Major chip-making nations, including the United States, are forming alliances, in part to protect their semiconductor supply chain and to prevent China from reaching the forefront of the industry, analysts told CNBC.
Places like the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have tried to forge partnerships around critical technology.
“The immediate reason for this is certainly China,” said Pranay Kotasthane, president of the High Tech Geopolitics Program at Takshashila Institution, in reference to alliances.
The collaboration underscores how important chips are to economies and national security, while highlighting countries’ desire to stem China’s progress in critical technology.
Kotasthane was a guest on the latest episode of CNBC’s Beyond the Valley podcast released Tuesday, which examines the geopolitics behind semiconductors.
Because chips are in the geopolitical spotlight
Semiconductors are a fundamental technology because they enter so many of the products we use, from smartphones to cars and refrigerators. And they are also crucial for artificial intelligence applications and even weapons.
The importance of chips was highlighted during the continuing shortage of these components, triggered by the Covid pandemic, amid a surge in consumer electronics demand and supply chain disruptions.
This has warned governments around the world of the need to secure chip supplies. The United States, under President Joe Biden, pushed to re-establish production.
But the semiconductor supply chain is complex: it encompasses areas ranging from design, to packaging, to manufacturing, and the tools needed 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 produce the most advanced chips.
The United States, although strong in many areas of the market, has lost its dominance in the manufacturing sector. Over the past 15 years or so, Taiwan’s TSMC and South Korea’s Samsung have come to dominate the manufacturing of the world’s most advanced semiconductors. Intel, the largest chip maker in the United States, has fallen far behind.
Taiwan and South Korea account for approximately 80% of the global foundry market. Foundries are facilities that produce chips designed by other companies.
The concentration of critical tools and manufacturing in a small number of companies and geographies has challenged governments around the world, as well as pushing semiconductors into the realm of geopolitics.
“What happened is that there are many companies around the world making a small part of it, which means there is a geopolitical corner, right? What if a company doesn’t provide the things you need? What if, you know, one of the countries somehow puts things on spying through chips? So those things make it a geopolitical tool, “Kotasthane said.
Concentrating power in the hands of a few economies and companies presents a risk to business continuity, especially in disputed places like Taiwan, Kotasthane said. Beijing considers Taiwan a renegade province and has promised a “reunification” of the island with mainland China.
“The other geopolitical significance is simply related to Taiwan’s pivotal role in the semiconductor supply chain. And as China-Taiwan tensions have increased, there is a fear that, you know, since a lot of manufacturing takes place in Taiwan, what if China were to occupy or even just that there are tensions between the two countries? ” Kotasthan said.
Alliances are being built that exclude China
Due to the complexity of the chip supply chain, no country can do it alone.
Over the past couple of years, countries have been looking for more and more chip partnerships. On a trip to South Korea in May, Biden visited a Samsung semiconductor plant. Around the same time, US Secretary of Commerce Gina Raimondo met her then Japanese counterpart, Koichi Hagiuda, in Tokyo and discussed “cooperation in fields like semiconductors and export control.”
Last month, Taiwanese President Tsai Ing-wen told Arizona Governor Doug Ducey that he was looking forward to producing “chips for democracy” with America. Taiwan is home to the world’s most advanced chip maker TSMC.
And semiconductors are a key part of cooperation between the United States, India, Japan and Australia, a group of democracies collectively known as the Quads.
The US has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all of which are powerhouses in the semiconductor supply chain. However, the details of this have not been finalized.
There are a few reasons behind these collaborations.
One is about joining countries, each with their own “comparative advantages”, to “put together alliances that can develop safe chips,” Kotasthane said. “There is no point in going alone” due to the complexity of the supply chain and the strengths of different countries and companies, she added.
US President Joe Biden met with South Korean President Yoon Suk-yeol in May 2022 during a visit to the Samsung Electronics Pyeongtaek campus. The United States and South Korea, along with other countries, are trying to form alliances around semiconductors, with the aim of cutting China out.
Kim Min Hee | Getty Images
The push for such partnerships has a common trait: China is not involved. Indeed, these alliances are designed to cut China out of the global supply chain.
“In my opinion, I think China’s development in this area will be severely limited in the short term [as a result of these alliances]”said Kotasthane.
China and the United States see themselves as rivals in technology in areas ranging from semiconductors to artificial intelligence. As part of that battle, the United States sought to isolate China from semiconductors and critical tools to get them through export restrictions.
“The goal of all this effort is to prevent China from developing the ability to manufacture advanced semiconductors domestically,” Paul Triolo, head of technology policy at consulting firm Albright Stonebridge, told CNBC, referring to the goals of the various partnerships. .
Chinese ‘cutting edge’ chips in doubt
So where does China come from?
In recent years, China has pumped a lot of money into its domestic semiconductor industry, with the goal of increasing self-sufficiency and reducing its dependence on foreign companies.
As explained above, it 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 such as chip design, but this is an area that relies heavily on foreign tools and equipment.
Manufacturing is China’s “Achilles heel”, according to Kotasthane. China’s largest contract chip maker is called SMIC. But the company’s technology is still far behind TSMC and Samsung.
“It requires a lot of international collaboration … which I now think is a big problem for China because of the way China has somehow antagonized its neighbors,” Kotasthane said.
“What China could do three, four years earlier in terms of international collaboration will not only be possible.”
This leaves China’s ability to reach the forefront of chip manufacturing in question, especially as the United States and other major semiconductor powers form alliances, Kotasthane said.
“In the long run, I think they are [China] they will be able to overcome some of the current challenges … but they will not be able to reach the vanguard that many other countries are, “said Kotasthane.
Tensions in alliances
However, there are some cracks starting to appear between some of the partners, particularly South Korea and the United States.
In an interview with the Financial Times, South Korea’s Minister of Commerce Ahn Duk-geun said there are disagreements between Seoul and Washington over continued restrictions on exports of 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 importer of chips, is a key market for chip companies globally, from US giants like Qualcomm to Samsung in South Korea. By mixing politics and business, the ground could be set for greater tension between nations in these high-tech alliances.
“Not all US allies are eager to sign these alliances or expand controls on technology destined for China, as they have major holdings in both manufacturing in China and selling in the Chinese market. Most do not want to conflict with Beijing for these problems, “Triolo said.
“A major risk is that attempts to coordinate parts of the development of the global semiconductor supply chain threaten the market-oriented nature of the industry and cause serious collateral damage to innovation, increasing costs and slowing the pace of development of new technologies.” .