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The U.S. Can't Win the Battle Over Semiconductors Alone

The U.S. Can't Win the Battle Over Semiconductors Alone

  • Categories:Industry News
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  • Time of issue:2022-05-19 09:38
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(Summary description) Semiconductors, the tiny chips that power everything from Apple iPhones to F-35 fighter jets, are a true product of globalization. Their technological sophistication is matched only by the logistical complexity of their supply chains, which stretch across the planet. It should be no surprise, then, that these chips are feeling the impact of accelerating deglobalization. Over the past several years, manufacturers of everything from shoes to home appliances have moved to reshore production, encouraged by protectionist governments erecting trade barriers to protect domestic economies from geopolitical forces. Gradually, the “just-in-time” supply chains of the globalized world, which outsourced aspects of production to lower costs at scale, are giving way to a “just-in-case” model that accepts the higher costs of domestic suppliers in order to prioritize security and resilience. Rather than offering a competitive advantage, international supply chains have become, as theGuardian puts it, “a web in which countries can trap one another” as they pursue their foreign policy objectives. The semiconductor industry was first battered by U.S.-China trade tensions during the administration of former U.S. President Donald Trump. The pandemic’s widespread supply chain disruptions further exposed the sector’s hidden vulnerabilities, triggering a chip shortage that continues to this day. Now, the war in Ukraine has led the U.S. and European Union to ban the sale of semiconductors to Russia, a policy that South Korea and Taiwan, two of the world’s leading semiconductor exporters, also intend to enforce. As fears mount that the conflict in Eastern Europe could be a prelude to one over Taiwan, it appears that the securitization of semiconductors is in full swing. In other words, world leaders have shifted from a passive strategy, in which possessing semiconductors allows a state to maintain a technological lead over adversaries, to an assertive one, in which states take action to actively deny adversaries access to that technology, including by enforcing sanctions. In fact, chips are becoming a core technological weapon in the emerging economic battle between the U.S.-led liberal order and the “arc of autocracy” led by Russia and China. Transforming the chip market into a techno-battlespace will have an enormous impact not just on the industry itself, but on the balance of power globally, dealing out costs and benefits to private firms, consumers and states alike. For now, Russia and China are both highly vulnerable to semiconductor sanctions, each exposed in its own unique way. Yet the use—or even threat—of sanctions, is sure to inspire both countries to achieve technological independence, including by decoupling their semiconductor supply chains from the West’s. Washington, meanwhile, relies heavily on its allies in East Asia to maintain its current dominance with respect to Beijing and Moscow. That means it cannot pursue an independent strategy on semiconductors. It will have to work with others on a multilateral sanctions strategy to achieve its aims. A New Weapon As thelifeblood of the modern economy, chip supplies, like money flows, can make or break Washington’s foes. Yet unlike in financial warfare, the U.S. enjoys only relative, rather than overwhelming, dominance in semiconductors. The dollar’s role as the world’s reserve currency gives the U.S. a privileged position at the heart of the global financial system. Washington has the means to wage economic warfare on terrorist groups and rival states unilaterally, and theU.S. Treasury has honed such sanctions for two decades, starting with its initial forays into cutting off donations to al-Qaida in the early 2000s. This year’s full-scale“shock and awe” economic blitzkrieg of the Kremlin, which has included freezing the foreign reserves of major Russian banks, is one of the most devastating sanctions campaign the U.S. has ever levied against an adversary. Any chip sanctions regime that hits autocratic economies where it hurts will require careful diplomatic coordination between liberal democracies. By contrast, the weaponization of semiconductors is fairly recent and has yet to be optimized in terms of strategy. The Trump administration’s “decapitation of Huawei” in 2020, which banned foreign companies from selling the company anything made with U.S. components, including semiconductors, was the first time its full force was brought to bear on a foreign entity. The massive hit to Huawei’s profits showed just how lethal this new economic weapon could be. And yet, more than financial warfare, chip sanctions hinge on winning consensus from other countries.This is because the most advanced chips are not fabricated in the United States, but in East Asia. Taiwan produces 92 percent of semiconductor process nodes smaller than 10 nanometers, which power the world’s most advanced machines. South Korea, meanwhile,dominates memory chips, with about 75 percent of the

The U.S. Can't Win the Battle Over Semiconductors Alone

(Summary description)

Semiconductors, the tiny chips that power everything from Apple iPhones to F-35 fighter jets, are a true product of globalization. Their technological sophistication is matched only by the logistical complexity of their supply chains, which stretch across the planet.

