US and EU “CHIPS Acts”: Wrong Solution to Phantom China Tech Threat
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US and EU “CHIPS Acts”: Wrong Solution to Phantom China Tech Threat

European and US ambitions to strive for semiconductor self-sufficiency are misguided and counterproductive


US and EU authorities have called the current semiconductor supply chain crisis a major national and economic security risk, citing a “dangerous” over-dependence on Asian foundries to source state-of-the-art chips.

In a purported effort to address the crisis, the US Senate in June passed the CHIPS Act that calls for $50 billion in subsidies to the US semiconductor industry (the bill has stalled in the House for the time being).  The EU, meanwhile, plans to spend as much as 145 billion Euros to build out a more comprehensive chip manufacturing ecosystem in Europe to produce the most advanced microchips. 

Semiconductors are critical to the global economy, and disruptions in the supply chain have exposed vulnerabilities, but US and EU politicians have mis-diagnosed the cause of the problems, and experts argue that the private sector is better situated to sort out the supply chain problems without government subsidies, which will likely prove to be too little, too late, causing a misallocation of resources. 

The US and Europe already control nearly all of the critical parts of the geographically-dispersed and globally integrated semiconductor industry. For instance, all three top suppliers of electronic design automation (EDA) software, an essential tool for chip design, are American. And ASML in The Netherlands is the only company able to produce extreme ultra-violet scanners, a tool essential for drawing the circuitry of the most advanced chips. 

  The only potential vulnerability of the US and EU is in the foundry segment, where Taiwan’s TSMC (with a 55% global market share) and South Korea’s Samsung (with an 18% share of the market) dominate the manufacturing of the most advanced chips. TSMC’s and Samsung’s foundries -- massive factories that produce the core circuitry of microchips -- embed a level of manufacturing knowhow that is extremely challenging for any aspiring competitor to emulate. 

This reliance on these Asian foundries, however, does not present much of a risk as a practical matter since both Taiwan and Korea are staunch allies of the US and EU. 

In fact, in promoting their semiconductor self-sufficiency policies, US and EU authorities focus little attention on resolving the dependence on Korea and Taiwan advanced chip foundries, but rather stoke fears that China will come to dominate the industry. US lawmakers have repeatedly sounded alarm bells over China’s growing semiconductor production capacity as a basis to justify additional US investment. 

However, upon closer examination, it is apparent that China is in the much more vulnerable position. 

Most experts estimate that China’s semiconductor champion, SMIC, is 10 to 12 years behind the current state of the art for semiconductor chips. Moreover, China lags well behind the ambitious targets set in “Made in China 2025,” China’s industrial policy plan that calls for, among other things, a fully autonomous Chinese semiconductor industry. In addition to challenges at the foundry level, developing domestic capabilities in EDA, specialized tools, and key materials is proving to be a daunting hurdle. 

As a practical matter, the vast disparity between the dominant position of the US-led semiconductor industry and China’s nascent capabilities has allowed the US and Europe to choke off any emerging competition from China. The US has been withholding sales of advanced factory tools to SMIC, halting the company’s ability to move beyond its current trailing-edge technologies.  It has also blocked semiconductor companies around the world, including Samsung and TSMC, from supplying advanced semiconductors to Huawei, the world’s largest telecommunications equipment manufacturer. 

Those restrictions on Chinese companies have proved counter-productive. Most leading Western analysts cite US trade policy against China, specifically the Huawei chip ban, as a key catalyst of the global chip crisis. As a result of the US trade action, Huawei (as well as other Chinese tech companies spooked by the Huawei chip ban) hoarded chips, thus contributing to the global shortage.

One of the main pieces of the US and EU strategies to foster advanced chip manufacturing capabilities has been to persuade Intel to invest in new foundries. The company had earlier announced that it would invest up to $200 billion or more in both Europe and the US. However, in early December it decided to postpone its final decision to sometime in the first part of next year. 

The semiconductor industry is perhaps the most capital-intensive industry in the world, and Intel’s plan can work only if it has access to a sustainable market.  The European market for chips, on its own, cannot support such a massive investment in chip manufacturing.

If the US continues to block sales of advanced chips to China, this could derail all such investment plans. In a white paper, the Semiconductor Industry Association, a US-based trade group, noted that China imported $378 billion worth of semiconductors in 2020 and produces a remarkable 36% of the world’s electronics, which makes China “the largest node in the global electronics supply chain.”  As a result, SIA said, “access to this massive market is essential to the success of any globally competitive chip firm today and in the future.”

Deglobalizing the semiconductor market is not a good option for anyone. A US Chamber of Commerce study found that decoupling from China would lead to an 8-18% decrease in American chip firms’ global market share, resulting in significant cuts to R&D and capital expenditures, the loss of up to 124,000 US jobs in the sector, eventually diminishing the US’ global leadership role in the industry.

To fix the problems ailing the semiconductor market, the proposed US and EU subsidies aren’t the solution.  The key is to restore the original – and highly successful – model of open markets, free trade, global collaboration, and private sector funding, which is always more efficient and effective than government subsidies that seek to solve last year’s problems.

Given the West’s entrenched advantages, and China’s late start from a low base, China is not a genuine threat to the West’s technological dominance in the semiconductor space.   However, if the US and EU continue to focus on this phantom risk and continue to cut off China from the purchase of advanced chips, that will create the ultimate disruption to global supply chains.

Robert Lewis, Formerly General counsel at Nortel, a senior international consultant with Chance Bridge Partners and a co-founder of docQbot.

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