Ongoing war on semiconductors

M S Siddiqui
https://businesspostbd.com/editorial/2022-09-07/ongoing-war-on-semiconductors
07 Sep 2022 00:02:17 | Update: 07 Sep 2022 00:02:17
Semiconductors — also known as computer chips or just chips, otherwise called an integrated
circuit, a microelectronic chip, or a computer chip, is a tiny electronic device composed of billions
of components that store, move, and process data.

Semiconductors are used for many purposes in many types of products, for example to run software
applications, to temporarily store documents and provide data storage and communication capabilities in
countless devices, including mobile phones, gaming systems, aircraft avionics, industrial machinery and
various types of military equipment and weapons.

It is an integral to all the networked devices that have become embedded into our lives. They also have
advanced military applications. Transformational, super-fast 5G internet is enabling a world of connected
devices of every kind (the ‘Internet of Things’) and a new generation of networked weapons.

Over the last 30 years, the US share of global semiconductor manufacturing capacity has dropped from 37
per cent to 12 per cent. Washington dominates the chip design market. US firms such as Intel, Micron,
Broadcom and Qualcomm continue to produce chips overseas or contract out production to foreign firms
over lack of domestic manufacturing capability.

China consumes 60 percent of global semiconductor production, more than 90 percent of which comes
from overseas or China-based foreign firms. Most of the world's top semiconductor companies are from
the US, followed by Europe, South Korea, Taiwan, and Japan. There is none from China, which is a huge
obstacle to its plan to build a "world class" army that will beat any enemy anywhere in the world. This is
a strategic black hole Beijing cannot afford to have. Besides, control of a major part of the semiconductor
value chain will give it significant bargaining power.

Only Taiwan Semiconductor Manufacturing Corporation (TSMC) and South Korean Samsung can make
the most advanced semiconductors (five nanometres in size) ‘puts at risk the ability to supply current and
future [US] national security and critical infrastructure needs.’ The TSMC has a 53 per cent market share
of the global foundry market (factories contracted to make chips designed in other countries). Other
Taiwan-based manufacturers claim a further 10 per cent of the market. Taiwan’s autonomy has become a
vital geopolitical interest for the US, because of the island’s dominance of the semiconductor
manufacturing market. Taiwan’s position in the world of semiconductor manufacturing is a bit like Saudi
Arabia’s status in OPEC.
Now a broader ‘tech war’ going on between the United States and China, in which the United States is
aiming to constrain China’s technological development and prevent it from exercising a global tech
leadership role. This has always been a sore point for China, which sees self-sufficiency in the
technological field as a necessary condition for reaching the status of a wealthy, developed nation, which
represents the largest market for this technology in the world.

The turning point in China’s interest in semiconductors came in 2014, when the State Council set a goal
of becoming a global leader in semiconductors by 2030. In 2015, the Made in China 2025 project was
launched, aiming for greater technological self-sufficiency. The first goal was to foster the creation of
national champions in the industry that could compete on a global scale and supply China’s voracious
appetite for semiconductors. The second objective was to acquire foreign technology through strategic
acquisitions of technologically advanced foreign companies or private Chinese companies operating
abroad.

Keeping in mind for self-sufficiency, China has promulgated the “Guidelines for the Promotion and
Development of the National Integrated Circuit Industry” in 2014 and its integration into the “Made in
China 2025” plan of 2015.

In the Guidelines, their objective was to formulate a series of priorities “to accelerate advancement of the
National Integrated Circuit Industry” in each of the four sectors previously cited (chip design,
manufacturing, packaging and equipment manufacturing) in order to reach an advanced international
level by 2030 “with some enterprises entering the ranks of international frontrunners and achieving
development by leaps and bounds”.

The Guidelines also recommended the creation of political structures and policies necessary to implement
massive investment in the sector needed to achieve those objectives, by 2015. This was achieved with the
formulation of the “Made in China 2025” plan, which provided a precise schedule for the whole project
by distinguishing three phases.

The first phase of the plan to see China gaining more self-sufficiency in the sectors, with Chinese
suppliers meeting 70 percent of the country’s needs in semiconductors and becoming a relevant
component of the global chain of production by 2025. During the second phase, by 2035, Chinese
manufacturing should reach “an intermediate level among world manufacturing powers” assuming a
leading role in the innovation of the industries where it is most competitive. Finally, in the third phase of
the plan, China’s ambition is to become the “leader among manufacturing powers” by 2049, the
centennial of the founding of the PRC.

To achieve this, the Semiconductor Industry Association (SIA) came up with a white paper of 2021, the
Chinese government made several big investments: in 2014, it instituted the National Integrated Circuits
Industry Development Investment Fund (“Big Fund”) which by 2021 had invested $39 billion in the
sector, most of which went into manufacturing with the goal to increase China’s share in global
semiconductor production.

To that we must add, again according to the SIA white paper, $25 billion in IC investments by local
governments and more than $50 billion accounting for “government grants, equity investments, and low
interest loans”.

The Chinese plan has shown results and Chinese semiconductor firms are making progress particularly in
chip design and fabrication which, might cause China to “meet 25 per cent to 40 per cent of its domestic
demand with locally designed semiconductors by 2025, more than double its current level but still below
its own 70 per cent ambition”.

The US has counter plan and attempts to stop the Chinese from acquiring and developing superior
technology was one of the main reasons behind the start of the still ongoing “US-China Trade War”,
along with the issue of the China-US trade deficit. USA did not hesitate to ban Huawei in 2018 and other
Chinese firms in the sector from trading with the US federal government under allegations, later contested
by British and German intelligence agencies, of industrial espionage, which provoked Chinese retaliation
and was one of the first shots in the trade war.

The important aspect of US House speaker Nancy Pelosi’s trip was the meeting with Mark Lui, chairman
of the TSMC has been largely overlooked of her Taiwan trip. She had played her role to convince TSMC
— the world’s largest chip manufacturer, on which the US is heavily dependent — to establish a
manufacturing base in the US and to stop making advanced chips for Chinese companies.

Moreover, the US Congress has just passed the Chips and Science Act, which provides $52 billion in
subsidies to support semiconductor manufacturing in the USA. But companies will only receive Chips
Act funding if they agree not to manufacture advanced semiconductors for Chinese companies. This
means that the TSMC and others may well have to choose between doing business in China and in the
United States because the cost of manufacturing in the United States is deemed to be too high without
government subsidies.

Over the last decade the Chinese government has consistently strived to overcome China’s dependence on
foreign supplies in the sector, and as a result China’s market share in semiconductors has increased from
5 percent in 2010 to 13 percent in 2020, more than doubling in ten years. China is moving along with the
planned schedule to achieve supremacy in manufacturing semi-conductors.

The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted

at mssiddiqui2035@gmail.com