US semiconductor policy seeks to cut off China, secure supply chain

GUANGZHOU, China – When you talk about chip manufacturing, you usually think of two companies – TSMC of Taiwan and Samsung Electronics of South Korea. The two Asian companies together account for more than 70% of semiconductor manufacturing.

The US, once a leader, lags behind in this space after monumental shifts in business models in the semiconductor industry.

But a global shortage of semiconductors and geopolitical tensions with China have intensified Washington’s investigation into the supply chain, which is concentrated in the hands of a small number of players, and created an effort to bring manufacturing back to US soil. to regain leadership.

The US has earmarked billions of dollars and is reportedly looking at alliances with other countries.

Semiconductors are critical to everything from cars to the smartphones we use. And they, too, have been driven into the midst of tensions between the US and China.

“One feature of US policy is that it has a strong emphasis on China. It has now become a national necessity to increase self-sufficiency in semi-production, which is accelerated by the recent shortage of chips and the ‘technological war’ against China. , “said Bank of America. said in a note published Wednesday.

The key to understanding semiconductor geopolitics, which countries dominate and why the US is trying to strengthen its domestic industry lies in tackling the supply chain and business models.

Companies like Intel are integrated device manufacturers (IDMs) that design and manufacture their own chips.

Then there are the fabulous semiconductor companies that design chips but outsource production to so-called foundries. The two largest foundries are TSMC in Taiwan and Samsung Electronics in South Korea.

Over the past approximately 15 years, companies have begun to switch to this fabulous model. TSMC and Samsung took advantage when they started investing heavily in leading-edge manufacturing technology. If a company like Apple now wants to manufacture the latest chip for their iPhone, they need to go to TSMC to do so.

According to Trendforce data, TSMC has a 55% market share and Samsung 18%. Taiwan and South Korea together have 81% of the world foundry market, emphasizing the dominance and dependence of these two countries as well as TSMC and Samsung.

“In 2001, thirty companies produced at the forefront, but as semi-manufacturing increased in cost and difficulty, that number dropped to just three companies” – TSMC, Intel and Samsung, according to a Bank of America note released in December was published.

However, Intel’s manufacturing process is still behind that of TSMC and Samsung.

“Taiwan and South Korea have become leaders in the production of waffles that require large capital investment; and part of their success over the past 20 years is due to supportive government policies and access to skilled labor,” said Neil Campling, head of technology, media and telecommunications research at Mirabaud Securities, told CNBC in an email.

While TSMC and Samsung are the dominant semiconductor manufacturers, they still rely heavily on equipment and machinery from the US, Europe and Japan.

The companies that require these tools through foundries are known as suppliers of semiconductor capital equipment or in short ‘semicap’.

According to Bank of America, the top five sellers of half-caps are nearly 70% of the market, citing Gartner data. Three of the five are American companies, one is European and one Japanese.

The Netherlands-based ASML is the only company in the world that can produce so-called extreme ultraviolet (EUV), which is needed to produce the most advanced chips, such as those manufactured by TSMC and Samsung.

Thus, the US does not necessarily lag behind in the semiconductor industry as a whole. Some of its businesses are an integral part of the supply chain. But one area in which it has lagged behind is manufacturing.

Under President Joe Biden, the United States wants to regain leadership in manufacturing and securing supply chains.

In February, Biden signed an executive order that involves reviewing the semiconductor supply chain to identify risks. As part of a $ 2 trillion economic stimulus package, $ 50 billion is earmarked for semiconductor manufacturing and research. A bill, known as the CHIPS for America Act, also works through the legislative process and aims to provide incentives to enable advanced research and development and secure the supply chain.

Meanwhile, the American firm Intel last month announced its plans to spend $ 20 billion to build two new chip factories and said it would act as a foundry. It could offer a local alternative like TSMC and Samsung.

Part of the supply chain investigation is the result of a worldwide shortage of chips that has hit the automotive industry. The coronavirus pandemic has accelerated demand for personal electronics such as laptops and game consoles, just as industrial and automakers have halted production. But a recovery in production and an increased demand for chips in different sectors caused a shortage.

The concentration of production in the hands of TSMC and Samsung exacerbated the problem.

According to Mirabaud Securities’ Campling, the shortage of semiconductor supplies probably made the US government realize that they did not control their own destiny.

But there are also geopolitical factors that inform US policy.

“In the longer term, the Biden government wants to continue to encourage foreign and US semiconductor manufacturers to expand capacity in the US, to reduce dependence on manufacturing in geopolitically sensitive areas such as Taiwan and to pay high-paying engineers in the US “Paul Triolo, head of geotechnology practice at Eurasia Group, told CNBC in an email.

Part of American policy in the semiconductor space involves the formation of alliances. Earlier this month, the Nikkei reported that the US and Japan will work together on supply chains for critical components such as semiconductors. The two parties will aim for a system where production is not concentrated in specific regions such as Taiwan, 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 consulting firm in Toronto, told CNBC in an email.

“It’s trying to redesign the way the world’s chip industry works in the face of a rising China. It’s not necessarily about self-sufficiency, although Washington will welcome it. It’s more about building critical sectors – from AI to chips – that are isolated. “And because several nations share American concern about China, the United States is taking part of the world with it.”

Meanwhile, China is trying to strive for self-sufficiency amid US efforts to ward it off key supplies. Over the past few years, China has been trying to boost its semiconductor industry through huge investments and incentives such as tax cuts.

But China is lagging behind everywhere, and it’s going back to the supply chain. SMIC is China’s largest foundry, a competitor of the likes of TSMC and Samsung. But SMIC’s technology is a few years behind those of its competitors in Taiwan and South Korea.

And even if it wanted to progress, it’s extremely difficult because of U.S. sanctions and action. Washington blacklisted SMIC last year, known as the Entity List. This restricts US companies from exporting certain technologies to SMIC, which deters the chipmaker because of the key role that US companies play in the semiconductor supply chain. According to Bank of America, about 80% or more of SMIC equipment comes from US suppliers.

Last year, Reuters reported that the US had put pressure on the Dutch government to stop selling an ASML machine to SMIC. The Dutch firm is the only company that manufactures the so-called extreme ultraviolet (EUV) machine needed to make the latest chips. That machine was still not shipped to China.

“If China wants to produce leading chips, it’s virtually impossible without US equipment or allies,” Bank of America said in December.

“We remain skeptical about a significant advance in China’s progress due to US restrictions, as it is significantly behind in IP (intellectual property) and has limited access to IP given the US restrictions,” Bank of America said last week in said a separate note.

“Our team expects a delay of about 5+ years before making any more significant progress.”