When it comes to chip manufacturing, TSMC of Taiwan and Samsung Electronics of South Korea are typically the first names that come to mind. The combined market share of the two Asian companies is more than 70%. After monumental changes in the semiconductor industry’s business models, the United States, which was once a pioneer, has fallen behind. However, a global semiconductor shortage and geopolitical tensions with China have heightened Washington’s scrutiny of the supply chain, which is concentrated in the hands of a limited number of players, and fuelled a push to bring manufacturing back to the United States, in order to reclaim leadership. The US has set aside billions of dollars, and is said to be considering alliances with other countries.
Anything we use, from vehicles to smartphones, relies on semiconductors. They’ve even been thrown into the middle of tensions between the United States and China. The US approach is characterised by a strong focus on China. The recent chip shortages and the ‘tech war’ against China have exacerbated this national imperative to increase semis output self-sufficiency. Understanding the supply chain and business models is critical to comprehending the geopolitics of semiconductors, which countries control, and that is why the US is attempting to improve its domestic industry. Intel is an integrated computer manufacturer (IDM), that designs and manufactures its own chips. Then there are fabless semiconductor companies, which design chips, but have them manufactured by so-called foundries. TSMC in Taiwan and Samsung Electronics in South Korea are the two largest foundries in the world.
Companies have been transitioning to this fabless model for the past 15 years or so. When they started to invest heavily in cutting-edge manufacturing technology, TSMC and Samsung took advantage. If Apple wants to manufacture the new chip for their iPhone, they must now switch to TSMC. According to Trendforce numbers, TSMC owns 55 percent of the foundry business, while Samsung owns 18 percent. Taiwan and South Korea account for 81% of the global foundry market, demonstrating their supremacy and dependence on TSMC and Samsung. According to a Bank of America note published in December, “in 2001, 30 companies manufactured at the leading edge, but as semi manufacturing increased in cost and complexity, this number has dropped to only three firms” — TSMC, Intel, and Samsung. Intel’s manufacturing process, on the other hand, lags behind that of TSMC and Samsung. “Over the last 20 years, Taiwan and South Korea have become pioneers in wafer fabrication, which needs significant capital investment; and part of their success has been due to supportive government policies and access to skilled labour forces,” Neil Campling, head of technology, media, and telecoms research at Mirabaud Securities, told CNBC by email.
The supply chain is complex
Although TSMC and Samsung are the largest semiconductor manufacturers, they still depend heavily on American, European, and Japanese equipment and machinery. Semiconductor capital equipment suppliers, or “semicap” for short, are the companies that produce the instruments that foundries require. According to Bank of America’s analysis of Gartner data, the top five semicap equipment vendors account for nearly 70% of the market. Three of the five firms are from the United States, one is from Europe, and the other is from Japan. ASML, based in the Netherlands, is the only company in the world capable of producing so-called extreme ultraviolet (EUV), which is needed to produce advanced chips such as those made by TSMC and Samsung.
What plans does the United States have, and why are they making them?
As a result, the United States is not inherently lagging behind the rest of the semiconductor industry. The supply chain relies on some of its businesses. Manufacturing, on the other hand, has slowed. The US is attempting to reclaim manufacturing supremacy and stable supply chains under President Joe Biden’s leadership. Biden signed an executive order in February that calls for a risk assessment of the semiconductor supply chain. An amount of $50 billion has been set aside for semiconductor production and research, as part of a $2 trillion stimulus package. The CHIPS for America Act, which seeks to provide incentives for advanced research, is also making its way through the legislative process. Meanwhile, Intel, a publicly traded company in the United States, revealed last month that it will invest $20 billion in two new chip factories which will double as a foundry. This could give TSMC and Samsung a domestic competitor. A global chip shortage that has impacted the automotive industry has sparked some of the attention on the supply chain.
The coronavirus pandemic boosted demand for personal electronics such as laptops and gaming consoles at a time when industrial and automakers were scaling back production. However, a rebound in productivity, combined with increased demand for chips in a variety of industries, has resulted in a shortage. The problem has gotten worse as demand has been concentrated in the hands of TSMC and Samsung.
According to Mirabaud Securities’ Campling, the semiconductor supply crisis has “likely made the US administration realise they aren’t in control of their own destiny.” Geopolitical considerations, on the other hand, influence the US strategy. In the face of a growing China, it is attempting to reshape how the global chip industry operates. While Washington will appreciate it, this isn’t really about self-sufficiency. Instead, it’s about bolstering vital industries that aren’t affected by geopolitics, such as AI and chips. And, since many countries share the United States’ reservations about China, the United States is encircling the globe.”
Self-sufficiency is a priority for China
Meanwhile, China is attempting to achieve self-sufficiency in the face of the US efforts to cut off main supplies. China has attempted to improve its semiconductor industry over the last few years, by making large investments and providing incentives such as tax cuts. China, on the other hand, continues to lag behind the rest of the world, and this is due to supply chain issues. SMIC is China’s largest foundry, with TSMC and Samsung as competitors. However, SMIC’s technology lags behind its Taiwanese and South Korean competitors by many years. Even though it were to progress, sanctions and acts imposed by the United States make it incredibly difficult. Last year, the US government added SMIC to the Entity Registry, a list of entities that are prohibited from doing business in the United States.
Because of the critical position that American firms play in the semiconductor supply chain, this prevents American companies from exporting such technology to SMIC, slowing down the chipmaker. According to Bank of America, about 80% or more of SMIC’s equipment is made in the United States. Even though it were to progress, sanctions and acts imposed by the United States make it incredibly difficult. Last year, the US government added SMIC to the Entity Registry, a list of entities that are prohibited from doing business in the United States. Because of the critical position that American firms play in the semiconductor supply chain, this prevents American companies from exporting such technology to SMIC, slowing down the chipmaker. SMIC’s equipment comes from a U.S. manufacturer for roughly 80% of the time.
In a December note, Bank of America said, “If China wants to produce cutting-edge chips, it is practically impossible without equipment from the US or allies.” “We remain doubtful about substantive improvement in China’s progress due to US restrictions,” Bank of America said in a separate statement. “China is materially behind in IP (intellectual property) and has restricted access to IP provided US restrictions.”
