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GUANGZHOU, China – When you talk about chip manufacturing, two companies usually come to mind – Taiwan’s TSMC and South Korea’s Samsung Electronics. The two Asian companies together control more than 70% of the semiconductor manufacturing market.
The US, which once led the way, is lagging behind in this area after monumental changes in the business models of the semiconductor industry.
However, a global semiconductor shortage and geopolitical tensions with China have strengthened Washington’s control of the supply chain, which is concentrated in the hands of a small number of actors, and provided the impetus to bring production back to American soil in an attempt to regain leadership.
The US has set aside billions of dollars and is reportedly considering alliances with other nations.
Semiconductors are critical to everything from cars to the smartphones we use. And they have also been placed at the center of US-China tension.
“A feature of US policy is that it has a strong focus on China. This has now become a national imperative to improve self-sufficiency in the semi-finished factory as a result of the recent chip shortages and the ‘tech war’ against China accelerated, “Bank of America said in a note released on Wednesday.
How Asia dominated production
The key to understanding the geopolitics of semiconductors, which countries dominate, and why the US is trying to boost its domestic industries is to grapple with the supply chain and business models.
Companies like Intel are Integrated Device Manufacturers (IDMs) who design and manufacture their own chips.
Then there are the fabless semiconductor companies that develop chips but outsource production to so-called foundries. The two largest foundries are TSMC in Taiwan and Samsung Electronics in South Korea.
In the last 15 years, companies have started to switch to this fabless model. TSMC and Samsung took advantage of this when they began investing heavily in cutting-edge manufacturing technology. If a company like Apple wants to have the latest chip made for their iPhone, it has to turn to TSMC to do so.
According to data from Trendforce, TSMC has a 55% market share in the foundry and Samsung has an 18% market share. Taiwan and South Korea together have 81% of the global foundry market, underscoring the dominance and confidence in these two countries as well as TSMC and Samsung.
“In 2001, 30 companies were manufacturing at the top, but as the cost and difficulty of the semi-finished product increased, that number dropped to just three,” – TSMC, Intel and Samsung, according to a December statement from Bank of America.
However, Intel’s manufacturing process still lags behind that of TSMC and Samsung.
“Taiwan and South Korea have become leaders in wafer manufacturing, requiring massive capital investments. Part of their success over the past 20 years has been due to supportive government policies and access to a skilled workforce,” said Neil Campling, director of technology, media and technology Telecommunications research at Mirabaud Securities, CNBC said via email.
The complex supply chain
While TSMC and Samsung are the dominant manufacturers of semiconductors, they still rely heavily on devices and machines from the US, Europe and Japan.
The companies that need these tools for foundries are known as suppliers of semiconductor capital goods, or “semicaps” for short.
According to Bank of America, the top five semicap device vendors account for nearly 70% of the market, citing Gartner data. Three of the five are US companies, one is European, and one is Japanese.
ASML, based in the Netherlands, is the only company in the world that can manufacture what is known as extreme ultraviolet (EUV), which is required to make the most advanced chips such as those made by TSMC and Samsung.
What is the US planning and why?
So the US is not necessarily falling behind in the entire semiconductor industry. Some of its companies are an integral part of the supply chain. One area it has lagged is manufacturing.
Under President Joe Biden, the US is striving to regain leadership in manufacturing and securing supply chains.
In February, Biden signed an executive order that included a semiconductor supply chain review to identify risks. A $ 2 trillion stimulus package has allocated $ 50 billion to semiconductor manufacturing and research. A bill known as the CHIPS for America Act is also working its way through the legislative process aimed at providing incentives to enable advanced research and development and secure the supply chain.
Meanwhile, US company Intel last month announced plans to spend $ 20 billion to build two new chip factories and said it would function as a foundry. This could be a domestic alternative to TSMC and Samsung.
Part of this supply chain review was triggered by a global chip shortage that hit the automotive industry. The coronavirus pandemic accelerated the demand for personal electronics such as laptops and game consoles as industrial and automakers ceased production. However, a recovery in production and increased demand for chips in various sectors have resulted in a shortage.
The concentration of production in the hands of TSMC and Samsung has made the problem worse.
The semiconductor shortage “has likely made it clear to the US government that they are not in control of their own destiny,” said Mirabaud Securities’ Campling.
But geopolitical factors also play a role that influence US politics.
“In the long term, the Biden government would like to continue encouraging both foreign and US semiconductor manufacturers to expand their capacities in the US, reduce reliance on manufacturing in geopolitically sensitive areas such as Taiwan, and create high-paying engineering jobs in the US.” Paul Triolo, head of geotechnical practice at Eurasia Group, told CNBC via email.
Part of US policy in the semiconductor space is to form alliances. Earlier this month, the Nikkei reported that the US and Japan will be working together on supply chains for critical components such as semiconductors. The two sides will seek a system where production is not concentrated in specific regions like Taiwan, the Nikkei said.
“The US is trying to cut China out of the equation,” Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future, a Toronto-based consulting firm, told CNBC via email.
“An attempt is being made to reshape the way the global chip industry works in the face of an emerging China. This is not necessarily about self-sufficiency, although Washington would welcome it. Instead, it is about building critical sectors – from AI to chips – that’s from geopolitics. And because several nations share US concerns about China, the US is taking part of the world with it. “
China’s pursuit of self-sufficiency
China, meanwhile, is trying to encourage self-sufficiency while the US is trying to keep them from essential supplies. In recent years, China has tried to boost its semiconductor industry through huge investments and incentives such as tax breaks.
But China is lagging far behind everywhere and that is down to the supply chain. SMIC is China’s largest foundry, a competitor to TSMC and Samsung. However, SMIC’s technology is several years behind that of its rivals in Taiwan and South Korea.
And even if it has wanted to move forward, it is extremely difficult because of US sanctions and measures. Washington blacklisted SMIC last year known as the Entity List. This prevents American companies from exporting certain technologies to SMIC, holding back the chip maker due to the key role US companies play in the semiconductor supply chain. According to Bank of America, around 80% or more of SMIC devices come from US vendors.
Last year, Reuters reported that the US had pressured the Dutch government to stop selling an ASML machine to SMIC. The Dutch company is the only company that makes the so-called EUV (Extreme Ultraviolet) machine, which is needed to make the most modern chips. This machine has not yet been shipped to China.
“If China wants to produce top-of-the-line chips, it is practically impossible to do without US equipment or allies,” Bank of America said in its December statement.
“We remain skeptical of significant advances in China’s advances due to US restrictions, which are significantly lagging behind on intellectual property (intellectual property) and have limited access to intellectual property due to US restrictions,” Bank of America said in a separate notice last week.
“Our team expects more than 5 years of delay before making any major progress.”