How does the US-China semiconductor conflict affect the supply chain?

Semiconductor chips, sized in nanometers, power nearly every electronic device. It is on smartphones, laptops, and even on the Internet of Things (IoT) and advanced military systems, among others.

Presently, the semiconductor industry, worth an estimated $500 billion, has become a battleground. It’s in-between the United States (US) and China war. Wherein, the leading contender, may grasp significant control over the global supply chain. There is also the potential for a resolute position as the world’s largest superpower economy.

The US is suggesting its supporters to decouple from China. Whilst, the latter is asserting its status as the biggest market for semiconductor chips. Hence, the future of this billion-dollar industry is now at a crossroads.

“You cannot make a parallel system, the world is deeply interconnected, so nobody can live without others. Semiconductor is a very complicated (technology), they have a lot of linkages,”

noted Ma Jia, Minister of the Chinese Embassy in India.

Semiconductor industry and the global network

Semiconductor chips, originally from the US, were initially part of the country’s space missions at NASA. They were exclusively for only the US.

As the number of transistors held in a single chip doubled every two years following Moore’s Law, its civilian use in everyday devices increased. The high demand for these chips, combined with a need for manufacturing them at low cost, shifted the manufacturing industry of semiconductor chips to US allies in Asia. Such is comprise of South Korea, Japan, and Taiwan.

Later on, stakeholders from Asian countries involved started investing in their own infrastructures. These are for manufacturing and designing semiconductor chips. Some of which are Toshiba, Japan; Samsung, Korea; and Taiwan Semiconductor Manufacturing Company (TSMC), Taiwan.

The end of the cold war marked China’s semiconductor breakthrough. One in which the distance between US and China decreased and the countries became allies. They’ve become the hub for semiconductor assembly but are still lacking the technology needed to manufacture or design them.

For example, TSMC is currently the largest semiconductor company in the world. Some of their clients are Apple Inc., Qualcomm, Intel, and NVIDIA.

Meanwhile, the advanced semiconductor chip is only being made by ASML Holding N.V., a Dutch Multinational Corporation in the Netherlands. The ASML Extreme Ultraviolet Lithography machine makes the most advanced semiconductor chips, with the equipment made in the US.

Only companies in Taiwan, South Korea, and Japan can put it all together. Therefore, only they can manufacture the most advanced chip which is assembled on a Silicon Wafer in China.

US and China war: The US perspective

The onset of Industry 5.0, powered by artificial intelligence (AI) and advanced robotics, is ushering in a new revolution in industrialization. An advanced semiconductor chip holds billions of transistors. Thus, it makes advanced AI systems faster and more efficient than ever.

Meanwhile, the US strives to lead in technological developments involving AI to stay ahead of its biggest competitor, China. In August 2022, The CHIPS and Science Act was introduced and signed into Law by President Joe Biden.

Said act bans the export of high-performing computing chips, technologies, software, equipment, and talents from the US or companies using US patent technologies to China. Therefore, depriving China’s semiconductor industry of the crucial computing power needed to train AI on a larger scale.

The decision was said to be taken, as the US feels that China is intervening in semiconductor technologies from civilians to military systems. Such was perceived as jeopardizing citizens’ security. Which eventually sparked the US and China war and heightened the distance between US and China.

 “US national security interests require that we act decisively to deny access to advanced technologies,”

said Thea Kendler,  US Assistant Secretary of Commerce for Export Administration.

Despite the interactions during the G20 Summit 2022, which shows a calm US and China war relations, tensions soon rose. It is when a Chinese spy balloon flew over sensitive US military areas, gathering intelligence. China denied the claims, stating it was a weather forecasting balloon, but the US government discovered otherwise.

The US is concerned that China’s engagement in business with military entities is unacceptable. They believe that China should be engaging in free trade on a business-to-business or company-to-company basis. 

US and China war: The China perspective

China leans toward establishing a dominant role in the semiconductor chip design and manufacturing sector. Its position in the advanced semiconductor chip manufacturing and design industry faces restrictions towards assembly tasks. Such was due to its limited technological advancements in these areas.

In their efforts to catch up, semiconductor company XTAL Inc. attempted to replicate ASML machines. They are deemed as China’s semiconductor breakthrough that eventually led to the US identifying China’s involvement in IP theft. 

Consequently, the US initiated a trade war against China during the presidency of Donald Trump. This has impacted China’s growth in the advanced semiconductor chip market.

The implementation began with the banning of ZTE tech and Huawei products in the US, with the recent incident of Apple Inc. ceasing its operation of chips from YMTC, one of the biggest chip companies in China.

“By trying to kill China as the largest buyer of chips products … you’re killing your own semiconductor business,”

said Victor Gao, Vice President of the Centre for China and Globalisation.

Nevertheless, the Chinese government is presently investing in the technology necessary to improve its position in the industry. It’s in the hopes to regain lost ground in the ongoing US and China war. Despite these efforts, Chinese authorities view the US’ actions as an attempt to slow down their growth and limit their free trade. 

On the side, China views Taiwan, the biggest manufacturer in the industry, as a fallen province. They are striving to capture or prevent Taiwan from allying with the US.

Global implications of the geopolitical conflict

As the ongoing conflict between the US and China continues, often referred Cold War 2.0, countries globally will be forced to choose sides. 

The US is actively persuading countries like the Netherlands and Japan to join their side in the US and China war. While China has filed a case at World Trade Organization (WTO) against the US. Wherein, the concern is over its export control of advanced semiconductor chips and related technology.

“The US has moved their goals, from having a couple of generations of an advantage on their rivals,”

said Joris Teer, a Strategic Analyst at The Hague Centre for Strategic Studies.

Teer noted the need to maintain a far lead against rivals. Meanwhile, Taiwan is also struggling to navigate its position amidst the conflict.

The US and China war will likely continue until both countries can find common ground for development. As a result, other Asian countries like India and global countries are trying to capitalize on the opportunity by building their own semiconductor supply chain elements.