Places such as the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have sought to build partnerships around the critical technology.

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Why chips are in the geopolitical spotlight

Semiconductors are a critical technology because they’re in so many of the products we use — from smartphones to cars to refrigerators. And it’s also vital for artificial intelligence applications and even weapons. The importance of the chips has come to the fore during an ongoing shortage of these components, sparked by the Covid pandemic, amid a surge in consumer electronics demand and supply chain disruptions. This alerted governments around the world to the need to secure chip supplies. The United States, under President Joe Biden, has pushed to renew production. But the semiconductor supply chain is complex—it includes areas ranging from design to packaging to manufacturing and the tools needed to do it. For example, ASML, based in the Netherlands, is the only company in the world that can build the highly complex machinery needed to make the most advanced chips. The United States, although strong in many market sectors, has lost its dominance in manufacturing. For the past 15 years or so, Taiwan’s TSMC and South Korea’s Samsung have dominated the manufacture of the world’s most advanced semiconductors. Intel, the largest chip maker in the United States, lagged far behind. Taiwan and South Korea account for about 80% of the global foundry market. Foundries are facilities that make chips designed by other companies.

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The concentration of critical tools and production in a small number of companies and geographies has put governments around the world on edge, as well as pushing semiconductors into the realm of geopolitics. “What’s happened is there are a lot of companies around the world that are doing a little bit of this, which means there’s a geopolitical angle to it, right? What if one company doesn’t supply the things you need? What if , you know, One of the countries is putting the things about chip spying? So those things make it a geopolitical tool,” Kotasthane said. Concentrating power in the hands of a few economies and companies presents a business continuity risk, especially in places of contention like Taiwan, Kotasthane said. Beijing considers Taiwan a renegade province and has promised a “reunification” of the island with mainland China. “The other geopolitical significance is just related to Taiwan’s central role in the semiconductor supply chain. And because China-Taiwan tensions have increased, there’s a fear that, you know, since a lot of manufacturing is happening in Taiwan, what if China was it to understand or even just that there are tensions between the two countries?” Kotastane said.

Alliances are being built to exclude China

Due to the complexity of the chip supply chain, no country can do it alone. Over the past two years, countries have increasingly pursued chip partnerships. On a trip to South Korea in May, Biden visited a Samsung semiconductor factory. At the same time, US Commerce Secretary Gina Raimondo met with her then Japanese counterpart, Koichi Hayuda, in Tokyo and they discussed “cooperation in areas such as semiconductors and export controls”. Last month, Taiwan’s President Tsai Ing-wen told visiting US Arizona Gov. Doug Ducey that she looked forward to producing “democracy chips” with America. Taiwan is home to the world’s most advanced chip maker TSMC. And semiconductors are a key part of cooperation between the United States, India, Japan and Australia, a group of democracies collectively known as the Quad. The US has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, details regarding this have not been finalised. There are a few reasons behind these partnerships. One is about bringing together countries, each with their own “comparative advantages” to “put together alliances that can develop secure chips,” Kotasthane said. “It doesn’t make sense to go it alone” because of the complexity of the supply chain and the strengths of different countries and companies, he added. US President Joe Biden met with South Korean President Yoon Suk-yeol in May 2022 during a visit to the Samsung Electronics Pyeongtaek campus. The US and South Korea, along with other countries, are seeking to form alliances around semiconductors with the aim of cutting off China. Kim Min-Hee | Getty Images The push for such partnerships has one thing in common – China is not involved. In fact, these alliances are designed to cut off China from the global supply chain. “In my view, I think that in the short term, China’s growth in this area will be severely limited [as a result of these alliances]” said Kotastane. China and the US view each other as technology rivals in areas ranging from semiconductors to artificial intelligence. As part of that battle, the US has sought to cut off China from critical semiconductors and the tools to make them through export restrictions. “The goal of this whole effort is to prevent China from developing advanced semiconductor manufacturing capacity domestically,” Paul Triolo, head of technology policy at consultancy Albright Stonebridge, told CNBC, referring to the goals of the various partnerships.

China’s “top” brands are being challenged

So where does this leave China? In recent years, China has poured a lot of money into its domestic semiconductor industry, aiming to boost self-sufficiency and reduce its dependence on foreign companies. As explained earlier, this would be incredibly difficult due to the complexity of the supply chain and the concentration of power in the hands of very few companies and countries. China is improving in areas such as chip design, but this is an area that relies heavily on foreign tooling and equipment. In the long run, I think they [China] they will be able to overcome some of the current challenges… however they will not be able to reach the peak that many other countries are. Pranay Kotasthane Takshashila Foundation Manufacturing is the “Achilles heel” for China, according to Kotasthane. China’s largest contract chip maker is called SMIC. But the company’s technology is still significantly behind the likes of TSMC and Samsung. “It requires a lot of international cooperation … which I think is now a big problem for China because of the way China has some kind of competitive neighbors,” Kotasthane said. “What China could do three, four years earlier in terms of international cooperation is just not going to be possible.” That leaves China’s ability to reach the cutting edge of chipmaking in doubt, especially as the U.S. and other major semiconductor powers form alliances, Kotasthane said. “In the long run, I think they do [China] they will be able to overcome some of the current challenges… however they will not be able to reach the cutting edge that many other countries are,” Kotasthane said.

Tension in alliances

However, there are some cracks starting to appear between some of the partners, notably South Korea and the United States. In an interview with the Financial Times, Ahn Duk-geun, South Korea’s trade minister, said there were disagreements between Seoul and Washington over the latter’s continued restrictions on exports of semiconductor tools to China. “Our semiconductor industry has a lot of concerns about what the US government is doing these days,” Ahn told the FT. China, the world’s largest chip importer, is a key market for chip companies worldwide, from US giants such as Qualcomm to South Korea’s Samsung. By mixing politics and business, the stage could be set for greater tension between nations in these high-tech alliances. “Not all US allies are willing to join these alliances or extend controls on technology destined for China, as they have large stakes in both manufacturing in China and selling in the Chinese market. Most do not want to come into conflict with Beijing on these issues,” Triolo said. “A major risk is that efforts to coordinate parts of the global semiconductor supply chain development undermine the market nature of the industry and cause significant collateral damage to innovation, raising costs and slowing the pace of new technology development.”