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The political significance of the microchip industry

Supply chain problems and rivalry between the US and China are straining the global chip industry. Some think the quest for chip domination between Washington and Beijing could lead to conflict in the South China Sea.

| 6 min read

The introduction of next-generation 5G internet services will result in chips with everything. The Internet of Things (IoT) will result in microchips being embedded in everyday objects to act as sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the world wide web.

The US still leads the world in microchip design and Intel has 80% of the market for computer processors, but the manufacturing of semiconductors has largely been outsourced to Asia. China and Japan manufacture some chips, but the industry is dominated by South Korea’s Samsung and Taiwan Semiconductor Manufacturing Co (TSMC). Most of the roughly 1.4 billion smartphone processors shipped each year are made by TSMC. Samsung dominates in memory chips.

Semiconductor independence

The strategic importance of this industry and supply chain issues particularly in the auto industry mean politicians have acted and the industry is changing significantly.

China has called chip independence a national priority in its latest five-year plan, unveiled in March 2021. Beijing wants to build its own technology giants that can compete with Samsung and TSMC. It has given this the same priority as it did to building its atomic capability.

Joe Biden’s policies differ completely in most areas from his predecessor Donald Trump, but on China and technology, their policies are essentially the same. President Trump blacklisted Semiconductor Manufacturing International Corp (SMIC) along with more than 60 of its peers deemed a threat to national security, depriving them of the American components, software and chemicals needed to manufacture their products.

This year, President Biden proposed $50bn of government investment in semiconductor manufacturing and research, as he vowed to build a secure American supply chain by reviving domestic manufacturing. The administration has also increased sanctions on Chinese technology companies and suppliers.

In April, Intel chief executive Pat Gelsinger said that the White House and Congress were working “aggressively” to support the semiconductor industry with more domestic manufacturing, research and development as well as efforts to build the workforce.

Major manufacturing challenge

As part of the US drive to boost chip manufacturing, TSMC secured incentives from Donald Trump to begin building a $12bn Arizona plant this year. “TSMC is confident that our 5 nanometre advanced fab plan in Phoenix Arizona – one of the largest foreign direct investments in US history – will be successful in partnership with the US government,” the company said after the investment was announced. This week, reports suggested that TSMC was planning to build several more chipmaking factories in Arizona beyond the one currently planned.

This is a sensible way forward as it takes many years and billions of dollars to build semiconductor fabrication facilities, which are highly complex operations that take specific skill sets to construct and operate. It needs massive factories, dust-free rooms, multi-million-dollar machines, molten tin, lasers – and lots and lots of water in the cooling process. Even if you successfully manage to build a plant, if your product can’t keep up with the competition it wouldn’t be worth the investment in the first place. Setting up a new chip manufacturing plant from scratch would be an extremely risky strategy.

Taiwan at the centre of the storm

The US-Taiwan relationship is, therefore, key to the raging technological competition with China – and is creating geopolitical ripples in the South China Sea.

Since Premier Xi Jinping secured his position for life, he has been taking aggressive nationalism steps. Beijing has increased its power in Hong Kong threatening its long-term status as a global financial centre and taking a more aggressive posture towards Taiwan. The Chinese government sees Taiwan as a breakaway province that will, eventually, be part of the country again. Many Taiwanese disagree and see themselves as a separate nation – whether independence is ever “officially” declared or not.

Taiwan is not only essential for China’s ambitions to be a technological leader but is totemically important for the Communist Party in Beijing. In the first few days of Mr Biden's presidency, Taiwan reported a "large incursion" by Chinese warplanes. On 12 April, the Taiwanese government said China flew the largest number of military jets into its air defence zone in more than a year.

This has led to increased US naval activity in the South China Sea, indicating the US’s commitment to safeguarding the independence of Taiwan. US Admiral John Aquilino, head of the Pentagon's Indo-Pacific Command, warned a few weeks ago that a Chinese invasion of Taiwan "is much closer to us than most think".

This may be overstating the case. A war between the US and China over Taiwan appears to be unlikely because there is too much at stake. It is more likely to be political posturing. However, the semiconductor industry underscores the importance of Taiwan to both Beijing and Washington in their attempts to outdo each other with their technological achievements.

Auto industry suffers from supply crunch

There is currently a major shortage of chips used in the auto industry. After a poor start to 2020 for new car sales, manufacturers cut their orders of computer chips. But the market proved quite resilient and, because of the limited pool of companies capable of manufacturing the silicon needed for semiconductors demand is high, and supply is tight. Automakers that cancelled orders have gone to the back of the queue.

With demand for chips set to rise spectacularly due to the development of the IoT, such shortages are possible in the future. Neither Washington nor Beijing wants to see an industry that is a strategic priority for the future be dominated by the other side. This implies tensions in the South China Sea have only just begun.

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The political significance of the microchip industry

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