It should be no surprise, then, that these chips are feeling the impact of accelerating deglobalization. Over the past several years, manufacturers of everything from shoes to home appliances have moved to reshore production, encouraged by protectionist governments erecting trade barriers to protect domestic economies from geopolitical forces. Gradually, the “just-in-time” supply chains of the globalized world, which outsourced aspects of production to lower costs at scale, are giving way to a “just-in-case” model that accepts the higher costs of domestic suppliers in order to prioritize security and resilience. Rather than offering a competitive advantage, international supply chains have become, as theGuardian puts it, “a web in which countries can trap one another” as they pursue their foreign policy objectives.

The semiconductor industry was first battered by U.S.-China trade tensions during the administration of former U.S. President Donald Trump. The pandemic’s widespread supply chain disruptions further exposed the sector’s hidden vulnerabilities, triggering a chip shortage that continues to this day. Now, the war in Ukraine has led the U.S. and European Union to ban the sale of semiconductors to Russia, a policy that South Korea and Taiwan, two of the world’s leading semiconductor exporters, also intend to enforce. As fears mount that the conflict in Eastern Europe could be a prelude to one over Taiwan, it appears that the securitization of semiconductors is in full swing.

In other words, world leaders have shifted from a passive strategy, in which possessing semiconductors allows a state to maintain a technological lead over adversaries, to an assertive one, in which states take action to actively deny adversaries access to that technology, including by enforcing sanctions. In fact, chips are becoming a core technological weapon in the emerging economic battle between the U.S.-led liberal order and the “arc of autocracy” led by Russia and China.

Transforming the chip market into a techno-battlespace will have an enormous impact not just on the industry itself, but on the balance of power globally, dealing out costs and benefits to private firms, consumers and states alike.

For now, Russia and China are both highly vulnerable to semiconductor sanctions, each exposed in its own unique way. Yet the use—or even threat—of sanctions, is sure to inspire both countries to achieve technological independence, including by decoupling their semiconductor supply chains from the West’s.

Washington, meanwhile, relies heavily on its allies in East Asia to maintain its current dominance with respect to Beijing and Moscow. That means it cannot pursue an independent strategy on semiconductors. It will have to work with others on a multilateral sanctions strategy to achieve its aims.

A New Weapon

As thelifeblood of the modern economy, chip supplies, like money flows, can make or break Washington’s foes. Yet unlike in financial warfare, the U.S. enjoys only relative, rather than overwhelming, dominance in semiconductors.

The dollar’s role as the world’s reserve currency gives the U.S. a privileged position at the heart of the global financial system. Washington has the means to wage economic warfare on terrorist groups and rival states unilaterally, and theU.S. Treasury has honed such sanctions for two decades, starting with its initial forays into cutting off donations to al-Qaida in the early 2000s. This year’s full-scale“shock and awe” economic blitzkrieg of the Kremlin, which has included freezing the foreign reserves of major Russian banks, is one of the most devastating sanctions campaign the U.S. has ever levied against an adversary.

Any chip sanctions regime that hits autocratic economies where it hurts will require careful diplomatic coordination between liberal democracies.

By contrast, the weaponization of semiconductors is fairly recent and has yet to be optimized in terms of strategy. The Trump administration’s “decapitation of Huawei” in 2020, which banned foreign companies from selling the company anything made with U.S. components, including semiconductors, was the first time its full force was brought to bear on a foreign entity. The massive hit to Huawei’s profits showed just how lethal this new economic weapon could be.

And yet, more than financial warfare, chip sanctions hinge on winning consensus from other countries.This is because the most advanced chips are not fabricated in the United States, but in East Asia.

Taiwan produces 92 percent of semiconductor process nodes smaller than 10 nanometers, which power the world’s most advanced machines. South Korea, meanwhile,dominates memory chips, with about 75 percent of the

  • Categories:Industry News
  • Author:
  • Origin:
  • Time of issue:2022-05-19 09:38
  • Views:
Information

Semiconductors, the tiny chips that power everything from Apple iPhones to F-35 fighter jets, are a true product of globalization. Their technological sophistication is matched only by the logistical complexity of their supply chains, which stretch across the planet.

