SUPERPOWERS led by the United States and European Union have funnelled nearly US$81 billion towards cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy.
It’s the first wave of close to US$380 billion earmarked by governments worldwide for companies such as Intel and Taiwan Semiconductor Manufacturing Company (TSMC) to boost production of more powerful microprocessors. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy.
“There is no doubt we have passed the Rubicon in terms of the tech competition with China, particularly on semiconductors,” said Jimmy Goodrich, senior China and strategic technology adviser to the Rand. “Both sides have basically made this one of their top strategic national objectives.”
What began as concern over China’s rapid advances in key electronics blossomed into a full-scale panic during the pandemic, as chip shortages highlighted the importance of these tiny devices to economic security. At stake now is everything from the revitalisation of US tech manufacturing to the assertion of an upper hand in artificial intelligence to the balance of peace in the Taiwan Strait.
Chips spending by the US and its allies marks a new challenge to Beijing’s decades of industrial policy – albeit one that will take years to bear fruit. The rush of funding has hardened battle lines in the US-China trade war, including in places such as Japan and the Middle East. It’s also giving a lifeline to Intel, the one-time global leader in chip manufacturing that in recent years has lost ground to rivals including Nvidia and TSMC.
Investment plans have reached a critical juncture in the US, where officials last month unveiled US$6.1 billion in grants for Micron Technology, the largest American maker of computer memory chips. That was the final multibillion US dollar grant for an advanced chipmaking facility in the US, capping a flurry of commitments nearing US$33 billion to companies including Intel, TSMC and Samsung Electronics.
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President Joe Biden opened that funding spigot with his signature 2022 Chips and Science Act, promising a total of US$39 billion in grants for chipmakers, sweetened by loans and guarantees worth an additional US$75 billion plus tax credits of up to 25 per cent. It’s the heart of his high-stakes bid to revive domestic semiconductor production – especially of leading-edge chips – and deliver a rush of new factory jobs to help convince voters he deserves reelection in November.
Those investments by the US seek to do more than just counter China, which still trails the rest of the world by several generations in advanced semiconductor technology. They also aim to close the gap on decades of state-directed incentives from Taiwan and South Korea that have made those places centres of the chip industry.
The spending spree likewise is fuelling rivalries among the US and its allies in Europe and Asia, all chasing a piece of the growing demand for devices powering advances in artificial intelligence (AI) and quantum computing.
“Technology is moving fast,” US Commerce Secretary Gina Raimondo, who’s leading the administration’s semiconductor charge, said at a conference in Washington last month. “Our enemies and competitors, they are not moving slowly. They are moving fast, so we have to move fast.”
Global investment plans
Across the Atlantic, the EU has forged its own US$46.3 billion plan to expand local manufacturing capacity. The European Commission estimates that public and private investments in the sector will total more than US$108 billion, mostly in support for large manufacturing sites.
Europe’s two largest projects are in Germany: an Intel fab planned in Magdeburg worth about US$36 billion and receiving nearly US$11 billion in subsidies, and a TSMC joint venture worth roughly US$11 billion, half of which will be covered by government funds. Even so, the European Commission has not yet given final approval for state aid to either, and experts caution that the bloc’s investments will not be enough to achieve its goal of making 20 per cent of the world’s semiconductors by 2030.
Other European countries have struggled to fund major projects or attract companies. Spain announced in 2022 that it would put nearly US$13 billion towards semiconductors but has only doled out small amounts to a handful of companies owing to the lack of a semiconductor ecosystem in the country.
Emerging economies are also looking to break into the chips game. India in February approved investments powered by a US$10 billion government fund, including a Tata Group bid to build the country’s first major chipmaking facility. In Saudi Arabia, the Public Investment Fund is eyeing an unspecified “sizeable investment” this year to kick off the kingdom’s foray into semiconductors as it seeks to diversify its fossil fuel-dependant economy.
In Japan, the trade ministry has secured about US$25.3 billion for its chips campaign since its inception in June 2021. Of that sum, US$16.7 billion has been allocated for projects including two TSMC foundries in southern Kumamoto and another foundry in northern Hokkaido, where Japan’s homegrown venture, Rapidus, aims to mass produce 2 nanometre logic chips in 2027. Prime Minister Fumio Kishida is targeting a total US$64.2 billion investment, including sums from the private sector, with a goal of tripling sales of domestically produced chips to about US$96.3 billion by 2030.
Seoul, by contrast, has avoided direct financing and subsidies such as those embraced by Washington and Tokyo, preferring to act as a guiding hand to its deep-pocketed chaebol. In semiconductors, the South Korean government plays a supporting role in an estimated US$246 billion of spending – part of a broader vision for homegrown technology from EVs to robotics. That effort stands to get a boost from a US$7.3 billion chips programme that the finance ministry said on Sunday (May 12) would be unveiled soon.
One potential danger overshadows the global surge of government support: creating a glut of chips.
“All of this investment into manufacturing driven by government investment and not primarily market-driven investment could eventually lead to a situation where we have more capacity than we need,” said Bernstein analyst Sara Russo. However, that risk is mitigated by the length of time it will take for the planned new capacity to come online.
China’s building boom
For now, companies such as Nvidia, Qualcomm and Broadcom lead the world in design of chips vital to key fields such as AI. But there’s debate on how wide that lead is. Some experts argue that China is years behind, while others insist that the world’s second-largest economy is on the cusp of catching up.
