A semiconductor is a material placed between a conductor and an insulator on which integrated circuits — composed of transistors — are installed, enabling an electronic device's operation and memory capacity. The related economic sector is worth $440 billion in annual turnover and is growing steadily (+7.7% expected in 2021). Indeed, semiconductors are a crucial component for smartphones and computers — amounting to three-fifths of global chip purchases — and for the automotive industry — accounting for 10% of the market.
Increasingly advanced processors are also fueling the development of new technological paradigms such as 5G and artificial intelligence. They are also a vital technology in the military sector as they help shape the trajectories of missiles and combat drones. However, the unprecedented swings in demand for these components recorded during the pandemic have caused disruptions in their supply chain. Due to this shortage of chips available on the market, entire sectors have been forced to review and temporarily suspend their production plans, especially the automotive industry. Global vehicle production is expected to fall by around 2% (1.5 million units) in 2021.
Inevitably, concerns around the length of these sensitive technologies’ value chains, the urgency to encourage the reshoring of manufacturing companies, and the need to reduce dependence on foreign suppliers have become central to political agendas and industrial plans. It is no coincidence that the American Jobs Plan, the European Digital Compass 2030, and China's 14th five-year plan all contain specific measures for the semiconductor sector, which has become a stage for genuine geopolitical competition.
The Semiconductor Market and Taiwan’s Central Role
The semiconductor supply chain consists of three main macro-phases: research and design, foundry, assembly testing, and packaging. The first phase is marked by US leadership, which holds 90% of the market for EDA tools, software for automating the electronic design of microchip layouts. Consequently, about half of global semiconductor sales are controlled by American firms, compared to 10% for the EU and 5% for China. Eight of the 15 largest semiconductor companies by annual sales globally are in the US, with Intel leading the way.
The picture is radically different for the foundry business, dominated by Taiwan and South Korea, with 23% and 26% of the industry's production capacity, respectively. Overall, around 80% of global chip production (amounting to $100 billion market value) is concentrated in East Asia. China accounts for 12% within this share, up to ten percentage points over the last 20 years. According to current growth forecasts, however, this percentage could rise up to 28% by 2030. At the same time, the US and Europe have seen their share of global semiconductor production capacity plummet over the last three decades, dropping from almost 40% to around 12% and 10%.
These figures highlight the progressive Eastwards shift of engineering capacity and incentives, which are necessary for increasingly advanced miniaturisation processes. The critical feature defining the technological advancement of microchips is, in fact, the space between two transistors, measured in nanometres (nm), millionths of a millimetre. The shorter the distance, the greater the number of transistors installed, hence the microprocessor's power and efficiency. Today, the technological frontier is the size between 10 and 5 nanometres. Taiwan Semiconductor Manufacturing Company (TSMC) accounts for a 90% market share of this technology. This technical leadership translates into a broad spectrum of customers for the supply of chips: from iPhones, Sony game consoles, and Google's cloud centres to car manufacturers such as Ford or Honda and F-35 fighter jets. The company has also invested over $20 billion to build a new factory in southern Taiwan, capable of developing 3nm and 2nm technologies, scheduled for 2022 and 2024.
The American Jobs Plan
The ten-year cost of owning a new factory located in the US is about 30% higher than in Taiwan and South Korea, and 50% higher than in China. Nearly half of this differential is related to the generous incentives Asian governments offer to attract and develop semiconductor companies within their borders. It is unsurprising, then, that to stop the progressive outsourcing of chip production for sensitive technologies President Biden has put on the table 50 billion dollar over five years for the US semiconductor industry in the form of additional subsidies and R&D initiatives through the American Jobs Plan and the CHIPS for American Act. On top of this, Biden also pledged an additional $40 billion to upgrade research capacity in laboratories across the nation and establish a National Semiconductor Technology Centre responsible for the sector's supply chain security.
Overall, according to the Boston Consulting Group, Biden’s plan would effectively reverse American semiconductor manufacturing’s decline of the last 30 years, allowing for the construction of 19 factories over the next ten years, thus bringing the US share of global production within the sector back up to 24%. Intel has already announced some $20 billion in investments to build two new semiconductor factories in Arizona, which are expected to begin production in 2024. Arizona is also scheduled to host the new Samsung Electronics' $17 billion plant and the $12 billion plant that TSMC has committed to build by 2023 under political pressure from the Trump administration.
The European Digital Compass 2030
There is a clear difference between European companies’ share of capital expenditure in the sector, 4%, and their competitors’ in Asia-Pacific, 63%. European action has therefore focused on pooling funds and capacities from different member states to close this competitive gap. In December 2020, 18 EU countries signed a joint declaration for 'A European Initiative on Processors and semiconductor technologies'. This declaration announced an investment in the sector worth around $60 billion from the EU budget, national recovery and resilience plans, and the private sector. That is an ambitious figure considering the total of all European venture capital investments in 2020 amounted to around $41 billion. The initiative will be based on the new Important Projects of Common European Interest (IPCEI) on microelectronics, which aims to expand the existing one, focused on completing projects supporting R&D and innovation in energy-efficient chips by 2024.
These objectives are also integral to the “Digital Compass 2030”, which aims to increase semiconductor production in Europe from the current 10% of world production value to 20%, thus becoming a global reference point in developing the next generation of 2nm, which would represent around 20 nanometres less than the current European production specialisation.
China's 14th Five-Year Plan
US controls and bans on national and foreign technology transfers to Chinese end-users have slowed the rise of China's semiconductor industry. For example, Huawei has been forced to sell its “Honor” smartphone brand to avoid bankruptcy. As a result, industrial policies have become more urgent for Beijing in order to develop China’s currently absent capacity to produce 7nm (or smaller) chips. China's top chipmaker, Semiconductor Manufacturing International Corporation (SMIC), makes processors with 14nm transistors. The result is a strong dependence on foreign markets, with chip imports exceeding $300 billion over the past three years, more than in any other country. Meanwhile, only 27% of chips sold in the country are produced domestically by Chinese companies, which is still well below the 70% target for 2025 set by the previous 'Made in China 2025' industrial plan.
China’s 14th five-year plan, therefore, proposes to internally strengthen the semiconductor industry. This objective is to be achieved through the continuation of generous subsidies, including over $100 billion since 2011 for the construction of around 70 factories, the allocation of $62 billion to this sector by the China Development Bank, and an increase in R&D spending from the current $400 billion to $650 billion. At the same time, Beijing aims to play a pivotal role in setting global standards for the next generation of critical technologies, including semiconductors, by further increasing Chinese technical committees' presence in the International Organisation for Standardisation - ISO (+75% between 2011 and 2019).
According to the plans set out by the US, Europe, and China, leadership in the semiconductor sector will be achieved by reducing dependence on technologies produced in Taiwan. The development of new standards below 5nm represents an opportunity to catch up with the disadvantage accumulated over the last few decades. However, the immense investments and expertise demanded by technological innovation in the sector will require pushing economic incentives and policies to promote public-private partnerships to their limits. As such, the economic and industrial system with the greatest flexibility in this regard will gain a significant advantage in geopolitical competition over semiconductors.
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