It should be no surprise, then, that these chips are feeling the impact of accelerating deglobalization. Over the past several years, manufacturers of everything from shoes to home appliances have moved to reshore production, encouraged by protectionist governments erecting trade barriers to protect domestic economies from geopolitical forces. Gradually, the “just-in-time” supply chains of the globalized world, which outsourced aspects of production to lower costs at scale, are giving way to a “just-in-case” model that accepts the higher costs of domestic suppliers in order to prioritize security and resilience. Rather than offering a competitive advantage, international supply chains have become, as theGuardian puts it, “a web in which countries can trap one another” as they pursue their foreign policy objectives.

The semiconductor industry was first battered by U.S.-China trade tensions during the administration of former U.S. President Donald Trump. The pandemic’s widespread supply chain disruptions further exposed the sector’s hidden vulnerabilities, triggering a chip shortage that continues to this day. Now, the war in Ukraine has led the U.S. and European Union to ban the sale of semiconductors to Russia, a policy that South Korea and Taiwan, two of the world’s leading semiconductor exporters, also intend to enforce. As fears mount that the conflict in Eastern Europe could be a prelude to one over Taiwan, it appears that the securitization of semiconductors is in full swing.

In other words, world leaders have shifted from a passive strategy, in which possessing semiconductors allows a state to maintain a technological lead over adversaries, to an assertive one, in which states take action to actively deny adversaries access to that technology, including by enforcing sanctions. In fact, chips are becoming a core technological weapon in the emerging economic battle between the U.S.-led liberal order and the “arc of autocracy” led by Russia and China.

Transforming the chip market into a techno-battlespace will have an enormous impact not just on the industry itself, but on the balance of power globally, dealing out costs and benefits to private firms, consumers and states alike.

For now, Russia and China are both highly vulnerable to semiconductor sanctions, each exposed in its own unique way. Yet the use—or even threat—of sanctions, is sure to inspire both countries to achieve technological independence, including by decoupling their semiconductor supply chains from the West’s.

Washington, meanwhile, relies heavily on its allies in East Asia to maintain its current dominance with respect to Beijing and Moscow. That means it cannot pursue an independent strategy on semiconductors. It will have to work with others on a multilateral sanctions strategy to achieve its aims.

A New Weapon

As thelifeblood of the modern economy, chip supplies, like money flows, can make or break Washington’s foes. Yet unlike in financial warfare, the U.S. enjoys only relative, rather than overwhelming, dominance in semiconductors.

The dollar’s role as the world’s reserve currency gives the U.S. a privileged position at the heart of the global financial system. Washington has the means to wage economic warfare on terrorist groups and rival states unilaterally, and theU.S. Treasury has honed such sanctions for two decades, starting with its initial forays into cutting off donations to al-Qaida in the early 2000s. This year’s full-scale“shock and awe” economic blitzkrieg of the Kremlin, which has included freezing the foreign reserves of major Russian banks, is one of the most devastating sanctions campaign the U.S. has ever levied against an adversary.

Any chip sanctions regime that hits autocratic economies where it hurts will require careful diplomatic coordination between liberal democracies.

By contrast, the weaponization of semiconductors is fairly recent and has yet to be optimized in terms of strategy. The Trump administration’s “decapitation of Huawei” in 2020, which banned foreign companies from selling the company anything made with U.S. components, including semiconductors, was the first time its full force was brought to bear on a foreign entity. The massive hit to Huawei’s profits showed just how lethal this new economic weapon could be.

And yet, more than financial warfare, chip sanctions hinge on winning consensus from other countries.This is because the most advanced chips are not fabricated in the United States, but in East Asia.

Taiwan produces 92 percent of semiconductor process nodes smaller than 10 nanometers, which power the world’s most advanced machines. South Korea, meanwhile,dominates memory chips, with about 75 percent of the market share for dynamic random-access memory chips, or DRAM, and 45 percent for NAND flash chips. The U.S. still dominates in chip design, but Taiwanese firms are gaining there, too. For the first time ever in 2021, four Taiwanese firms were among thetop 10 most profitable chip-designcompanies, the other six being American.

Any chip sanctions regime that hits autocratic economies where it hurts will therefore require careful diplomatic coordination between liberal democracies. Realizing this, Washington recentlyfloated the idea of forminga quadrilateral semiconductor industry alliance with Japan, South Korea and Taiwan. Tellingly, Seoul expressed caution about the idea, worried it could jeopardize its firms’ operations in China. This hints at the ongoing challenge the U.S. will face in ensuring its allies don’t break ranks if and when they impose such coordinated sanctions.

