U.S. semiconductor policy aims to cut China and ensure a secure supply chain

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

The United States, which was once a leader, is lagging behind in this space after monumental changes in the business models of the semiconductor industry.

But global semiconductor shortages and geopolitical tensions with China have bolstered Washington’s scrutiny of the supply chain, which is concentrated in the hands of a small number of players, and has created a push to return to manufacturing. on American soil to regain leadership.

The United States has earmarked billions of dollars and is reportedly studying alliances with other nations.

Semiconductors are key to everything from cars to the smartphones we use. And they have also been pushed into the center of US-China tensions.

“One feature of American politics is that it places great emphasis on China. It has now become a national imperative to improve self-sufficiency in seed production, accelerated by the recent shortage of chips and the” war “against China,” Bank of America said in a note released Wednesday.

The key to understanding the geopolitics of semiconductors, which countries dominate and why the United States is trying to boost its domestic industry, lies in dealing 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 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.

Over the last fifteen years or so, companies have begun to move to this fabless model. TSMC and Samsung took advantage when they started investing heavily in cutting-edge manufacturing technology. Now, if a company like Apple wants to get the latest chip for their iPhone, they have to turn to TSMC to do so.

According to data from Trendforce, TSMC has a 55% share of foundry market and Samsung 18%. Taiwan and South Korea collectively hold 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 manufactured at the forefront, however, as semi-manufacturing grew in costs and difficulties, this number has fallen to only 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 a massive investment of capital; and part of their success over the past 20 years is due to government policies of support and access to ‘skilled work,’ Neil Campling, head of technology, media and telecommunications research at Mirabaud Securities, told CNBC by email.

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

Companies that manufacture these tools required by foundries are known as suppliers of semiconductor or “semicap” capital equipment.

The top five suppliers of semi-layered equipment account for nearly 70% of the market, according to Bank of America, citing data from Gartner. Three of the 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 required to manufacture the most advanced chips such as those manufactured by TSMC and Samsung.

Therefore, the United States is not necessarily lagging behind in the semiconductor industry as a whole. Some of their companies are an integral part of the supply chain. But one of the areas in which it has lagged behind is manufacturing.

Under President Joe Biden, the U.S. wants to regain leadership in manufacturing and security of supply chains.

In February, Biden signed an executive order involving a review of the semiconductor supply chain to identify the risks. As part of a $ 2 trillion economic stimulus package, $ 50 billion was spent on the manufacture and research of semiconductors. A bill known as the CHIPS for America Act is also making its way into the legislative process and aims to provide incentives to enable advanced research and development and secure the supply chain.

Meanwhile, US firm Intel last month announced plans to invest $ 20 billion in the construction of two new chip factories and said it would act as a foundry. This could offer a domestic alternative to TSMC and Samsung.

Part of this control over the supply chain has been caused by the global shortage of chips that has affected the automotive industry. The coronavirus pandemic accelerated the demand for personal electronics, such as laptops and game consoles, in the same way that industrialists and automakers ended production. But a rise in production and increased demand for chips in various sectors has led to a shortage.

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

The shortage of semiconductor supply “has probably made the U.S. administration realize that they do not control their own destiny,” according to Camaba of Mirabaud Securities.

But there are also geopolitical factors at play that inform U.S. politics.

“In the longer term, the Biden administration wants to continue to encourage foreign and U.S. semiconductor manufacturers to expand capacity in the United States, reduce manufacturing dependence in geopolitically sensitive areas such as Taiwan, and create jobs in the United States. ‘well-paid engineering.’

Part of American politics in the semiconductor space involves forming alliances. Earlier this month, the Nikkei reported that the U.S. and Japan will cooperate in supply chains for critical components such as semiconductors. Both sides will try a system where production is not concentrated in specific regions like Taiwan, the Nikkei said.

“The United States is trying to remove China from the equation,” Abishur Prakash, a geopolitics specialist at the Center for Innovating the Future, a Toronto-based consulting firm, told CNBC by email.

“Attempts are being made to redesign the functioning of the global chip industry in the face of growing China. It is not necessarily about self-sufficiency, although Washington would accept it. Instead, it is about building critical sectors (from the And because the chips are isolated from geopolitics, and because several nations share U.S. concerns about China, the United States is taking a piece of the world. “

Meanwhile, China is trying to boost self-sufficiency amid U.S. moves to cut it off from key supplies. In recent years, China has tried to boost its semiconductor industry through huge investments and incentives such as tax breaks.

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

And even if I wanted to move forward, it’s extremely difficult because of U.S. sanctions and actions. Washington put SMIC on a blacklist known as the list of entities last year. This restricts U.S. companies from exporting certain technology to SMIC, slowing down the chip maker because of the key role U.S. companies play in the semiconductor supply chain. According to Bank of America, approximately 80% or more of SMIC equipment comes from U.S. suppliers.

Last year, Reuters reported that the U.S. pressured the Dutch government to stop selling an ASML machine to SMIC. The Dutch company is the only company that manufactures the so-called extreme ultraviolet machine (EUV) needed to manufacture the most advanced chips. This machine has not yet been shipped to China.

“If China wants to make top-notch chips, it’s virtually impossible without equipment from the United States or allies,” Bank of America said in its December note.

“We remain skeptical about significant progress in China’s progress due to U.S. restrictions, as it is materially backward in intellectual property and has limited access to given intellectual property. U.S. restrictions, ”Bank of America said in a separate note last week.

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