The US-China geopolitical fault lines in high technology have become sharper than ever, and nowhere has it been more significant than semiconductors. Semiconductors are critical to advanced computing and artificial intelligence (AI) that will form the core of the next-generation industrial revolution. They also have significant implications for advanced and precision weaponry and consumer tech.
The deepening of the US-China geopolitical rivalry has rendered the widely distributed global semiconductor value chain susceptible to disruption and choking. Consequently, their value as a critical tech has increased the domain’s securitisation. The incessant urge to maintain a competitive edge over the adversary has led to efforts toward creating a closed tech ecosystem through attaining “self-sufficiency” and “technology access control” by countries, particularly by the US and, to an extent, by China.
US’s dominant position in the chip value chain
While the global semiconductor value chain is too complex and widely distributed for any self-sufficiency efforts by a single country to succeed, the US holds a dominant position in the chip ecosystem for several reasons. The most significant pertains to the US’s dominance in the chip-designing ecosystem. US-based companies such as AMD, Qualcomm, Broadcom, and NVIDIA hold most chip-designing IP rights. The US also has a near monopoly in the Electronic Design Automation (EDA) market. Firms engaging in EDA test the chip designs for their performance against real-world scenarios through simulation and software and hardware verification. Without EDA, the cost of error in chip manufacturing would be too catastrophic as chips, once fabricated, cannot be reworked.
Another factor bolstering the US’s dominance in the chip industry is the specialised leadership of its allies in various segments of the value chain. For instance, the Netherlands-based ASML and Japan’s Tokyo Electron, Nikon, Cannon and Nuflare are the sole manufacturers of specialised lithography tools for fabricating advanced chips. Of them, ASML enjoys a near monopoly in manufacturing the most sophisticated lithography tools that use Deep Ultraviolet (DUV) and Extreme Ultraviolet (EUV) technology. Manufacturing of chips also requires a host of specialised gases and materials like silicon wafers, a segment that Japan primarily dominates.
Lastly, in the fabrication segment, Taiwan, a key US partner, alone produces more than 60% of all global semiconductors and over 90% of all advanced semiconductors. Taiwan’s TSMC is the market leader, accounting for around 80% of Taiwanese chip output. Its competitors include UMC (Taiwan), SK Hynix (South Korea) and Global Foundries (US). Each of the US’s allies that specialise in their respective segments depend on the US technologies in some way or another to maintain their leadership. Thus, the US emerges as a seemingly invincible player in the semiconductor industry.
US’s rising insecurity
Yet the insecurity in the US has grown sharply due to China’s recent advances in chip technology and efforts to attain self-sufficiency primarily through unfair means such as IP theft and forced technology transfer backed by heavy investments and government subsidies. China’s strength in the global semiconductor supply chain is two-fold. One, it is the world’s largest market for chips produced globally (one-third of the total sales), as most electronic goods manufacturing takes place in China. Secondly, almost all the contract manufacturing companies have some fabrication capacity or foundries in China. Even in-house semiconductor companies like Intel and Samsung operate factories in China to fabricate their chips. Close to 15% of the global chip fabrication (China-owned and foreign-owned) occurs in China.
China has leveraged these advantages (through IP theft, forced tech transfer and reverse engineering) to achieve marginal gains in its effort to become ‘self-reliant’ in designing and producing lithography machines and fabricating high-end semiconductors. Amidst the deepening contestation with China, the US has become increasingly wary of Beijing’s relative gain and losing the competitive advantage that it currently holds in the semiconductor industry. The anxiety has arisen against the backdrop of the falling share of the US’s domestic semiconductor manufacturing capacity from around 40% in 1990 to about 12% at present. The fall is attributed to the rise of fabless semiconductor companies in the US that decided to concentrate on chip designing and outsource the manufacturing to contract manufacturing companies or foundries. The others who still manufacture their chips, like Intel, have shifted their manufacturing operation to East Asia, where 80% of the global fab capacity is concentrated.
To address this gap, the US unveiled the Chips and Science Act in August 2022, intending to invest $280 billion over the next ten years to boost its domestic semiconductor manufacturing and R&D capability. In October 2022, the US also tightened the stranglehold over China by introducing severe export control measures to deny the latter access to critical technologies in chip-making without government approval. Building on these measures, in December 2022, the US commerce department added 36 of China’s semiconductor-related companies, including the state-owned YMTC, to its ‘entity list’, making Beijing’s access to critical technologies extremely difficult. It also applied the foreign product rule to 21 of the 36 entities prohibiting American companies from exporting products containing a specified proportion of US technology to China. Finally, the US struck a trilateral deal with the Netherlands and Japan in January 2023 to restrict China’s access to advanced lithography tools.
