Analysts told CNBC that leading chip makers, including the United States, are forming alliances, in part to secure the semiconductor supply chain and prevent China from being up-to-date.
Places like the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have sought partnerships around biotechnology.
“The direct cause of all of this is definitely China,” said Pranai Kotastin, head of the Geopolitical High Technology Program at the Takashila Foundation, referring to the alliances.
The collective collaboration underscores how important chips are to economies and national security, while at the same time highlighting countries’ desire to halt China’s advances in biotechnology.
Kotasthane was a guest on the last episode of Beyond the Valley podcast on CNBC Published Tuesday, which looks at the geopolitics behind semiconductors.
Why chips in the geopolitical spotlight
Semiconductors are an important technology because they are in many of the products we use – from smartphones to cars and refrigerators. They are also essential for AI applications and even weapons.
The importance of chips was highlighted during The ongoing shortage of these components, caused by the Covid pandemic, amid increased demand for consumer electronics and supply chain disruptions.
This alerted governments around the world to the need to secure chip supplies. The United States pushed, under President Joe Biden, to reinstate support for manufacturing.
But the semiconductor supply chain is complex – it includes areas ranging from design to packaging to manufacturing and the tools required to do so.
For example, ASML, headquartered in the Netherlands, is the only company in the world capable of manufacturing the highly complex machinery needed to manufacture the most advanced chips.
Despite the United States’ strength in many areas of the market, 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 chip maker in the United States, has fallen far behind.
Taiwan and South Korea make up about 80% of the global foundry market. Foundries are facilities that make chips that other companies design.
The concentration of critical tools and manufacturing in a small number of companies and geographies has put governments around the world on edge, as well as pushing semiconductors into the realm of geopolitics.
“What has happened is that there are so many companies spread all over the world doing a small part of it, which means there is a geopolitical angle to that, right? What if one company doesn’t provide the things you need? What if, you know, one of the Countries put espionage matters through chips?
Kostasten said that the concentration of power in the hands of a few economies and companies presents a risk to business continuity, especially in places of contention such as Taiwan. Beijing considers Taiwan a breakaway province and has promised to “reunify” the island with the Chinese mainland.
“The other geopolitical significance is just related to Taiwan’s central role in the semiconductor supply chain. And because the tensions between China and Taiwan have escalated, there is a fear, you know, since a lot of industrialization is happening in Taiwan, what happens if China is to occupy or even just have tensions between The two countries?” Kotasthane said.
Alliances that exclude China are being built
Because of the complexity of the chip supply chain, no country can function alone.
Countries have increasingly sought partnerships in the past two years. On a trip to South Korea in May, Biden visited Samsung’s semiconductor factory. Around the same time, US Secretary of Commerce Gina Raimondo met her then Japanese counterpart, Koichi Hagiuda, in Tokyo and discussed “cooperation in areas such as semiconductors and export control.”
Last month, Taiwan President Tsai Ing-wen told visiting US Arizona Governor Doug Ducey that she is looking to produce “democratic chips” with America. Taiwan is home to the world’s most advanced chip maker TSMC.
Semiconductors are an essential part of cooperation between the United States, India, Japan and Australia, a group of democracies known collectively as the Quartet.
The US has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all of which are powerhouses in the semiconductor supply chain. However, the details of this have not been finalized.
There are several reasons behind these partnerships.
One is to bring together countries, each with their “comparative advantages,” Kostasten said, to “assemble alliances that can develop secure chips.” “It doesn’t make sense to go it alone” due to the complexity of the supply chain and the strengths of different countries and companies, he added.
US President Joe Biden met South Korean President Yoon Seok-yeol in May 2022 on a visit to the Samsung Electronics Pyeongtaek campus. The United States and South Korea, along with other countries, are seeking to form alliances around semiconductors, with the goal of excluding China.
Kim Min Hee | Getty Images
The push for such partnerships has one common feature – China is not involved. In fact, these alliances are designed to isolate China from the global supply chain.
“From my point of view, I believe that in the short term, China’s development in this sector will be severely constrained [as a result of these alliances]Kostasten said.
China and the United States view each other as technology competitors in areas ranging from semiconductors to artificial intelligence. As part of that fight, the United States has sought to isolate China from important semiconductors and tools to make it through export restrictions.
“The goal of all this effort is to prevent China from developing the ability to produce advanced semiconductors domestically,” Paul Triulo, head of technology policy at consultancy Albright Stonebridge, told CNBC, referring to the goals of the various partnerships.
China’s “high-end” chips are in doubt
So where does that leave China?
Over the past few years, China has poured a lot of money into the domestic semiconductor industry, aiming to promote self-sufficiency and reduce its dependence on foreign companies.
As we explained before, this will be very difficult due to the complexity of the supply chain and the concentration of power in the hands of very few companies and countries.
China is improving in areas such as chip design, But this is an area that is highly dependent on foreign tools and equipment.
According to Kotastin, industrialization is China’s “Achilles heel”. The largest chip maker in China is called SMIC. But the company’s technology still lags significantly behind the likes of TSMC and Samsung.
“It requires a lot of international cooperation… which I think is now a big problem for China because of the way there are some kind of anti-Chinese neighbors,” Kostastan said.
“What China could do three or four years ago in terms of international cooperation will not only be possible.”
This leaves China’s ability to reach the edge of chip industry leadership in doubt, Kotastin said, especially as the United States and other major semiconductor companies form alliances.
“In the long run, I think they [China] They will be able to overcome some of the current challenges…however they will not be able to reach the latest model like many other countries.”
However, some cracks are starting to appear between some partners, notably South Korea and the United States.
In an interview with financial timesAhn Duk-gyun, South Korean Commerce Minister, said there are differences between Seoul and Washington over continued restrictions on the export of semiconductor tools to China.
“Our semiconductor industry has a lot of concerns about what the US government is doing these days,” Ahn told the Financial Times.
China, the world’s largest chip importer, is a major market for chip companies globally, ranging from US giants like Qualcomm to Samsung in South Korea. With politics and business mixed, the way could be set for more interstate tension in these high-tech alliances.
“Not all US allies are eager to sign up for these alliances, or expand controls on technology destined for China, because they have significant stakes in both manufacturing in China and selling in the Chinese market. And most of them don’t want to conflict with Beijing on these issues,” he said. Triollo.
“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 significant collateral damage to innovation, driving up costs and slowing the development of new technologies.”