‘Chip Wars’: US, China and the battle for semiconductor supremacy

Semiconductors, known as “chips,” are at the heart of economic growth and a vital component of technological innovation. Nano-sized silicon wafers, thinner than a strand of human hair and consisting of up to 40 billion components, have a gigantic impact on the global economy.

Incredibly complex and capital intensive, these integrated circuits (IC) power everything from computers, smartphones, cars, data centre servers to gaming consoles. And the demand for chips is only rising, just as the industry faces a shortage crisis as the Covid-19 pandemic and international trade disputes strain supply and value chains.

This geopolitical dimension of semiconductors – at the centre of the US and China’s battle for tech supremacy – risks further splintering global supply chains and disrupting international commerce.

For geopolitical futurist Abishur Prakash, that the chip industry is in limbo is “a sign that geopolitics of technology can threaten any sector.”

“Nobody is untouchable,” Prakash, an author and consultant with the Toronto-based Center for Innovating the Future, tells TRT World. “The chip industry can no longer do business like they could in the past when nations were ‘open’ to one another. Now, chip companies need licenses or government approval before they can take any step.”

With nations increasingly wanting to move supply chains outside of China, he says the industry is being forced into rethinking their global operations, from recruitment to rare earth metal mines, because of geopolitical considerations.

Since the US-China decoupling began to make headlines in 2017, much of the attention centred on trade and the 5G campaign against Huawei, China’s most important global technology company.

But recent punitive actions taken by Washington involving semiconductors present a much more fundamental problem for Beijing. Efforts to cut off the supply of chips to Huawei and to encourage the construction of advanced semiconductor factories (or foundries) in the US, have dragged the industry into the new tech cold war.

Last September, the US government placed sanctions on China’s largest chip maker, Semiconductor Manufacturing International Corporation (SMIC), citing military end use in China.

Two months later, China released its 14th five-year plan, elevating autonomy in semiconductor production to help achieve technological self-reliance. On March 5, Chinese Premier Li Keqiang singled out investments in core technologies like chips, AI and 5G to catch up with the US.

While closing the semiconductor technology gap is one of Beijing’s top priorities, significant obstacles remain.

Beijing’s drive for chip independence

For decades, the US has maintained its lead in the semiconductor industry, controlling 48 percent ($193 billion) of the market share in terms of revenue. Eight of the 15 largest semiconductor firms in the world are in the US, with Intel on top in terms of sales.

China, meanwhile, is a net importer: for three years in a row, it has imported at least $300 billion on chips – more than any other country – and supplies just around 30 percent of its chips domestically.

It is not lost on Beijing how critical semiconductors are to its technology ambitions, with the next generation of digital applications dependent on cutting-edge integrated circuits (IC). Given its overreliance on foreign technology, the Chinese government has been desperate to fast-track development of a domestic semiconductor industry to attain “chip independence”.

On the level of chip design, Huawei has made progress by successfully developing its in-house Kirin chip for the company’s 5G equipment and smartphones, said to be competitively on par with rivals Samsung and Qualcomm.

But Beijing’s main problem is the manufacturing of high-end chips. Huawei’s Kirin chipsets are made by the Taiwan Semiconductor Manufacturing Corporation (TSMC) using American technology. Outside of semiconductors for mobile devices, in other key semiconductor verticals like memory and logic (CPUs/GPUs), Chinese firms are well behind their Western counterparts in terms of both design and market share.

When it comes to semiconductor technology, the driving force behind IC design is miniaturisation.

TSMC, the world’s leading chip maker which owns over half of the foundry market, is now moving ahead to develop the 3-nanometre (nm) production process and is expected to have 2-nm chips hit the market in 2025.

In comparison, China’s state-owned SMIC foundry only began producing 14-nm chips at the end of 2019, putting them at least two generations behind leading foundries in the US and East Asia.

Over the years, government support has boosted domestic chip production. Chinese chip manufacturers received $50 billion in subsidies over the past two decades, attached with preferential loans and procurement incentives. China’s semiconductor exports hit $101 billion in 2019, a 20 percent increase from the previous year.

Despite massive investment, China is unlikely to achieve independent semiconductor manufacturing capabilities in the next ten years, except in some niche areas. Like TSMC, it might be more conducive for China to focus capabilities on a segment rather than the entire supply chain.

Over the longer term, some believe that China’s semiconductor bubble is likely to burst, with the collapse of startups leading to massive job losses.

In the immediate horizon, Chinese firms are unable to compete against top-tier rivals because of limited access to specialised manufacturing equipment and software. Additional bottlenecks such as a lack in industry talent and innovation hinders a self-sufficient supply chain from being developed.

“Of course, it will take time for China to catch up,” says Prakash. “But the pieces are already in play. For example, Alibaba has developed AI-chips that are being used in cloud computing. It shows that China is not starting from scratch”.

“But at the same time, in the short term, Chinese companies are going to feel the effect of the US taking action on chips, and China will struggle to solve this pain point for its firms.”

The Taiwan factor

At the end of the day, semiconductors represent the linchpin for the US and China’s mutually dependent technological ambitions: every major Chinese tech company relies on US chips, and many US firms have benefited from Chinese markets and customers.

Given its central role in chip manufacturing and supply chains, Taiwan is likely to become ensnared into the escalating US-China conflict, seeing as both rely on Taiwanese-produced semiconductor devices.

“Taiwan plays a massive role because of its place in global technology. It is Taiwanese talent, from AI to chips, that is being competed over for technology projects,” says Prakash. “There is a massive drive by China to acquire Taiwanese talent and technology, and there is an equally massive drive by Taiwan to stop China from acquiring its talent.”

Prakash argues that while in the middle of US sanctions, Chinese access to markets like Taiwan is critical for sourcing the technology and expertise it needs to catch up.

Chinese cyber attacks on key Taiwanese companies are a distinct possibility too, with the aim of obtaining the intellectual property necessary to boost its mainland semiconductor industry.

Geopolitics, after all, played a key role in why Chinese chip production trails that of Taiwan, South Korea and Japan. As US allies during the Cold War, those economies benefited from American capital and technology transfers.

As US-China competition intensified under the former Trump administration, the US has resorted to tightening semiconductor export controls with stricter licensing policies aimed at Chinese entities, as Washington cracks down on investment and acquisitions of American technologies by Beijing.

To maintain its chipmaking lead, Washington has implemented the so-called entity list to deny sales to Chinese firms, as it did with Huawei and SMIC. Ultimately, the goal is what Eurasia Group’s Paul Triolo describes as rival “blue” (US) and “red” (Chinese) semiconductor supply chains, compelling firms like TSMC to decide which side of the great tech divide they are on.

“Semiconductors remain one of the greatest advantages Biden has over China’s President Xi Jinping. And in a new Cold War, you fight with the weapons you have to hand,” writes author and journalist James Crabtree, adding that “Biden is likely to push forward with an evermore Chinese-style industrial policy as he seeks to both cajole global chip suppliers to shift with the US.”

However, persuading other Asian and European countries to follow suit and impose similar restrictions on Beijing will come fraught with political and economic risks.

America’s bipartisan China hawks view US dominance of key semiconductor sub sectors as a strategic policy lever, one they can use to bludgeon China with. But will the US’ measures of technological denial be self-defeating in the long run, spurring China to frantically invest in closing the gap?

“Now that China is being forced to double down and build its own domestic technologies, the US has lost a lever of its control. And once China has developed its own advanced chip industry, it can take big steps geopolitically,” says Prakash.

“There will be little the US can do at that point to stop China.”