1. Why compete for chips?
Chipmaking has become an increasingly volatile business. New factories cost more than $20 billion, take years to build, and run at full speed 24 hours a day to be profitable. The scale required has reduced the number of companies with leading technologies to just three — Taiwan Semiconductor Manufacturing Company. Taiwan Semiconductor Manufacturing Company (TSMC), South Korea’s Samsung Electronics Company. and Intel Corporation. America’s. Chipmakers have been under increasing scrutiny over their sales to China, the largest chip market. National security concerns, changes to global supply chains and pandemic-era shortages have led governments in the United States and Europe, China and Japan to subsidize investment in new production lines costing tens of billions of dollars. More recently, an economic slowdown has dampened global demand, leading to a glut of unwanted chips.
2. Why is the chip so important?
They are needed to process and make sense of the vast amounts of data that has become the lifeblood of an economy competing with oil. Chips are made of materials deposited on silicon disks that perform a variety of functions. Memory chips that store data are relatively simple and traded like commodities. The logic chips that run programs and act as the brains of devices are more complex and expensive. Semiconductors are becoming more ubiquitous as the technology that runs the devices — from rockets to refrigerators — becomes smarter and more connected. This explosive growth has some analysts predicting that the industry will double in value within this decade. Chip research and development spending is dominated by American companies, accounting for more than half of the total.
3. How did we go from a chip shortage to a surplus?
Pandemic lockdowns and supply chain disruptions have made many types of chips scarce for about two years. The cycle has reversed as demand for cellphones and PCs cooled in the wake of the pandemic. As consumers tighten their purse strings and PC and smartphone makers cut chip orders, there is a glut in areas such as industrial machinery and cloud computing. Chipmakers are coping by reining in their plans for new capacity, although the government is willing to cover some of the costs.
4. How about geo-competition?
• In October, the United States imposed stricter export controls on certain chips and chip-making equipment to prevent China from developing capabilities that could become military threats, such as supercomputers and artificial intelligence.
• The success of Washington’s policy of containing China depends in part on getting allies to impose similar restrictions on their home-grown companies. The effort appears to be paying off in early 2023, when Japan and the Netherlands agreed to join the US in restricting China’s access to its advanced semiconductor machinery.
• Chinese chipmakers still rely on US technology, and their access is shrinking. China’s huge spending spree has failed to create enough domestic supplies of key components.
• US politicians have decided they need to do more than stop China. The Chips and Science Act signed into law in August. On the 9th, about $50 billion in federal funding will be provided to support semiconductor production in the United States and develop the skilled workforce the industry needs. All three major manufacturers have announced plans to build new factories in the United States.
• Europe joins the race to reduce the concentration of production in East Asia. EU countries agreed in November to a 43 billion euro ($46.6 billion) plan to start semiconductor production in the region. The goal is to double EU production to reach 20 percent of the global market by 2030.
5. How does Taiwan fit into all this?
The island’s democracy became a dominant player in outsourced chip manufacturing, in part because of a government decision in the 1970s to boost the electronics industry. TSMC almost single-handedly created the foundry chip business, which has gained popularity as the cost of new factories has soared. Big customers like Apple. Giving TSMC the vast resources to build industry-leading expertise, the world now relies on it. The company surpasses Intel in terms of revenue in 2022. Matching its size and skills will take years and be costly. Politics has made the race more than money, though the U.S. has said it will continue efforts to limit China’s access to U.S.-designed chips produced by Taiwanese foundries. China has long claimed the island, just 100 miles off the coast, as its own territory and has threatened to invade to prevent its formal independence.
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