March 21, 2023

Leading chipmaking nations, including the United States, are forming alliances, in part to secure their semiconductor supply chains and prevent China from reaching the cutting edge of the industry, analysts told CNBC.

Places including the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have sought to build partnerships around critical technologies.

“China is the immediate cause of all this,” Prannoy Kotasthanay, chairperson of the High Tech Geopolitics Program at the Taxila Institution, said of the alliance.

The teaming up underscores how important the chips are to the economy and national security, while also highlighting countries’ desire to stem China’s advances in critical technologies.

Kotasthan was a guest in its latest episode CNBC’s Beyond the Valley podcast published Tuesday, which looks at the geopolitics behind semiconductors.

Why chips are in the geopolitical spotlight

Semiconductors are important technologies because they go into many of the products we use — from smartphones to cars and refrigerators. And they are important for artificial intelligence applications and even weaponry.

Chips were thrust into the spotlight at a time of importance The ongoing shortage of these components, which was triggered by the Covid pandemic, is amid increased demand for consumer electronics and supply chain disruptions.

It alerted governments around the world to the need to secure chip supplies. The United States, under President Joe Biden, has pushed to restore manufacturing.

But the semiconductor supply chain is complex — it includes areas from design to packaging to manufacturing and the tools needed to do it.

For example, ASML, based in the Netherlands, is the only firm in the world capable of building the highly complex machines required to manufacture the most advanced chips.

While the US is strong in many market sectors, it has lost its dominance in manufacturing. For the past 15 years or so, Taiwan’s TSMC and South Korea’s Samsung have dominated the world’s most advanced semiconductor manufacturing. Intel, the largest US chipmaker, has fallen far behind.

Taiwan and South Korea make up about 80% of the global foundry market. Foundries are facilities that manufacture chips that other companies design.

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The concentration of critical equipment and manufacturing in a small number of companies and geographic regions has put governments around the world on edge, as well as pushed semiconductors into the realm of geopolitics.

“What’s happened is that there’s a lot of companies scattered around the world doing small parts of it, which means there’s a geopolitical angle to it, right? What if one company doesn’t provide what you need? If, you know, a country of chips Puts something about espionage through? So these things make it a geopolitical tool,” Kotasthanay said.

Kotasthanay said the concentration of power in the hands of a few economies and companies presents a business continuity risk, especially in places as contentious as Taiwan. Beijing considers Taiwan a renegade province and has vowed to “reunify” the island with mainland China.

“The other geopolitical significance is just related to Taiwan’s central role in the semiconductor supply chain. And as Sino-Taiwan tensions rise, there’s a fear that, you know, since a lot of manufacturing happens in Taiwan, what if China were to take over or even Are there tensions between the two countries?” Kotasthan Dr.

A coalition is being formed excluding China

The Quad is moving beyond military exercises — and China is watching

And semiconductors are a key part of cooperation between the United States, India, Japan and Australia, a group of democracies known collectively as the Quad.

The US has proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, the details have not been finalized yet.

There are a few reasons behind this partnership.

One is to bring countries together, each with their “comparative advantages” to “join together to develop secure chips,” Kotasthanay said. “It doesn’t make sense to go it alone” because of the complexity of supply chains and the power of different countries and companies, he added.

US President Joe Biden meets with South Korean President Yoon Suk-yeol during a visit to the Samsung Electronics Pyeongtaek campus in May 2022. The United States and South Korea, along with other countries, are looking to form alliances around semiconductors with the goal of ousting China.

Kim Min-hee Getty Images

The push for such partnerships has one common feature – China is not involved. Indeed, these alliances are designed to isolate China from global supply chains.

“In my view, I think in the short term, China’s development in this sector will be severely hampered [as a result of these alliances]” said Kotasthan.

China and the US see each other as rivals in technologies ranging from semiconductors to artificial intelligence. As part of that war, the United States sought to cut off critical semiconductors and equipment to manufacture China through export restrictions.

“The goal of all these efforts is to prevent China from developing the ability to produce advanced semiconductors domestically,” Paul Triolo, head of technology policy at consulting firm Albright Stonebridge, told CNBC, citing the various partnership goals.

Doubts over China’s ‘cutting edge’ chips

In the long run, I think they are [China] Some of the current challenges will be overcome… yet they will not reach the cutting edge that many other countries have.

Pranay Kotasthan

Taxila Institute

According to Quotasthan, manufacturing is the “Achilles’ heel” for China. China’s largest contract chipmaker is called SMIC. But the company’s technology is still significantly behind the likes of TSMC and Samsung.

“It requires a lot of international cooperation … which I think is a big problem for China now because of the way China has antagonized its neighbors,” Kotasthanay said.

“What China can do in terms of international cooperation, it wouldn’t have been possible three, four years ago.”

This casts doubt on China’s ability to reach the leading edge of chipmaking, especially as the U.S. and other major semiconductor powerhouses form alliances, Kotasthanay said.

“In the long run, I think they are [China] Some will be able to overcome the current challenges… yet they will not be able to reach the cutting edge that many other countries have,” said Kotasthanay.

Tension in the alliance

Still, some rifts are beginning to appear between some partners, particularly South Korea and the United States.

In an interview with financial barAhn Duk-geun, South Korea’s trade minister, said Seoul and Washington are at odds over the latter’s continued export ban on semiconductor equipment to China.

“We in the semiconductor industry have a lot of concerns about what the US government is doing these days,” Ahn told FT.

It will take a long time for the US to compete with Asia in chip production, strategists say

China, the world’s largest chip importer, is a key market for global chip companies, from US giants like Qualcomm to South Korea’s Samsung. With a mix of politics and business, this high-tech alliance could set the stage for further tension between the countries.

“Not all U.S. allies are interested in signing up for these alliances or expanding control over technology bound for China, because they have large equity in both manufacturing in China and sales in the Chinese market. Most don’t want to fall foul of Beijing. That’s the problem,” Triolo said. .

“A major risk is that attempts to coordinate parts of the global semiconductor supply chain development undermine the market-driven nature of the industry and cause major collateral damage to innovation, raising costs and slowing the pace of new technology development.”

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