The US-led efforts to exclude China from its innovation ecosystem have left Beijing anxious. In response, China has lodged a complaint against the US in the WTO for unfair trade practices. Meanwhile, SMIC and YMTC have reported a fall in their revenue and downscaled their orders for semiconductor equipment. The US measures have also delayed SMIC’s expansion plans.
Facing the heat, China is aggressively pushing for self-reliance, but the US restrictions significantly constrain its efforts. Consequently, China is pressing to capture overseas Chinese talent in the high-tech sector by offering lucrative salaries. But even this effort has met resistance because of the exploitative work culture in China. In contrast, the work environment in the West is more appealing and has prevented any material shift in this regard until now.
Speculating the future: two separate ecosystems?
Based on the developments so far, one likely outcome that seems apparent is the emergence of two separate semiconductor ecosystems, albeit with some overlaps. Given its ‘chip overlord’ status, the US can enforce an ecosystem that is exclusive of China. American companies have so far been compliant with the state’s directives. Nvidia and Intel have restructured and downgraded their operations in China to comply with the US restrictions. Korea’s Samsung and SK Hynix have also downgraded their operations in China. The Chinese response lately is to target American companies operating in China by stalling their merger operations or subjecting them to increased surveillance under the newly reformed counter-espionage law. If anything, the Chinese response will likely strengthen an alignment between the American state and the companies. Its allies are the second category of consequent actors in realising the US vision of an exclusive chip ecosystem. Here also, there seems to be a visible convergence, as evident in the responses of Japan, the Netherlands, Taiwan and South Korea. While Japan and the Netherlands have already announced intentions to enforce the trilateral agreement reached with the US to restrict the export of advanced lithography tools to China, Taiwan’s TSMC has also promised to comply with the CHIPS Act and announced to open a foundry in Arizona to boost US domestic chip manufacturing.
If the US’s plans to enforce an exclusive ecosystem materialise, China will find it challenging to catch up with its rival, and the gap will likely increase. The probable option China will look toward is first attracting overseas Chinese talent that has hitherto been a part of the US ecosystem. Efforts are underway as multiple Chinese companies have floated lucrative offers for overseas Chinese talent in the high-tech sector. In the past, there have been incidents where Chinese citizens trained in Europe and the US have returned and helped establish Chinese tech companies, thus raising challenges relating to IP theft. The most infamous case involved Zhongchang Yu, a former ASML employee accused of stealing its IP rights and later setting up two chip firms in China.
Therefore, IP protection and close guarding of human capital could turn into the next front for US-China contestation. It will certainly begin with the exclusion of Chinese personnel from the Research & Development (R&D) field in these categories. Although the US has yet to announce its plan, Marvell, a US semiconductor firm, laid off its entire China R&D team in March 2023. Besides, the R&D cooperation and collaboration between the US and Chinese nationals have seen a steep decline in recent years. The figures for the same between European and Chinese researchers have stagnated lately.
China’s semiconductor advancements in the coming years may be severely limited if its access to equipment and talent is restricted. This restriction would mean that its domestically produced chips will be unable to compete in the market with those produced by the US-led ecosystem, which would impede the commercialisation of Chinese chips. And since a direct correlation exists between commercialisation and innovation, seemingly true for at least the chip ecosystem governed by Moore’s law, China will find it even more challenging to compete with the US. Several domain experts feel that given these restrictions, China could fall at least two decades behind the US technology with no real chance of catching up.
Of course, there would also be significant economic costs for the US in building a chip ecosystem exclusive of China. Still, some of the associated costs could be offset by ‘friend shoring’ and support from its allies. The fact that India and Vietnam, along with other South Asian countries, are competing to absorb the functions currently undertaken in China, for instance, in the ATP segment, will aid the US efforts. Furthermore, the Indian government has rolled out the Product Linked Incentive (PLI) scheme to boost domestic semiconductor manufacturing. The EU created its own CHIPS Act to boost its manufacturing capacity and cut its reliance on Asian players as the US-China conflict threatens to impact the supply of chips from the region. Considering a relatively deeper convergence between the EU and the US, these steps will likely lessen the burden on the US. Anyway, there is enough momentum within the US to overcome the inertia in pursuing an exclusive chip ecosystem, given its increased securitisation and the remarkable capability the world is witnessing in the realm of AI lately.
The author is a Research Analyst at the Indo-Pacific Studies Programme at the Takshashila Institution. Views are personal.
