6 December 2022, will probably go down in history as one of the most important dates of the post-Covid era.
In Arizona, top officials of the United States government will be present to celebrate the installation of equipment at the $12 billion semiconductor facility being built by the Taiwan Semiconductor Manufacturing (TSMC).
While the attendance of President Joe Biden for the event remains uncertain, it is certain that the West is now working towards reclaiming the supply chain dominance in critical sectors, starting with semiconductors.
Trump’s Trade Policy: The Initial Shock
The origins of the supply chain fightback can be traced back to the trade war that began under the watch of President Donald Trump.
Back in the day, the Democrats were too quick to label Trump’s policy as short-sighted, stating that it would dent the backbone of the US semiconductor industry, hurt the research and development prospects, and usher a decline in revenues from foreign consumers like Vivo, Oppo, and Xiamoi.
Some feared it would warrant federal compensation for the equipment manufacturers.
Thus, there were not many takers for the export controls announced by Trump in 2019.
It was argued that the semiconductors needed for Huawei’s base stations were readily available elsewhere, and Trump’s trade war was only hurting the revenue interests of American companies.
Even with $49 billion worth of sales to Huawei and other Chinese companies, America’s share of semiconductor imports in China was not more than 5 per cent, while Taiwan and South Korea, together, made up for 60 per cent of those imports.
In 2020, the Trump administration came up with the foreign-produced direct product (FDP) rule.
To fix the gaps in the 2019 export control rules, the US Commerce Department ruled that American companies should only sell semiconductor manufacturing equipment to those companies that will not sell to Huawei or any other Chinese entities.
Therefore, if a TSMC in Taiwan or Samsung in South Korea wanted American equipment, they would have to let go of their Chinese customers. In May 2020, TSMC had announced its $12 billion plant in Arizona.
Biden Takes Over: The $280 Billion CHIPS Act
In the last week of February 2021, merely a month after he took over the White House, Biden signed an executive order directing the administration to address the worrying shortfall in semiconductor production that impacted operations at some auto plants.
The order was mainly focused on reviewing the US supply chains for semiconductors, ensuring they were secure and reliable, especially as tensions with China looked imminent back then.
To the surprise of many, Democrats were not doing away with Trump’s trade policies.
The new administration followed up with a 100-day review of supply chains.
The review covered semiconductors, large capacity batteries, pharmaceuticals, critical minerals, and also strategic minerals like ‘rare earths’ used in rechargeable batteries for electric and hybrid cars, advanced ceramics, computing devices, and many other electronics.
The review was critical for one simple reason. While the US was the global leader when it came to semiconductor design, research and development, it only had 12 per cent of the world’s semiconductor manufacturing.
Almost 18 months later, the Biden administration introduced the $280 billion CHIPS and Science Act.
The legislation came with $52 billion for the semiconductor industry and also ushers $200 billion in scientific research in artificial intelligence, quantum computing, and other relevant technologies where America was losing out to China.
More than a legislative victory for Biden ahead of the midterms, it was about Trump’s trade stance against China becoming the bipartisan policy in the power corridors of Washington DC.
The $52 billion CHIPS funding subsidises companies building fabs or production plants within the United States. Also, it set aside billions of dollars for building a semiconductor ecosystem with elaborate research and development facilities and a thriving workforce.
Companies building fabs would also be eligible for tax credits. Thus, it incentivised the likes of TSMC, Intel, Samsung, and several other semiconductor giants to come build in America, instead of China. This was the first key step in reclaiming China’s supply chain dominance.
The buck did not stop here, however.
Restrictions And Ramifications
In October 2022, the US Commerce Department, under the Biden administration, announced a set of sweeping instructions, aimed at disrupting China’s manufacturing dominance in the supply chain sector.
The Biden administration announced that it would impose restrictions on 31 Chinese companies, research institutions and related groups effective October 21, effectively blocking their ability to obtain core US technologies.
The Commerce Department claimed that the latest export control moves were intended to halt shipments of chips and chip-making technology of potential use to China in its military build-up and bid to dominate key industries.
The Biden administration added China's top memory chipmaker Yangtze Memory Technologies (YMTC) and 30 other Chinese entities to a so-called ‘unverified’ trade list. Already, some senators were pushing for investigations against Apple for their deal with YMTC in September 2022.
YMTC was to supply 3D NAND memory chips to Apple. The latter, however, was forced to reassess the decision, given the pressure from the senators, and also citing YMTC’s closeness to the Chinese government.
YMTC was also a supplier to Huawei, and therefore, it was against the export controls announced during the Trump administration in 2020.
