Chips now the front line of the East-West tech battle

The US is close to approving $52bn of funding for the semiconductor industry as the tech rivalry with Beijing escalates. This is politics not business.

| 5 min read

Worries surrounding a recent shortage of microchips in the auto and other industries, the US Senate is now considering a proposal to give $52bn in new subsidies to American semiconductor manufacturers to spur domestic production.

The chip industry is now at the heart of US industrial policy. The United States Innovation and Competition Act of 2021, unveiled at the end of May, noted that the share of semiconductors and microelectronics manufactured in the US had fallen sharply in recent decades. While the US represented 37% of global semiconductor manufacturing capacity in 1990, today just 12% of semiconductors are manufactured in the country. It noted that many foreign competitors, including China, are investing heavily to dominate the industry. The Act will provide the federal investment to fully fund the implementation of the bipartisan semiconductor provisions passed in last year’s defense bill.

China's plans to spend the equivalent of about $150bn to bolster its own computer chip industry, as restrictions on Chinese components in western systems mount following the campaign against Huawei by the Trump administration.

Competitiveness threat

Senate majority leader Chuck Schumer, who introduced the legislation, said this week: “We must immediately address several dangerous weak spots in our country’s competitiveness that threaten America’s global technological leadership. We’re in an all-out race for the jobs of the future and to protect our country’s global technological edge and it’s time to put New York’s top-tier workforce and tech community on the frontlines.”

Mr Schumer also noted that, without a significant and sustained increase in investment in “research, education and training, technology transfer and entrepreneurship, manufacturing, and the broader US innovation ecosystem across the nation” that it was only a matter of time before America’s global competitors overtake the US in terms of technological primacy, threatening national security and economic prosperity.

As well as providing £52bn for the chip industry, the Act also:

  • Authorises $81bn for the National Science Foundation from fiscal 2022 to fiscal 2026
  • Provides $16.9bn for the Department of Energy over the same period for research and development and energy-related supply chains in key technology areas.
  • Authorises $10 billion to NASA’s human landing systems program

The largest part of the 1,400-page plan is a proposal previously known as the “Endless Frontier Act” which was rebranded into the Innovation and Competition Act of 2021.

Pat Gelsinger, Intel’s chief executive, believes that it could take several years before the current global shortage of semiconductors is resolved.

The crunch is the result of several factors associated with the Covid-19 pandemic, beginning with the shuttering of production facilities due to health protocols, coupled with the sudden rise in demand for technology, including laptops and tablets as people around the world were forced to work and study remotely due to worldwide lockdowns.

Chip manufacturers profits soar

In January, global semiconductor industry sales reached $40bn, an increase of 13.2% compared to the same time in 2020. But although chip manufacturers assiduously continue to produce components, the demand for electronic devices that use semiconductors is reaching new heights and has already far outpaced the global supply of chips. The advent of the Internet of Things (IoT), where everyday devices are connected to the internet, is likely to boost demand further.

The shortage is proving difficult for the auto industry, which has had to reduce production because of the shortages. However, the world’s ten largest microchip-manufacturing companies saw their revenues surge to a record high in the first quarter of 2021. Most companies do not manufacture their own chips but outsource their manufacture to specialist foundries.

According to market research group TrendForce. Taiwan’s TSMC remains the largest chip foundry in the world. The combined quarterly total revenue of the chipmakers rose to a record $22.75bn, as prices rose in the current chip shortage.

While chip manufacturers make hay, bottlenecks are likely to continue for some time. The extra investment in manufacturing in the US will not reap dividends for many years – building foundries is extremely challenging and requires a specific skill set. The industry is also cash rich, so arguably does not need this level of funding. This is politics, not business. The tech rivalry with China is deepening under the Biden administration.

China split deepens

President Biden issued a new executive order on Thursday barring Americans from investing in Chinese companies that are linked to the country’s military or that sell surveillance technology used to repress dissent or religious minorities, both inside and outside China.

The new order expands on an earlier, Trump-era blacklist and brings to 59 the total number of Chinese firms banned from US investment. Mr Biden has termed the conflict with China as a struggle between “autocracy and democracy.” The semiconductor industry has become the front line of the tech battle between Washington and Beijing. The implications will distort the industry for many years but could boost innovation because of the competition it creates.

Garry White looks at the political implication of the semiconductor industry crunch here.

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Chips now the front line of the East-West tech battle

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