller and more advanced processors. TSMC’s facilities are so advanced that even chip manufactures that have their own processor facilities such as Intel choose to use TSMC to produce a large majority of their CPU’s. TSMC produces 56% of global semiconductor chips and over 90% of the advanced processors used in sophisticated AI applications.
From a business perspective, it is never a good idea to have all your eggs in one basket which is why we are seeing moves from the two global giants China and the USA to boost their onshore production of processors. Both countries have processor manufacturing facilities that need to be modernized if they were to diminish Taiwan’s dominance as the leading supplier. Doing so however is by no means easy. It requires specialized expertise, billions of dollars and time to upgrade. Processors today consist of up to 12 different layers of electronics connected through microscopic circuity, which poses great challenges in terms of both engineering and physics as the scale gets smaller, hence the need to continually innovate better manufacturing techniques. 
This is not a comfortable place for either the USA or China as they compete in the technological cold war. Each one has been implementing legal and economic instruments such as barriers, investigations, sanctions, and tariffs to target each other’s technologies and to strengthen their respective geopolitical positions. 
In a major step, the US administration has decided to fully fund the CHIPS act where it has pledged $52 billion to boost onshore US semiconductor manufacturing. The US is the world’s leading processor designer with the bill designed to supercharge US efforts in semiconductors, legislating $200 billion over 10 years to better compete with China. As a result, Intel is focusing on upgrading its own facilities to boost onshore American production which is estimated to cost  $20 billion to upgrade its Ohio facility, expected to open in late 2025. Samsung is set to open a similar manufacturing facility in Texas to be operational by the end of 2024. TSMC has also caught wind of this and is planning to open a $12 billion facility in Phoenix, Arizona, with advanced processor manufacturing facilities. Eight of the fifteen largest semiconductor companies in the world are in the US with Intel leading the pack in terms of global sales.
The US is trying to stranglehold the Chinese semiconductor industry by forming the ‘Chip4alliance’. This is an alliance between the US, Japan, South Korea and Taiwan, designed for the US to reassert its dominance by developing a coalition between governments and companies of allied countries to build US chip dominance and isolate China totally. Processor manufacturers that move to the US are set to receive tax benefits as well as other subsidies, based on the condition they restrict investment in China for ten years, and in some cases, not upgrade facilities they have on mainland China. This will have a knock on effect on Chinese goods and international manufacturers that have their facilities in China such as Apple and others. Chinese supply chains may well suffer heavily as a result.
The US Commerce Department has also recently been working on rules to deny the Chinese access to gate-all-around (GAA) technology through electronic design automation (EDA) software. This is essential to build smaller transistor designs which are the core components of modern processors. This yet is another blow to the longevity of the Chinese semiconductor sector.
President Xi JinPing has repeatedly called for China to prioritize self-reliance and wants it to meet 70% of its domestic processor needs under the ‘Made in China 2025’ policy. However, China was only able to meet 16% of it needs in 2019 and remains a net importer of processors, being subject to the tightening of export controls by the US. While China has been recruiting international talent in this space to bolster its semiconductor expertise, it has faced difficulty in dealing with overseas companies that are critical in the semiconductor supply chain. The Dutch company ASML is the sole supplier of critical lithographic chip making machines used to etch silicon wafers to produce more efficient designs. Through US intervention, exports from ASML to China have been blocked and export restrictions have been strong-armed by the US globally on Chinese technology companies such as Huawei and others, to the extent that even TSMC has severely restricted its dealings with Chinese entities.
The US is ahead of China in the semiconductor sector in terms of both research and development and manufacturing. The US has international allies in this game and is highly influential on the international stage, attracting talent and adopting a pro US - anti China stance when it comes to processors. I see that China’s progression will be dependent on how its relations proceed with the US and the level of diplomacy it can muster in its negotiations with Uncle Sam. Having said this, we should not rule out China as it is a highly resourceful country and could well play on its experience in developing internal capacity, foster better relations with the international semiconductor community, purchase foreign firms that can fill the gaps they have as well as put more resources into research and development activities.
Both the US and China need time to develop their semiconductors infrastructures as this is both expensive and time consuming. It costs billions to build such facilities and years to come fully online. This means that for the short term at least, Taiwan will continue to play an important role in the global semiconductor sector.
Talal Abu-Ghazaleh