Analysts told CNBC that leading chipmaking nations, including the US, are forming alliances to secure their semiconductor supply chains and prevent China from reaching the industry’s cutting edge.
Those including the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have sought to build partnerships around critical technology.
“The immediate cause of all this is certainly China,” said Pranay Kotasthane, president of the Hi-Tech Geopolitics Program at the Taxila Institution, in reference to the alliance.
The teaming underscores how important the chips are to the economy and national security, as well as highlights the countries’ willingness to halt China’s advances in critical technology.
Guest in the latest episode of Kotasthene CNBC’s Beyond the Valley Podcast Published Tuesday, which looks at the geopolitics behind semiconductors.
Why chips are in the geopolitical spotlight
Semiconductors are important technology as they go into many of the products we use – from smartphones to cars and refrigerators. And they are important for artificial intelligence applications and even weapons.
The importance of chips was brought to the limelight during a The ongoing shortage of these components, which was sparked by the COVID pandemic, comes amid increased demand for consumer electronics and supply chain disruptions.
It alerted governments around the world to the need to secure chip supplies. The United States, under President Joe Biden, has pushed to restart manufacturing.
But the semiconductor supply chain is complex – it encompasses areas from design to packaging to manufacturing, and the equipment needed to do so.
For example, ASML, based in the Netherlands, is the only firm in the world capable of manufacturing the highly complex machines that are needed to make the most advanced chips.
The United States, while strong in many segments of the market, has lost its dominance in manufacturing. Over the past 15 years, Taiwan’s TSMC and South Korea’s Samsung have dominated manufacturing of the world’s most advanced semiconductors. Intel, the largest chip maker in the United States, was left far behind.
Taiwan and South Korea make up about 80% of the global foundry market. Foundries are facilities that manufacture chips designed by other companies.
The concentration of critical equipment and manufacturing in a small number of companies and geographies has put governments around the world on edge, as well as putting semiconductors in the realm of geopolitics.
“What’s happened is that many companies spread around the world are doing a small part of it, which means it has a geopolitical angle, right? What if one company doesn’t supply what you need? What if, you know, one of the countries talks about espionage through chips? Then those things make it a geopolitical tool,” Kotasthene said.
The concentration of power in the hands of some economies and companies presents a business continuity risk, especially in places of contention such as Taiwan, Kotasthene said. Beijing considers Taiwan a renegade province and has promised “reunification” of the island with the Chinese mainland.
“The other geopolitical importance relates to Taiwan’s central role in the semiconductor supply chain. And because Sino-Taiwan tensions have escalated, there’s a fear that, you know, since a lot of manufacturing takes place in Taiwan, if there was China. What would happen for the capture or even there is tension between the two countries?” Kotastane said.
Forming alliances that exclude China
Due to the complexity of the chip supply chain, no country can run it alone.
Countries have increasingly sought chip sharing over the past two years. On a trip to South Korea in May, Biden visits Samsung Semiconductor Plant. Around the same time, US Secretary of Commerce Gina Raimondo met with her then-Japanese counterpart, Koichi Hagiuda, in Tokyo and discussed “cooperation in areas such as semiconductors and export controls”.
Last month, Taiwan’s President Tsai Ing-wen told the governor of the US state of Arizona, Doug Ducey, that he looked forward to producing “democracy chips” with the US. Taiwan is home to TSMC, the world’s most advanced chip maker.
And semiconductors are an important part of cooperation between the United States, India, Japan and Australia, a group of democracies known collectively as the Quad.
The US has also proposed “Chip 4” alliances with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, its details have not been finalized.
There are a few reasons behind these partnerships.
It’s about bringing a country together, each with its own “comparative advantage,” to “tie together alliances that can develop secure chips,” Kotasthene 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 said.
US President Joe Biden meets with South Korean President Yoon Suk-yol during his visit to the Samsung Electronics Pyeongtaek campus in May 2022. The US and South Korea, along with other countries, are seeking to form an alliance around semiconductors aimed at eliminating China.
Kim Min-hee | Getty Images
Fostering such partnerships has a common feature – China is not involved. In effect, these alliances are designed to cut China off the global supply chain.
“In my view, I think that in the short term, China’s development in this area will be seriously hindered [as a result of these alliances]Kotasthene said.
China and the US see each other as technology rivals in areas ranging from semiconductors to artificial intelligence. As part of that fight, the US has looked to cut China off critical semiconductors and equipment through export sanctions.
“All of this effort is aimed at preventing China from developing the capacity to produce advanced semiconductors domestically,” Paul Triolo, head of technology policy at consulting firm Albright Stonebridge, told CNBC, referring to the objectives of the various partnerships.
China ‘state-of-the-art’ chips in doubt
So where does that leave China?
Over the past few years, China has invested a lot of money into its domestic semiconductor industry, aimed at promoting self-reliance and reducing its dependence on foreign companies.
As mentioned earlier, this will 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 making improvements in areas such as chip design. But this is an area that relies heavily on foreign tools and equipment.
According to Kotasthene, manufacturing is the “Achilles’ heel” for China. China’s largest contract chipmaker is called SMIC. But the company’s technology still lags far behind the likes of TSMC and Samsung.
Kotasthene said, “It requires a lot of international cooperation …
“What China could have done three, four years ago in terms of international cooperation will not be possible.”
Kotasthene said this casts doubt on China’s ability to reach the leading edge of chipmaking, especially as the US and other major semiconductor powerhouses form alliances.
“In the long term, I think they [China] will be able to overcome some of the current challenges … yet they will not be able to reach the cutting edge, which many other countries are,” Kotasthene said.
Nevertheless, some cracks are beginning to appear between some partners, notably South Korea and the United States.
in an interview with financial TimesSouth Korea’s trade minister Ahn Duk-gyun said Seoul and Washington had disagreements over the latter’s export restrictions on semiconductor equipment to China.
“Our semiconductor industry is very concerned about what the US government is doing these days,” Ah told the FT.
China, the world’s largest importer of chips, is a major market for chip companies around the world, ranging from US giants such as Qualcomm to Samsung in South Korea. With a mix of politics and business, these high-tech alliances could set the stage for greater tensions between nations.
“Not all US allies are eager to sign up to these alliances, or expand control over technology bound for China, because they have major equity in both manufacturing in China and sales in the Chinese market. Most do not want to run away from Beijing on these issues,” Triolo said.
“A major risk is that attempts to coordinate parts of the global semiconductor supply chain development undermine the market-driven nature of the industry and cause major collateral damage to innovation, drive up costs and hinder the development of new technologies. slows down the pace.”