The continued global chip shortage in recent months amid the COVID-19 pandemic has highlighted the role of semiconductors, their supply chain, production stages and business cycle in the global economy. With a market size of USD 452.2 billion in 2021 expected to expand to USD 803.1 bn in 2028, the semiconductor industry landscape is poised to register a compound annual growth rate (CAGR) of 8.6% annually for the next seven years as the digital economy has been accelerated and bolstered by the contactless economy during the pandemic. The quest for supremacy and leadership in chips is at the crux of geoeconomics in the age of connectivity (5G/6G), blockchains, IoT (internet of things), AI (artificial intelligence), and machine learning (ML). Seizing the policy momentum in the midst of a shortage of chips for autos, the Biden administration has retained the Trump administration’s Huawei ban, translating it into a risk-based review of insecurity in supply chains and asserting the need for the US to regain control of the semiconductor supply chain and production cycles as part of its infrastructure plan – be it system chips, memory chips, or the machinery, technologies and reagents needed for its fabrication. The recent US- South Korea Summit revealed Seoul’s commitment to funding the building of new chips and electric vehicles (EV) battery plants in the US Meanwhile, the US is attempting to sway its other high-tech producing allies in East Asia, namely Taiwan and Japan, to adhere to its geopolitical drive to shift global supply chains, limit China’s access, and retain supremacy in chips.
This article addresses the key sectors in the global economy wherein semiconductors are vital for further growth to envision the plausible impact of the reshuffled chip supply chain in the post-pandemic digital economy, in which the demand for semiconductors will rise exponentially, and to ascertain how European and East Asian players are responding to the ‘tech decoupling’ between the US and China and the evolving semiconductor supply chain.
The Key Sectors that will Accelerate the Post-Pandemic Digital Economy with Chips
Semiconductors have been vital to the advancement of the automobile industry as well as consumer electronics and telecommunications. In the pandemic-induced, data-driven digital economy, the widespread application of IoT and ML as well as AI have become paramount. As such, chips play a vital role in processing information at rapid speed and storing data. While it is acknowledged that the existing level of sophistication in the digital realm under the 4G long-term evolution (LTE) network - encompassing recommendation engines, business intelligence, and the “Uber-fication” of everything in the platform economy - has brought more convenience to modern livelihood, the pandemic is further intensifying digitalization. As the pandemic carries on and contactless interactions become more ubiquitous, more AI tools are being deployed, enabled by advanced semiconductors and 5G connectivity globally, from augmented reality (AR) and virtual reality (VR), 8K streaming, telemedicine, to autonomous driving and connected cars in smart cities. Under 5G, future mobile networks will enable holographic calls, avatar robotics applications, nanonetworks, flying networks, teleoperated driving (ToD), electronic health (e-Health), tactile internet and Internet of Skills (IoS), which will lead to significant network traffic increase. 6G, being developed for further convergence and inclusivity of users, would enable telepresence as a surrogate for physical travel, wearable displays, mobile robots, and drones, whereby smartphones would likely be replaced by extended reality (XR) through lightweight glasses.
The most crucial and fundamental component of the high-tech conflict is advanced semiconductors, particularly system chips on smartphones and computers. Such are Qualcomm’s application processor SnapDragon series, Samsung’s Exynos series, and Huawei’s Kirin series, which are required for the operating systems of computers and electronic devices. System-on-Chips (SoC) such as Apple’s Bionic M1 Chip — which takes a single platform and integrates the entire computer system on a single chip — perform better at AI and machine learning tasks. Memory chips such as dynamic random-access memory (DRAMs) or NAND Flash by Samsung and SK Hynix for short term storage, and long-term storage on hard drives, such as Samsung’s V-NAND solid state drives (SSD) are needed for storage of massive data for intensive workload upon processing and big data analysis. As such, advanced semiconductors are the centerpiece of the high-tech decoupling, because without chips there would be no connectivity or AI implementation to speak of. Advanced semiconductors are embedded in the telecommunication equipment for broadband connections of 5G and 6G for device-to-device communication. Various features of artificial intelligence, besides the robotics embodied in IoT (which can be realized in a 4G environment), such as autonomous driving and machine learning, are made possible through the sophistication of chips for processing and storing data and communication between devices by connectivity.
The adoption of new technologies that require advanced chips is likely to prolong the ongoing conflict between the US and China and spark a constant mode of competition. The cross-cutting technologies in chips deployed to energy and military sectors will prompt China to seek access at all costs to the advanced chips that it is not capable of producing. In the meantime, the US will continue to seek cooperation from its allies to consolidate chip production capacity within its soil.
High-Tech Players in the Game: South Korea, Taiwan, Japan, and China
With the Huawei ban still ongoing under the Biden administration, advanced chip supply to China has been cut, and other competing producers (Samsung and SK Hynix of South Korea, Taiwan’s TSMC, and Japan’s Toshiba) are participating in the ban, which effectively bars factories located in mainland China from supplying to Huawei. Samsung and SK Hynix have requested special permits to the US Department of Commerce, but they have not received any thus far: so, at the moment, South Korean chip factories in Wuxi (SK Hynix) and Xian (Samsung Electronics) are banned from supplying to Huawei.
Skepticism has been on the rise regarding the Biden administration’s commitment to keep China’s access to advanced chips in check when, in March 2021, the US Department of Commerce granted the Dutch company ASML, known for extreme ultraviolet (EUV), the sale of deep ultraviolet (DUV) 14 nm chip production machines (which is no longer considered state-of-the-art, as the current trend is on 5nm and 7nm) to China’s SMIC. ASML holds about 62% of market shares in lithography machines and EUV monopoly. If Biden loosens up on the ban, chip companies would return to supplying to China in a heartbeat. Huawei has procured chips leading up to the ban and managed to reserve supply remaining prior to the extension of the ban, but as the ban continues it is now having trouble developing its chips to the levels of sophistication by existing dominant players. If sophisticated chips are not delivered to China, it will result in a lag for China’s AI development in the coming years.
It is possible that China will seek the technology from other players via other means or economically coerce them by finding a weakness in the supply chain for raw materials as retaliation; after all, it holds control of the world’s biggest share of cobalt (53.3%) from the Democratic Republic of Congo (DRC) and half of the world’s biggest share of lithium (55.5%) from Chile, both crucial for battery production for electronic vehicles. The banning of chip supply has caused Huawei to decrease smartphone production levels at an unprecedented rate. Moreover, it is widely understood that China is pressured with the lack of supply, but also on financing the development of chips. Subsidies were poured into system and memory chip development, but the funding is reportedly drying out.
The EU’s Pursuit of Strategic Autonomy in Chips and Policy Space for Collaboration
As all eyes are set on the semiconductor sector, the European Union is seeking a chip alliance of its own to ensure strategic autonomy amid the unstable geopolitical climate, incorporating STMicroelectronics (French-Italian-Dutch), NXP (Dutch), Infineon (German) and ASML (Dutch) in the initiative, to either complement or serve as an alternative to a foreign-funded factory (foundry) for chip fabrication. There have been continuous calls to TSMC and Samsung for chip foundry construction within the European region, but TSMC has ruled out the possibility after committing to invest within Taiwan and the US (6 factories) for future facility construction. ASML has indicated its participation in the South Korean government-initiated K-Chip Belt Cluster announced in May 2021, with plans to build a plant in Hwasung, Gyeonggi Province. There is still policy space for cross-regional collaboration on chips to continue maximizing interests for chip sovereignty, while business strategies taken on by chip companies at this pivotal point in time will lead us to the next era in semiconductors.