China now has more semiconductor plants under construction than anywhere else in the world, building production of less-glamorous legacy chips while amassing the expertise needed for a home-grown technological leap. It’s also working on domestic alternatives to Nvidia’s AI chips and other advanced silicon.
“You are seeing an alignment between the Chinese private sector and the Chinese state’s goals, in that the Chinese private sector has to go domestic to risk-mitigate,” said John Lee, director of East West Futures Consulting.
The amount of money Beijing is pouring into the sector likely dwarfs US spending. China was on track to spend more than US$142 billion, the Washington-based Semiconductor Industry Association (SIA) estimated last week. As part of that effort, the government has been raising another US$27 billion for what’s known as the Big Fund to oversee state investments in scores of companies, including local chipmaking champions Semiconductor Manufacturing International Corporation (SMIC) and Huawei Technologies.
Another sign of Beijing’s determination comes from corporate records in China. According to a Bloomberg News analysis of hundreds of companies in the official corporate database Tianyancha, there are more than 200 semiconductor firms in the country with registered capital of more than US$61 billion. Much of that comes from state-affiliated entities, and all of it should translate into real capital deployed.
Beijing and local governments do not disclose their overall semiconductor funding, although certain companies disclose some of the subsidies they receive. Estimates vary widely because money comes from state-backed national funds, local government financing and a wide array of incentives and tax breaks.
Export controls
China’s efforts have been slowed by a wall of restrictions imposed by the US to deny its geopolitical rival access to the latest semiconductors. The Biden administration is enlisting allies in Europe and Asia to adopt export controls on sophisticated equipment needed to make the most advanced chips.
“We cannot allow China to have access for their military advancement to our most sophisticated technology,” Raimondo said in Manila in February, when she announced that American chip companies would invest US$1 billion in the Philippines. “We will do whatever it takes to protect our people, including expanding our controls.”
Prior to the export crackdown, China was making progress, led by Huawei. The company’s abilities in designing some types of chips were beginning to rival those of the best American companies before it was blacklisted by the US in 2019, leaving its processor designers with a far-smaller business to finance their innovation efforts.
SMIC, China’s top chipmaker, joined Huawei on the US government’s so-called restricted entities list in 2020. Two years later, Washington hit Beijing with export controls designed to further block China’s access to the latest manufacturing technology. The Biden administration is now trying to close remaining loopholes, including on equipment repair, though some US allies including the Netherlands and Japan are baulking.
The US-led crackdown has provided “a huge incentive for Chinese firms to improve their capabilities, move up the value chain, collaborate amongst themselves, and galvanise more government support to firms like Huawei that are driving the industry forward”, said Paul Triolo, a former US government official who specialises in China and technology policy at Albright Stonebridge Group.
Huawei made a significant leap in August when it unveiled a new Mate 60 Pro smartphone featuring a 7-nanometre processor from SMIC – a feat that Biden administration officials had hoped to keep beyond China’s reach. The release came during Raimondo’s highly anticipated visit to China, irritating the secretary and quickly prompting an investigation by the Commerce Department.
US officials have since said that the chip lags behind foreign components in both performance and yield. It was manufactured using American and Dutch tools, Bloomberg has reported, underscoring China’s dependence on Western technology.
Even so, the Biden administration is still weighing its response: Officials have said that SMIC may have violated US law if it produced the chip for Huawei, and they are considering sanctioning a network of Chinese tech firms that they fear could also manufacture processors for the telecom giant.
Political stakes
Looming over the global chips push is the risk of a Chinese invasion of Taiwan that the Pentagon estimates Beijing would be ready to undertake as soon as 2027. The island – regarded by China as a renegade province – is home to industry leader TSMC and supplies 90 per cent of the world’s most advanced chips.
The threat of chips supply disruption is motivating Raimondo, a former Rhode Island governor and ex-venture capitalist who wants US factories to make 20 per cent of the world’s most advanced logic semiconductors by the end of the decade. The SIA says the US is on track to capture 28 per cent of that market by 2032. That’s up from zero per cent today – and would make the US the second-biggest producer, behind only Taiwan.
The race to construct those factories also carries the added stakes of Biden’s pursuit of a second term, putting his promise of a manufacturing revival at the heart of his reelection campaign against Donald Trump.
Projects in Arizona – a state seen as crucial for victory in November – have secured billions of US dollars in awards. Yet it will take until well after the US election for fabs planned there by Intel and TSMC to be built and start producing chips – testing voters’ patience to see the promised jobs.
So far, Trump has yet to spell out his plans for semiconductors – including the Chips Act funds that won’t begin flowing until sometime around Election Day after a long period of due diligence. While in office, Trump was responsible for winning TSMC’s commitment to build its first advanced fab in the US in 2020, and he imposed tech-related sanctions against China, including on Huawei. Trump is also threatening tariffs of up to 60 per cent on Chinese goods if he becomes president again. That risks triggering a much more forceful response from Beijing, Triolo said, from targeting American companies in China to restricting exports of materials critical to semiconductors and other strategic technologies.
“It doesn’t really matter who is president going forward,” Lee said. “The US-China tech war is going to get worse, not better.” BLOOMBERG
