Semiconductors are the “brains of modern electronics”. They are crucial to a variety of applications, from vehicles, to electronic devices, to infrastructure and play a vital role in the digitisation of economy and society. However, it is an increasingly politicised area of global trade and has become a focus for concerns about security and economic sovereignty amid increasing geopolitical tensions.
Complex Value Chains
Semiconductor manufacturing operations work within globalised and complex value chains focused around regional clusters. A characteristic of the semiconductor industry is that the manufacture of advanced chips is also a high value part of the chain. As US companies have tended to move away from manufacturing operations to focus on (even higher value add) R&D and design,Asia has become the global semiconductor manufacturing centre of the world with advanced foundries and leading companies. Manufacturing capabilities of semiconductors are concentrated around clusters in Taiwan, South Korea, Japan, and China. Furthermore, manufacturing capabilities for the most advanced semiconductors are concentrated in a small number of companies and geographies. Only Intel, Samsung and Taiwan Semiconductor Manufacturing Company (TSMC) are capable of producing the most advanced semiconductors, with Intel recently encountering production issues.
Politics and the Semiconductor Industry
The concentration of manufacturing capabilities has created tensions and rivalries. As semiconductors are crucial to delivering the digital economies that governments and companies envisage, this concentration of capabilities in a few players and places has led to a sense of vulnerability within governments. Supply shortages can have knock on effects for a wide variety of industries, as the halting of car production by Volkswagen in Germany shows. Furthermore, the semiconductor industry has become entangled in the wider issue of technological competition between the US and China. The US has sought to limit sales of semiconductors and semiconductor technology with the intellectual property (IP) of US firms to Huawei by placing Huawei on the Department of Commerce’s entity list. This was intended to limit the Chinese firm’s access to advanced semiconductor technology and thereby limit its operations. This also posed problems for firms, such as TSMC, which are involved in the supply of semiconductors to Huawei and use US IP for production.
On the one hand the semiconductor industry is a driver of increased integration across Asia. This happens through the interconnectedness of the semiconductor manufacturing value chain itself, and through the connectivity brought about from the myriad applications of semiconductors. For example, leading manufacturing firms Samsung and TSMC have established foundries within China that work within locally and regionally integrated supply chains. On the other hand, it has become a sector that is emblematic of how the politicisation of technology may lead to fracturing.
There have been increasingly interventionist actions from political authorities which aim for greater production autonomy, as seen in moves by China, the US, and the EU. The US government has treated US reliance on foreign manufacturing hubs as a perceived security threat and sought to bring more manufacturing capabilities away from Asia and into the US. The EU has also indicated a desire to bolster EU capabilities in design and manufacture of semiconductors. Within Asia, the Chinese government’s ambitions for greater production autonomy can be seen with the state-led development of an advanced semiconductor industry. This is a key aspect of its Made in China 2025 strategy, which identifies semiconductors as a “core foundational component”. The Chinese government is aiming for qualified self-sufficiency in semiconductor manufacturing, with the hope of domestically producing 70% of domestic demand by 2025, though this target is unlikely to be met. Within a wider geo-economic picture, semiconductors are also an essential part of China’s Belt and Road Initiative, notably the Digital Silk Road as a strategy to develop digital and telecommunications infrastructure, globally.
Logics of Economics and Politics
Yet against this backdrop, the logics of economics have not gone away. Semiconductor manufacturing is a capital-intensive sector with enormous outlays of resources required to establish capabilities and maintain a competitive edge; R&D spending by firms in the sector is amongst the highest of any industry. Economic imperatives may compel firms within the value chain towards greater collaboration to share the cost burden. Furthermore, as semiconductor design and manufacturing become more advanced and specialised, there will likely be greater specialisation by firms within the value chain. This may further encourage interfirm cooperation and limit the effectiveness of political interventions to control cross border activity.
However, the logics of politics are on the ascendency. Initiatives to pursue production autonomy indicate a motivation that potentially leads to the splintering of value chains. China’s moves to develop production autonomy would likely impact on its links with other Asian countries, in terms of sharing IP and manufacturing capacity. Likewise, with global US bans on selling advanced semiconductors and semiconductor technology that use US IP to China, companies are straddling the US’s and China’s increasingly separate value chains. Geopolitics will continue to be a significant factor in shaping the industry and if governments continue to pursue policies of greater national-level self-sufficiency, this will likely hinder integration across Asia.
 Intel is one of the few US firms that designs and manufactures advanced semiconductor chips
 TSMC estimated its market share of manufacturing to be over 50% in 2019
 U.S. Department of Commerce, Department of Commerce Announces the Addition of Huawei Technologies Co. Ltd. to the Entity List (19 May 2019); U.S. Department of Commerce, Commerce Addresses Huawei’s Efforts to Undermine Entity List, Restricts Products Designed and Produced with U.S. Technologies (15 May 2020).
 EU capacity for production is currently 10% of global capacity and no European company currently manufactures the most advanced semiconductors