Nvidia and Advanced Micro Devices (AMD) were also restricted from supplying high-end graphics processors and AI chips essential for high-performance computing processes.
The repercussions from the restrictions were immediate. In less than a week, China’s chip companies took a hammering on the stock market, losing as much as $8.6 billion in market value.
In the past month alone, NAURA Technology Group has lost 16 per cent of its value. Another key company, Hwatsing Technology group, is down by 19 per cent. China’s SMIC has also been on the decline for a year now. To make matters worse, even global giants are now beginning to desert China.
Lam Research, Applied Materials, and KLA Corporation, critical players in the semiconductor production process, have halted their sales and other supplies to China.
ASML, engaged in chip making equipment, has told its staff in the United States to halt their trade with Chinese customers as they study the sanctions.
LAM Research, as per the report, has started pulling out support staff from Chinese chipmaking companies including the YMTC and suspended all presale negotiations with the Chinese customers.
The Imagined Cost Of US Restrictions
Put simply, the US wants to cripple China’s ability to produce advanced semiconductors (3-14 nanometre process technology).
Thus, the cost of these restrictions will be felt by Chinese chipmakers, especially those working on cutting-edge technologies for next generation computing.
This also impacts production in China, the conventional factory of the world. For instance, the latest Androids and iPhones, gaming laptops, Macbooks, and other high-end devices, all use semiconductors in the 5-10 nanometre spectrum.
The Chinese are now without the ability to produce chips and even chip making equipment; a double whammy to the semiconductor ambitions of President Xi Jinping.
From almost nothing in 1990, China’s share in global semiconductor production went to about 15 per cent in 2020. However, that castle was built on the unrestricted access to chip making equipment from the likes of KLA, Lam Corporation, and Applied Materials.
Today, the US restrictions are mounting a direct attack on that access that worked in the favour of the Chinese.
If the semiconductor manufacturing process was broken down into several components, the Chinese had negligible share in chip design (electronic design, intellectual property rights), and production of equipment.
What worked for China as a manufacturing base was to ensure infrastructure for large-scale assembling and testing, backed by subsidies from Beijing, and therefore lower costs for the procuring companies. With the restrictions from the US, the discount party will also cease to exist.
Therefore companies, both US and Chinese, relying on cheap chips will now have to look at covering up costs elsewhere.
From surveillance cameras to Apple’s iPhones, and from electric cars to biotech equipment, an upthrust in cost is inevitable.
For instance, Apple’s iPhone 12 Pro had five key chips making up for more than half the cost. Against iPhone 12 Pro, the cost of iPhone 14 Pro was more than 25 per cent, given the inflated cost of chips. The trillion dollar question, however, is will the consumers be able to keep up with the cost of the chip wars?
There are implications for China's tech giants too. Catering to a market of 1.4 billion people, China’s tech giants like Alibaba and Tencent rely on data centers that use chips made from foreign technology.
In the 2000s and 2010s, China spent more money on importing semiconductors than oil, especially high-powered chips, from Taiwan and South Korea.
However, with the new restrictions and the ever expanding need for data centers in the age of Internet of Things (IoT), Metaverse, 5G, and much more, the Chinese companies are left in a limbo.
Trump’s Prophecy Comes True
It was during the Trump administration that the concerns against intellectual property theft were made mainstream.
The theft was made in the garb of strategic takeovers by Beijing.
For instance, AMD, in 2016, sold 85 per cent stake in its semiconductor assembly, testing, and packaging facilities in Malaysia and China to a Chinese firm to escape bankruptcy. In the same year, AMD cut a deal with a group of Chinese firms to licnese the production of x86 chips for China’s market.
For those times, x86 chips were critical for data centres, and only three companies on the planet had the necessary technology to manufacture them; AMD, Intel, and Via (a Taiwanese company).
AMD ran the details of the deal through the Commerce Department. However, it was not stopped, because not many understood the sector well enough, and even after angry protests and lobbying by Intel, a rival company and a producer of x86 chips, the deal went through, giving the Chinese government much needed leverage.
When Trump first floated the idea of import restrictions from China, Democrats were worried about the inflated costs for the consumers, but today, under the Biden administration, Trump’s policy has not only been followed, but elevated to unimaginable proportions.
The increased cost for the consumers is inevitable, but so is a gradual reset of the global supply chains.
From 37 per cent in 1990, US’ manufacturing share in the semiconductor industry declined to 12 per cent in 2020. Now, they are moving to reclaim it from China.
Welcome to the age of supply chain renaissance, initiated under Trump, and being intensified under Biden.
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