The global semiconductor industry continues to be a flashpoint of geopolitical friction, with the United States and China locked in a struggle for technological dominance.
This escalating rivalry, dubbed the “Semiconductor Cold War” by some analysts, has witnessed restrictions on critical materials, export bans on key technologies, and the sidelining of major chipmakers from lucrative markets. The escalating tensions come amidst a global chip shortage that has disrupted numerous industries, highlighting the strategic importance of domestic semiconductor production.
In a move aimed at strengthening its domestic chipmaking capabilities, the US Department of Commerce announced on Monday a significant financial incentive for Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading contract chip manufacturer.
TSMC, the world’s leading contract chip manufacturer, will receive a combined $11.6 billion from the US government, according to Reuters. This includes a $6.6 billion subsidy for the construction of a new advanced chip fabrication facility in Phoenix, Arizona, along with “up to $5 billion in the form of low-interest government loans.” The announcement coincides with the implementation of the CHIPS Act, a US legislative initiative designed to incentivize domestic semiconductor research and production.
The US-China rivalry in the semiconductor space has intensified in recent years. China has restricted exports of critical materials needed for chip production, while the US has implemented measures blocking chip sales to certain Chinese companies. Further escalating tensions, China recently banned the use of processors from major US manufacturers like AMD and Intel, as well as Microsoft’s Windows operating system, within its government institutions. These actions come on top of previous bans on Chinese telecom giants Huawei and ZTE due to national security concerns.
Europe has also expressed anxieties regarding the escalating tensions. The European Commission has raised the possibility of challenging the US and China’s actions before the World Trade Organization (WTO). Additionally, the Netherlands, home to ASML, a leading manufacturer of chip-making equipment, has implemented export restrictions on semiconductors to specific countries, though China has not been explicitly named. These measures were reportedly prompted by the theft of “sensitive information” by an ASML employee in China in February 2023.
The US’s $11.6 billion commitment to TSMC represents a significant investment aimed at bolstering domestic chip production and reducing reliance on foreign manufacturers. However, analysts remain divided on whether this will be enough to counter China’s long-term ambitions in the semiconductor industry.
This is a positive step, but it’s a marathon, not a sprint. China is pouring significant resources into domestic chip production, and it will take more than one factory to achieve parity.
While the move is seen as a strategic win for the US in its rivalry with China, question remains whether it will be enough to attract a broader range of chipmakers to American shores.
TSMC’s decision to build a new fabrication facility in Arizona is undoubtedly a coup for the US. The company is the world leader in contract chip manufacturing, producing cutting-edge processors for major tech giants like Apple and Nvidia. Having TSMC on US soil will bolster domestic chip production capacity and reduce reliance on foreign suppliers, particularly China.
However, the hefty price tag attached to securing TSMC raises concerns about the long-term sustainability of such targeted incentives. “The US can’t afford to throw $11.6 billion at every major chipmaker. This approach might create an uneven playing field and distort the market.”
There are some logistical challenges associated with attracting a wider swathe of chipmakers too. Building new fabrication facilities, or “fabs,” is a complex and time-consuming process. The highly specialized workforce required to operate these facilities is another hurdle. The US currently faces a shortage of qualified engineers and technicians, potentially creating bottlenecks in ramping up domestic production.
In response to these concerns, the CHIPS Act also includes funding for workforce development programs aimed at bolstering the domestic semiconductor talent pool. Additionally, the legislation offers tax breaks and other incentives for companies that invest in chip research and development within the US.
The success of the CHIPS Act in achieving its broader goals will likely hinge on its ability to create a more holistic and sustainable ecosystem for domestic chip production. While the TSMC deal is a significant step, analysts warn against viewing it as a silver bullet. A multi-pronged approach that addresses workforce development, infrastructure investment, and ongoing research and development support will be crucial for the US to achieve long-term competitiveness in the global semiconductor market.
The geopolitical ramifications of the US-China chip rivalry extend beyond national borders. The current environment of restricted exports and export bans threatens to disrupt established global supply chains. The potential for a prolonged standoff could lead to higher chip prices for consumers worldwide.
The need for international cooperation to ensure the smooth flow of essential semiconductor components is becoming increasingly apparent. Industry leaders are urging both the US and China to engage in dialogue and explore opportunities for collaboration to prevent the current rivalry from escalating into a full-blown trade war.
