Chipping away at China

Matt Haldan, SCMP, Global Impact 20 August 2022
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The chip war between Washington and Beijing has never felt so real as it has in the past few months, which has seen a deluge of news related to the semiconductor industry as the United States seeks to reshore fabrication and China vies for technological self-sufficiency. 

Not since the early days of the chip shortage in 2020 has there been so much related news, although that now feels like a teaser for what was to come.

The biggest news for the US this month was President Joe Biden signing the Chips and Science Act. The new law will pump US$53 billion into the domestic chip industry, incentivising companies to build and expand fabrication capacity in the country.

Chinese state media and trade institutions were quick to condemn the new law. China’s foreign ministry spokesman called an earlier version of the bill the result of a “cold war and zero-sum mentality”.

This is just the latest move from the US that is expected to hit China’s chip industry. Washington has also been tightening restrictions on Chinese companies’ access to advanced chip-making tools, including certain types of electronic design automation (EDA) software

On top of that, there are reports that the US is looking to widen its ban on equipment exports to cover those needed for 14-nanometre processes, up from the existing ban covering 10-nm and below.

Taiwan chip makers are caught in the centre of all of this. The island is home to the world’s largest and most advanced contract chip manufacturers, but in addition to having to adhere to Taipei’s trade restrictions with mainland China, it must also deal with the constant changes coming from Washington.

This has meant political headaches for Taiwan Semiconductor Manufacturing Company, the island’s biggest chip champion, but it is also expected to be a big beneficiary of new subsidies in the US, where it is currently building a US$12 billion foundry in Phoenix, Arizona.

During a recent visit to Taipei, US House Speaker Nancy Pelosi met with TSMC chairman Mark Liu and discussed the Chips Act, highlighting the company’s importance to the global chip supply chain. But Pelosi’s visit also angered Beijing, which began military drills around the island immediately after her departure.

Sabre rattling is probably unlikely to get Taipei to rethink closer ties with Washington – ties that look increasingly important to the current US approach to building deeper cooperation on key technologies with democracies in the region. 

This includes the so-called Chip 4 alliance, which Washington hopes will bring closer coordination in semiconductors between the US, Japan, South Korea and Taiwan. Beijing sees it as a plot to exclude China from semiconductor value chains.

However, there have been questions about whether South Korea would join the alliance. The country’s chip giants Samsung Electronics and SK Hynix have extensive operations in China relative to its overseas peers.

But it can be hard to swim against the geopolitical tide. Seoul has sought to downplay Chip 4 as an “alliance”, instead calling it a “semiconductor supply chain consultative body” and insisting South Korea “has no intention to exclude or be hostile to China”.

Despite Beijing’s loud protestations, the effects of Washington’s policies on China appear mixed so far. The US Commerce Department is still approving many exports to China, where national chip champion Semiconductor Manufacturing International Corporation (SMIC) recently achieved 7-nm chip production. It may be producing 7-nm chips using deep ultraviolet (DUV) scanners, which the company is allowed to purchase, and it is unlikely that it is able to mass produce them in the near term.

Meanwhile, China’s efforts to supercharge the domestic chip industry have hit a few snags. This month, six executives at China Integrated Circuit Industry Investment Fund have become the subject of corruption probes. The Big Fund, as it is known, was set up in 2014 to help China leap ahead in semiconductors.

Earlier in the year, the debt-laden Tsinghua Unigroup, once China’s most promising chip giant, was finally separated from its namesake university in Beijing and handed over to a state-owned asset watchdog in Sichuan province.

While China’s traditional chip firms were reeling, internet giants like Tencent, TikTok owner ByteDance and Alibaba Group Holding, were busy starting their own chip design operations. Chip design is the trend du jour among Big Tech firms globally, but the emphasis here is on design. This does little to help build up China’s manufacturing prowess.

On that front, China has been feeling the pinch of supply chain constraints. Domestic production of integrated circuits fell by 17 per cent in July.

None of this is to say that the US has successfully thwarted China’s efforts in semiconductors. As is often the case in technology, it may only be a matter of time until China catches up. 

Eric Schmidt, the former Google CEO who now chairs the National Security Commission on Artificial Intelligence, warned last year that the US must invest more money into the industry to “stay two semiconductor generations ahead of the Chinese”. A report from Harvard said China could be a “top-tier player in the semiconductor industry by 2030”.

After much political wrangling, the US finally has its Chips Act. But only time will tell whether that is enough to get the desired results.

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