Russia’s Self-Reliance

Inannouncing the first round of U.S. sanctionson Russia after its invasion of Ukraine, Biden noted that the U.S. aimed to “impair [Russia’s] ability to compete in a high-tech 21st-century economy.” Yet Putin himself is often described as a19th-century imperialist, and much of Russia’s infrastructure and hardware are leftovers from the Soviet era. So just how far into the current century is the Russian economy?

If transistors are any measure, not very far. Russia’s largest chipmaker is Mikron Group, which produces about 500 million chips each year, most of which end up as the radio-frequency identification tickets that power debit cards, biometric IDs, public transit passes and the like. Mikronclaimed to have produced a 65-nanometer process node in 2014, but that turned out to be an experimental product not ready for commercial production. As of now, the company’s smallest process node is 90 nanometers. Even if Mikron achieved the 65-nanometer process node, Russia would still be at least a decade behind the industry leader, Taiwan’s TSMC, which released a process of that size in 2005.

Russia thus relies on semiconductor imports to keep its tech companies going. In the aftermath of the U.S. sanctions, Yandex—Russia’s answer to Google—is onthe path to ruin. A shortage of chips, which power its servers, could spell doom for its cloud business, search engine, music streaming service and e-commerce platform. The company is hastily restructuring itself and selling off operations to keep its head above water, predicting that it will run out of chips in one year.

But outside of Russia’s minimal tech scene, the country’s broader economy might just walk off the pain of semiconductor sanctions. Perhaps ironically, its technological backwardness may help cushion the fall, since its resource-fueled economy requires fewer hi-tech inputs, lowering the potential for disruption.

Putin has lauded artificial intelligence technology for many years, describing it as essential to becoming “the ruler of the world.” Yet his actions have failed to live up to his grand ambition of turning Russia into anAI superpower by 2030.Despite the size of its economy—the world’s 11th-largest in 2021—Russia has a relatively low appetite for chips. The country consumesroughly $500 millionworth of semiconductors each year, making up just 0.1 percent of global chip sales. The bulk of these imports are loose analog chips used in legacy machinery for switches, motor controls and other parts, rather than cutting-edge microprocessors from the likes of Intel or Nvidia, according to an analysis of Russian customs databy the technology news site Protocol.

As it is, Russia remains a petro-state with little in the way of cutting-edge technology, outside of military hardware and legacy space programs. Unlike China, it has not staked its economic future on breakthrough, next-generation technologies. But as sanctions start to bite, the Kremlin is making up for lost time.

In mid-April,Russia announced a $38.3 billion planto bolster its self-reliance by building out its capacity to design and manufacture chips at home. Moscow aims to ramp up production of 90-nanometer process nodes by the end of the year, and to develop and manufacture 28-nanometer chips by 2030. Until then, it will look to its more tech-savvy autocratic partner, China. Anticipating this, theEuropean Union and U.S.havewarned Chinese firmsthat they will be punished for violating their tech sanctions if they sell chips and other high-tech hardware to Russia.

Whether it be for this or for its own military aggression against, for instance, Taiwan, China could be the next target of semiconductor sanctions. But pulling the trigger on China would be an entirely different scenario.

China’s Vulnerability

Compared to Russia, China has a much more robust domestic semiconductor industry, led by Semiconductor Manufacturing International Corporation—or SMIC, China’s largest foundry and the fifth-largest globally—and Hua Hong, the country’s second-largest. The 28-nanometre nodes produced by these two companies remain several generations behind those of TSMC, but they are at least a decade ahead of where their Russian counterparts are. They have yet to break the criticalthreshold of 10 nanometers, which would allow them to supply chips for the leading smartphones and computers, but neither is standing still.

SMIC will spend about$5 billion in 2022building out new fabrication plants in Beijing, Shenzhen and Shanghai, while upgrading other facilities. Hua Hong, which saw its salesrocket up 70 percentin 2021 to $1.63 billion, is expanding capacity and doing a second listing on Shanghai’s stock market to raise more capital.

Last year,Alibaba revealed the Yitian 710, a 5-nanometer server chip, one of the country’s most advanced designs to date. This follows on the heels of an Alibaba-designed AI chip made for internet-enabled products. However, since SMIC or Hua Hong lack cutting-edge fabrication plants, Alibaba will have to outsource production to either TSMC or Samsung.

Alibaba’s predicament gets at the heart of China’s vulnerability to sanctions. Though its firms can design cutting-edge chips for a range of industrial capabilities, they still rely on outside firms to make them. If those firms refuse to ship the chips, China is stuck.

