The semiconductor industry began in 1947 at Bell Laboratories in the United States with the invention of the first transistor. Over the past 75 years, the US has transformed itself from a semiconductor superpower into a marginal player.
At present, only 12 percent of chips are made in the US. The primary consideration for enacting the CHIPS and Science Act of 2022 (the Act) is that the US has been too heavily dependent on the Taiwan-based TSMC Ltd. Its plants are mainly located in Taiwan, which is currently exposed to a number of geopolitical risks. As a result, the US wants to reduce such risks. Another consideration is the common perception among American politicians that there is a strategic need to crack down on China’s semiconductor supply chain.
To further tighten the noose on China’s semiconductor industry, the Biden administration is forming a “Chip 4” alliance to push the semiconductor industry of the rising dragon to the edge. The four intended members of the Chip 4 alliance are: the US, Japan, South Korea, and Taiwan. Initiated by the US, the Chip 4 alliance is seen by Beijing as a hostile move by Washington to exclude China from the global semiconductor supply chains. In the second part of our discussion, we will evaluate the strength and weakness of the Chip 4 alliance.
First of all, we will examine whether the strict conditions stipulated by the Act in relation to the $52 billion federal subsidies will adversely affect relevant companies’ normal investment in the semiconductor industry of China. One strict condition that companies must meet to receive the subsidies from the US government is that they must not expand their semiconductor manufacturing on the Chinese mainland for 10 years after getting a grant to build a US plant. Besides, the US government can amend these restrictions if necessary.
Aiming at enhancing American semiconductor supply chain resilience at the expense of China, the Act seems to be heading in the wrong direction. Nikkei Asia correspondents Cheng Ting-fang and Lauly Li have poured cold water on such attempts. They argue that these efforts touch only the visible end of the semiconductor supply chains. Behind chip production sits a complicated network of supplying equipment and other items encompassing hundreds of raw materials, chemicals, consumable parts, gases and metals without which the bogglingly precise process of chipmaking could not function (Cheng Ting-fang and Lauly Li, No Easy Tasks, in Nikkei Asia, Aug 1-7, 2022, pp 14-21).
It’s unrealistic that any country could reach an exceptionally high degree of self-reliance in terms of making everything about chips from the start to the end. To cite an example, China controls nearly 60 percent of the global production of fluorspar, which is an important mineral for making fluoropolymers. And fluoropolymers are key coating materials used in all kinds of valves, pumps, tubes, pipes and containers that are essential to chipmaking. Interdependence is indisputably the order of the day in chipmaking.
Another well-known example is the monopolistic control over extreme ultraviolet lithography by ASML Holding (the Netherlands). Lithography is a printing process that uses photographic techniques to transfer a pattern from a photomask to a coating of photosensitive material, called photoresist, on the wafer surface (Richard Yanda, et al, Demystifying Chipmaking (Oxford: Elsevier, 2005), p.79). ASML has maintained a very close working relationship with TSMC for a long period.
Moreover, the American attempts to onshore semiconductor manufacturing do not stand a reasonable chance of success because of the lack of talents in the US. Another difficulty is the need to foster a team spirit in newly built American plants. According to the founder of TSMC, Morris Chang, the high manufacturing costs in the US is also a great disadvantage. As Daniel Ives, a stock analyst, has pointed out, the cost dynamics, logistics and technology ecosystem have cemented the “chip food chain” in and around Asia.
With regard to subsidy restrictions imposed by the Act, Samsung Electronics and SK Hynix of South Korea may not like to tie themselves tightly with the American chariot. In order to protect their own interests, these South Korean companies may be forced to find some way around the strict letter of the restrictions. Constrained by the subsidy limitations, they would be barred from upgrading their Chinese manufacturing sites. As a consequence, South Korean capacity in China would quickly become obsolete, and these two companies would fail to meet the demands of their Chinese clients. Unlike their South Korean counterparts, TSMC may have no choice but to meet the unreasonable demands of the US, even though they are detrimental to the interests of TSMC and Taiwan.
For the above reasons, the Chip 4 alliance is far from united. TSMC, Samsung, SK Hynix and other semiconductor companies in Taiwan and South Korea would be adversely affected by joining the alliance. Both South Korea’s and Taiwan’s semiconductor companies have many clients on the Chinese mainland, and the alliance might force these companies to give them up. At the moment, China offers massive financial assistance to Samsung and SK Hynix on their chip plant operations in China. A sudden decoupling would hurt these two companies. As a leader in the production of wafers and photoresists, Japan may also suffer by denying Chinese semiconductor companies access to these products. On the positive side, the US and Japan have the strong scientific capability to do joint research on next-generation chips.
South Korean Foreign Minister Park Jin tried to ease China’s anxiety by defining the alliance as a “cooperative partnership” and not as a means to exclude other players. It remains to be seen whether South Korea will adopt a more-flexible attitude toward its commitment to the alliance. Meanwhile, China should try its best to climb up the technological ladder in chipmaking. The Chinese mainland deserves great credit for developing the expertise to make 7-nanometer microchips.
Junius Ho Kwan-yiu is a Legislative Council member and a solicitor.
Kacee Ting Wong is a barrister, part-time researcher of Shenzhen University Hong Kong and the Macao Basic Law Research Center, and co-founder of the Together We Can and Hong Kong Coalition.
The views do not necessarily reflect those of China Daily.