US Semiconductor Policy Aims to Eliminate China and Ensure Secure Supply Chain

GUANGZHOU, China – Speaking of chip manufacturing, two companies usually come to mind – TSMC from Taiwan and Samsung Electronics from South Korea. The two Asian companies control more than 70% of the semiconductor production market.

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

But a global shortage of semiconductors and geopolitical tensions with China have tightened control over Washington’s supply chain, which is concentrated in the hands of a small number of players and created an impetus to bring production back to American soil to regain leadership.

The United States has allocated billions of dollars and seems to be looking at alliances with other nations.

Semiconductors are essential for everything from cars to the smartphones we use. And they were also pushed into the center of US-China tensions.

“A feature of US policy is that it has a strong focus on China. This has now become a national imperative to increase self-sufficiency in seedling production, accelerated by the recent lack of chips and the ‘technological war’ against China.” America said in a note released Wednesday.

The key to understanding the semiconductor geopolitics, which countries dominate and why the US is trying to stimulate its domestic industry, is to deal with the supply chain and business models.

Companies like Intel are manufacturers of integrated devices (IDM), which design and manufacture their own chips.

Then there are the wireless 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 last 15 years or so, companies have begun to switch to this wireless model. TSMC and Samsung took advantage as they began to invest heavily in cutting-edge manufacturing technology. Now, if a company like Apple wants to get the latest chip for the iPhone produced, they have to turn to TSMC to do it.

TSMC has a foundry market share of 55%, and Samsung holds 18%, according to data from Trendforce. Taiwan and South Korea collectively 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 top-ranked companies, however, as manufacturing increased in costs and difficulties, this number fell to just 3 companies” – TSMC, Intel and Samsung, according to a note from Bank of America published in December.

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

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

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

The companies that manufacture these tools requested by foundries are known as semiconductor or “semicap” capital equipment suppliers.

The top five suppliers of semicap equipment account for almost 70% of the market, according to Bank of America, citing Gartner data. Three out of five are American companies, one is European and one is Japanese.

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

So the US does not necessarily lag behind in the semiconductor industry as a whole. Some of its companies are an integral part of the supply chain. But one area he remained in was production.

Under President Joe Biden, the United States is trying to regain leadership in production and security of supply chains.

In February, Biden signed an executive order involving a review of the semiconductor supply chain to identify risks. As part of a $ 2 trillion economic stimulus package, $ 50 billion has been allocated for semiconductor production and research. A bill known as the CHIPS for America Act also operates through the legislative process and aims to provide incentives to enable advanced research and development and to secure the supply chain.

Meanwhile, US firm Intel announced last month that it would spend $ 20 billion to build two new chip factories and said it would act as a foundry. This could provide an internal alternative to TSMC and Samsung.

Part of this control over the supply chain was caused by the global lack of chips that affected the car industry. The coronavirus pandemic has accelerated the demand for personal electronics, such as laptops and game consoles, just as manufacturers and automakers have stopped production. But a return to production plus increased demand for chips in various sectors has triggered a shortage.

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

The semiconductor supply shortage “probably made the US administration realize that it does not control its own destiny”, according to the Mirabaud Securities Campling.

But there are also geopolitical factors that inform US policy.

“In the longer term, the Biden administration wants to further encourage both foreign and US semiconductor manufacturers to expand capacity in the US, reduce production dependence on geopolitically sensitive areas such as Taiwan and create jobs. High-paid engineering jobs in the United States, “Paul Triolo, head of geotechnology at Eurasia Group, told CNBC in an email.

Part of US policy in the semiconductor space involves forming alliances. Earlier this month, Nikkei reported that the US and Japan will cooperate in supply chains for critical components such as semiconductors. The two sides will aim for a system in which production does not focus on certain regions such as Taiwan, Nikkei said.

“The United States is trying to get China out of the equation,” Abishur Prakash, a geopolitical specialist at the Center for Future Innovation, a Toronto-based consulting firm, said in an email.

“It’s trying to redesign the way the global chip industry works in the face of growing China. It’s not necessarily about self-sufficiency, although Washington would welcome that. Instead, it’s about building critical sectors – from AI to chips – that “Because many nations share US concerns about China, the United States is taking a part of the world with it.”

Meanwhile, China is trying to push self-sufficiency amid US moves to cut off key supplies. In recent years, China has tried to stimulate its semiconductor industry through huge and stimulating investments, such as tax cuts.

But China lags far behind and this is back in the supply chain. SMIC is the largest foundry in China, a competitor to TSMC and Samsung. But SMIC technology is a few years behind its rivals in Taiwan and South Korea.

And even if he wanted to move forward, it is extremely difficult because of US sanctions and actions. Washington put SMIC on a blacklist known as the Entity List last year. This restricts US companies from exporting certain technologies to SMIC, preventing the chip maker from playing a key role in US companies in the semiconductor supply chain. About 80 percent or more of SMIC equipment comes from U.S. suppliers, according to Bank of America.

Last year, Reuters reported that the US had put pressure on the Dutch government to stop selling an ASML device to SMIC. The Dutch company is the only company that produces the so-called extreme ultraviolet machine (EUV) needed to produce the most modern chips. The car has not yet been shipped to China.

“If China wants to produce cutting-edge chips, it is virtually impossible without US or allied equipment,” Bank of America said in its December note.

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

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