China’s issue is the inverse of Russia’s. Whereas Russia has a limited need for high-tech chips, China requires them, having invested heavily in building out a high-tech economy that promises to deliver relative prosperity to its people. If hit by sanctions, domestic production could fill the shortage for larger chips, but not for the most advanced ones.

Though China’s firms can design cutting-edge chips, they still rely on outside firms to make them. If those firms refuse to ship the chips, China is stuck.

Although China is more self-sufficient than Russia in terms of chipmaking, cutting off its supply of high-end chips would be more of a setback for Beijing’s grand economic strategy. China’s government is arguably the most techno-ambitious regime on Earth and is trying to surpass its East Asian neighbors by moving up the value chain. This means its economic structure, and even political legitimacy, could be more exposed to chip disruption than Russia’s.

As experts atTaiwan’s Industrial Technology Research Institute note,cutting China off from Taiwanese chips would dramatically hobble its AI and 6G ambitions, and would force Beijing to reorder its entire industrial strategy.

China already got a taste of chip sanctions in 2019 with Trump’s hit on Huawei, which triggered aprecipitous fallin its global smartphone sales and shrunk its telecom market share. This is a microcosm of what could be in store for the entire Chinese tech industry if the U.S. expanded this ban to all Chinese companies.

Split in Two

Putin and Xi have said they have a“limitless partnership”that extends to all possible domains of cooperation. As both superpowers face increasing pressure from Washington, they very well might seek to support one another’s technological ascent.

China sees Russia as a secure and reliable energy supplier it can use to hedge against democratic countries. Last month, for instance, Beijingmore than doubledits imports of heavily discounted Russian coking coal whileweaning itself offcoal from Australia. Meanwhile, for Russia, China is a potential provider for its high-tech critical technology needs.

In time, Russia and China could create what analysts from the Eurasia Group, a New York-based think tank, call “red supply chains,”existing independently of U.S.-centric “blue supply chains.”

The shift would mirror Moscow and Beijing’s joint push for de-dollarization, which has seen them increasingly conduct bilateral trade in renminbi or rubles. Starting in 2020, dollar-denoted trade between China and Russiafell below 50 percentfor the first time.

Though Russia and China have a long way to go to build such supply chains, the U.S. cannot afford to rest on its laurels. Aseconomic historian Chris Miller wrote in The New York Times, when it comes to semiconductor sanctions, “it is one thing to use power and another to accumulate it.”

The U.S. has so far been leveraging the economic power it accumulated during decades of innovation over the past century. But that cannot last forever. The United States is long overdue for an industrial overhaul, and Washington is keenly aware of that fact. That is why the Biden administration is now investing$50 billion through the CHIPS for America Actto boost research and reshore production to the continental United States: to maintain its lead. As these red and blue battle lines are drawn, a nano-sized arms race is revving up.

Winners and Losers

Sanctions are a double-edged sword. The governments that wield them need to maximize their impact on adversaries while minimizing the resulting costs to their home economy.

Since Russia exports so few electronics products, the West’s semiconductor sanctions have had a minimal impact on consumers outside of the country. Similar sanctions on China would see much larger reverberations, with impacts on a wide range of products, from Apple’s iPhones to Tesla’s electric cars, that are today manufactured in China with cutting-edge chips.This means semiconductor sanctions may push global electronics brands to relocate their production to other markets, destabilizing supply in the meantime and causing price volatility.

There are potential upsides, however. Sanctions on autocracies mean that chips originally meant for those states would beredirectedinto the international market, easing the pandemic-driven supply shortage that is still being felt everywhere.

For chipmakers themselves, it is a mixed picture. Smaller operations may buckle under the disruption, but industry leaders will have the wherewithal to adapt. For instance, in 2020, TSMC shrugged off the loss of one of its largest customers, Huawei, byraising revenue targets,knowing it had plenty of potential new clients waiting to place orders from its factories.

Going forward, geopolitical risk is sure to reshape the global market for semiconductors and the multivarious products that chips power. In this protracted economic competition, one should expect to see techno-nationalism among consumers rise and strategic coordination between governments and technology firms increase. The end game is unknowable, but from now on, one irony seems inevitable: The colossal superpower struggle for world domination will be increasingly played out on the microscopic imprints of razor-thin chips.

Liam Gibson is a Taipei-based freelance geopolitical analyst focusing on Indo-Pacific affairs. He also produces podcasts for think tanks and is the founder of Policy People, an online platform for think tank experts.

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Time of issue: 2021-04-27 16:30:07