Semiconductor alliances between U.S. and Asia could hold back China
Leading chipmakers, including the U.S., are forming alliances, in part to secure their semiconductor supply chains and keep China out of the frontiers of the industry, analysts told CNBC.
Places with strong semiconductor industries, such as the United States, South Korea, Japan and Taiwan, all want to build partnerships around key technologies.
“The immediate cause of all this is definitely China,” Pranai Kotastan, chair of the Takshahira Institute’s High-Tech Geopolitics Program, said of the alliance.
The collaboration underscores the importance of chips to the economy and national security, as well as the desire of countries to prevent China from making progress in key technologies.
Kotasthane is a guest on the latest episode CNBC’s Beyond the Valley Podcast Published on Tuesday, it looks at the geopolitics behind semiconductors.
Why chips are a geopolitical focus
Semiconductors are key technologies as they make their way into many of the products we use – from smartphones to cars and refrigerators. They are also critical for AI applications and even weapons.
Importance of chips pushed into spotlight The ongoing shortage of these components has been triggered by the Covid-19 pandemic due to surging demand for consumer electronics and supply chain disruptions.
This is a reminder of the need for governments around the world to secure chip supplies. Under President Joe Biden, the U.S. has pushed for a resurgence of manufacturing.
But the semiconductor supply chain is complex—it includes everything from design to packaging to manufacturing and the tools needed to do it.
For example, Netherlands-based ASML is the only company in the world capable of building the highly complex machines needed to make state-of-the-art chips.
The United States, while strong in many areas of the market, has lost its dominance in manufacturing. For the past 15 years or so, Taiwan’s TSMC and South Korea’s Samsung have dominated the world’s most advanced semiconductor manufacturing. Intel, the largest U.S. chipmaker, is far behind.
Taiwan and South Korea account for about 80% of the global foundry market. A foundry is a facility that manufactures chips designed by other companies.
The concentration of critical tools and manufacturing in a few companies and regions has put governments around the world on edge and pushed semiconductors into the geopolitical realm.
“What happens is there are a lot of companies around the world that do only a fraction of that, which means there’s a geopolitical angle to it, right? What if a company doesn’t provide what you need? What if, you know, one of the States put espionage in a way with chips? So these things make it a geopolitical tool,” Kotastein said.
Kotasthane said the concentration of power in the hands of a few economies and companies creates business continuity risks, especially in contentious places like Taiwan. Beijing considers Taiwan a renegade province and has pledged to “unify” Taiwan with mainland China.
“The other geopolitical significance is just to do with Taiwan’s central role in the semiconductor supply chain. And because of the escalating tensions between China and Taiwan, people are concerned, you know, now that a lot of manufacturing happens in Taiwan, if China is occupied or even just saying the two countries There are tensions?” Kotastein said.
A coalition is being built to exclude China
Due to the complexity of the chip supply chain, no country can survive alone.
Countries have increasingly sought chip partnerships over the past two years. Traveling to Korea in May, Biden toured a Samsung semiconductor factory. Around the same time, U.S. Commerce Secretary Gina Raimondo met her then Japanese Foreign Minister Koichi Hagida in Tokyo and discussed “cooperation in areas such as semiconductors and export controls.”
Last month, Taiwanese President Tsai Ing-wen told visiting Arizona Governor Ducey that she was looking forward to producing a “democratic bargaining chip” with the United States. Taiwan is home to the world’s most advanced chipmaker, TSMC.
Semiconductors are a key part of the cooperation between the US, India, Japan and Australia, the democracies collectively known as the Quartet.
The U.S. has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, the details of this have not yet been finalized.
There are several reasons behind these partnerships.
One is to bring together countries with a “comparative advantage” to “chain consortia that can develop security chips,” Kotasthane said. He added that “it doesn’t make sense to go it alone” due to the complexity of the supply chain and the strengths of different countries and companies.
In May 2022, U.S. President Joe Biden met with South Korean President Yoon Seol-yeol during a visit to Samsung Electronics’ Pyeongtaek campus. The U.S. and South Korea, among others, are seeking to form alliances around semiconductors with a view to excluding China.
Kim Min-hee | Getty Images
There is one common feature in driving this partnership – China is not involved. In fact, these alliances are aimed at severing China from global supply chains.
“In my opinion, I think in the short term, China’s development in this area will be severely constrained [as a result of these alliances]’ Kotastan said.
China and the U.S. see each other as technological rivals in everything from semiconductors to artificial intelligence. As part of the battle, the U.S. wants to cut off China’s access to key semiconductors and tools through export restrictions.
“The goal of all these efforts is to prevent China from developing its ability to produce advanced semiconductors domestically,” Paul Triolo, head of technology policy at consulting firm Albright Stonebridge, told CNBC, referring to the goals of various partnerships.
China’s “cutting-edge” chips in doubt
So where will this leave China?
China has poured money into its domestic semiconductor industry over the past few years, aiming to increase self-sufficiency and reduce reliance on foreign companies.
As mentioned earlier, this will be very 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 progress in areas such as chip design, But this is an area that relies heavily on foreign tools and equipment.
In the long run, I do think they [China] will be able to overcome some of the current challenges…but they will not be able to reach the forefront of many other countries.
Manufacturing is China’s “Achilles heel”, Kotasthane said. China’s largest foundry chip maker is called SMIC. But the company’s technology still lags far behind the likes of TSMC and Samsung.
“It requires a lot of international cooperation … I think it’s a big problem for China right now, because China has some hostile neighbors,” Kotastan said.
“What China can do three or four years ahead in terms of international cooperation will be more than possible.”
Kotasthane said that makes it possible for China to achieve a lead in chip manufacturing, especially if the United States has forged alliances with other major semiconductor powers.
“In the long run, I do think they [China] will be able to overcome some of the current challenges…but they will not be able to reach the forefront of many other countries,” Kotasthane said.
tensions in the league
Still, some rifts are starting to appear between some partners, notably South Korea and the United States.
in an interview Financial TimesSouth Korean Trade Minister Andergan said there was a disagreement between Seoul and Washington, which continued to restrict 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 Financial Times.
China is the world’s largest importer of chips and a key market for global chip companies, from U.S. giants such as Qualcomm to South Korea’s Samsung. As politics and business mix, tensions between countries in these high-tech alliances are likely to increase.
“Not all U.S. allies are eager to join these alliances or expand their control of China-facing technology because they have significant stakes in both manufacturing in China and selling to the Chinese market. Most don’t want to clash with Beijing over these issues,” he said. Riolo said.
“A major risk is that attempts to coordinate the development of the various parts of the global semiconductor supply chain undermine the market-driven nature of the industry and cause significant collateral damage to innovation, driving up costs and slowing the pace of development of new technologies.”