US semiconductor policy is trying to take out China and secure the supply chain

GUANGZHOU, China – When you talk about chip making, you usually think of two companies: the Taiwanese TSMC and the South Korean Samsung Electronics. The two Asian companies together control more than 70% of the semiconductor manufacturing market.

The US, once a leader, is lagging behind in this field after monumental shifts in semiconductor business models.

But a global shortage of semiconductors 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 players, and created a drive to return manufacturing to U.S. territory to gain leadership. regain.

The US has set aside 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 have also plunged into the center of the tensions between the US and China.

“A hallmark of US policy is its strong emphasis on China. This has now become a national necessity to increase self-sufficiency in semifinished goods, accelerated by the recent chip shortages and the ‘tech 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 boost its domestic industry, is getting to grips with the supply chain and business models.

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

Then there are the fabless semiconductor companies, which design chips but outsource manufacturing to so-called foundries. The two largest foundries are TSMC in Taiwan and Samsung Electronics in South Korea.

In the past 15 years, companies have started to switch to this fabless model. TSMC and Samsung took advantage of it when they began to invest heavily in advanced manufacturing technology. If a company like Apple wants to have the latest chip produced for their iPhone, they have to turn to TSMC.

TSMC has a 55% market share for foundries and Samsung 18%, according to data from Trendforce. Taiwan and South Korea together have 81% of the global foundry market, highlighting the dominance and dependence of these two countries as well as TSMC and Samsung.

“In 2001, 30 companies were producing at the forefront, but as semi-production increased in cost and difficulty, this number has dropped to just 3 companies” – TSMC, Intel and Samsung, according to a Bank of America note released in December.

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

“Taiwan and South Korea have become leaders in wafer manufacturing requiring massive capital investment; and 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, chief of technology, media and telecom research at Mirabaud Securities, told CNBC by email.

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

The companies that make these tools required by the foundries are known as suppliers of semiconductor equipment or “semicap” for short.

The top five semicap equipment suppliers make up nearly 70% of the market, according to Gartner data. Three out of five are US companies, one is European and one is Japanese.

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

So the US is not necessarily lagging behind in the semiconductor industry as a whole. Some of its businesses are an integral part of the supply chain. But one of the areas where it lags is manufacturing.

Under President Joe Biden, the US wants to regain leadership in manufacturing and secure supply chains.

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

Meanwhile, the US company Intel last month announced plans to spend $ 20 billion to build two new chip factories and said it will act as a foundry. This could provide a domestic alternative to TSMC and Samsung.

Some of that supply chain research has been prompted by a global shortage of chips in the automotive industry. The coronavirus pandemic increased the demand for personal electronics such as laptops and game consoles, just as industrial companies and car manufacturers stopped production. But due to a recovery in production and an increased demand for chips in various sectors, a shortage has arisen.

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

The shortage of semiconductor supplies “has probably made the US government realize that they have no control over their own destiny,” said Mirabaud Securities’ Campling.

But there are also geopolitical factors influencing US policy.

In the longer term, the Biden government wants to continue to encourage both foreign and US semiconductor manufacturers to expand capacity in the US, reduce dependence on manufacturing in geopolitically sensitive areas like Taiwan, and create well-paid tech jobs in the US. , ”Paul Triolo, head of geotechnology practice at Eurasia Group, told CNBC by email.

Forming alliances is part of US policy on semiconductors. Earlier this month, the Nikkei reported that the US and Japan will collaborate on supply chains for critical components such as semiconductors. The two sides will aim for a system where production is not concentrated in specific regions such as Taiwan, the Nikkei said.

“The US is trying to disregard China,” Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future, a Toronto-based consultancy, told CNBC via email.

It’s trying to redesign how the world’s chip industry works in the face of an emerging China. It’s not necessarily about self-sufficiency, although Washington would welcome it. Instead, it’s about building crucial industries – from AI to chips – ) that are isolated from geopolitics. And because several countries share US concerns about China, the US is taking part of the world with them. ”

China, meanwhile, is trying to boost self-sufficiency amid US measures to cut off major supplies. In recent years, China has sought to boost its semiconductor industry through massive investments and incentives such as tax breaks.

But China is lagging far behind everywhere and that goes back to the supply chain. SMIC is the largest foundry in China, a competitor of TSMC and Samsung, among others. But SMIC’s technology is several years behind that of its rivals in Taiwan and South Korea.

And even if it were to move forward, it is extremely difficult due to US sanctions and actions. Washington blacklisted SMIC last year known as the Entity List. That prevents US companies from exporting certain technology to SMIC, which is holding back 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 was putting pressure on the Dutch government to stop selling an ASML machine to SMIC. The Dutch company is the only company that makes the so-called extreme ultraviolet (EUV) machine that is needed to make the most advanced chips. That machine has still not been shipped to China.

“If China wants to produce industry-leading chips, it would be next to impossible without US or allied equipment,” Bank of America said in its December note.

“We remain skeptical of any meaningful progress in China’s progress due to US restrictions as it lags materially in IP (intellectual property) and has limited access to IP given US restrictions,” said Bank of America last week in a separate note.

“Our team expects a delay of about 5 years before making greater progress.”