The chip war between the US and China is changing tech supply chains
The author is the author of Chip War, a visiting fellow at the American Enterprise Institute, and a professor at the Fletcher School
When Taiwanese tycoon Terry Gou and former US President Donald Trump ceremonially lifted the shovel at the 2018 groundbreaking ceremony for a new electronics factory in Wisconsin, many tech analysts and executives saw a textbook example of why politicians shouldn’t interfere in supply chains. Wisconsin voters soon learned that Gou’s company, Foxconn, only invested because it was promised billions in subsidies and relaxed environmental regulations. When Foxconn’s factory plans were drastically scaled back a few years later, it seemed proof that political din couldn’t overwhelm market forces.
Five years later, however, heightened tensions between the US and China over technology — and semiconductors in particular — have slowly but significantly transformed electronics supply chains. Foxconn’s Wisconsin plant is much smaller than originally promised, but TSMC, Taiwan’s most valuable company and the world’s largest maker of processor chips, will soon open a new plant in Arizona. Previously, almost all of TSMC’s recent investments have been made in Taiwan or China. Now it is diversifying its manufacturing base, building a new chip fab in Japan and also exploring one in Singapore. TSMC’s change of course is fueled by subsidies from these governments as well as political pressure to reduce the concentration of chip manufacturing along the Taiwan Strait.
There is growing concern in both corporate boardrooms and defense ministries that mutually promised economic destruction might not keep the peace in the Taiwan Straits. Multinational companies have invested billions of dollars in both Taiwan and China, believing that war is simply too costly.
But just this year, Germany’s bet on the same thesis to secure its energy supply has gone horribly wrong. Xi Jinping seems more deterred by the cost of war than Vladimir Putin. However, as the economically disastrous Covid lockdowns have shown, China’s leaders are no longer so fixated on economic growth.
Even corporate leaders who see the risk of war as low cannot ignore more immediate policy changes prompted by the US-China chip war. The US continues to tighten its chip choke and introduces new restrictions limiting China’s access to chip-making software and equipment.
Some overseas chip companies with facilities in China are paying the price for not anticipating these new restrictions. SK Hynix, one of South Korea’s two major memory chip makers, is now blocked from upgrading critical lithography equipment at its plant in Wuxi, China, which will prevent it from producing next-generation chips there. Partly because of this, non-Chinese firms are changing their investment patterns.
Subsidies also change the structure of the industry. Attention has focused on recently passed US legislation to incentivize semiconductor manufacturing, prompting TSMC and South Korean company Samsung to build new facilities in Arizona and Texas, respectively. Europe, Japan and India are also introducing their own subsidies for semiconductors. With the shift in the location of semiconductor manufacturing, the production of materials and consumables for chip manufacturing will also change.
However, the largest semiconductor subsidy program is that of China, where the national, provincial and local governments continue to pour funds into the chip industry. A wave of new facilities for manufacturing low-end processor chips is about to come online, which will depress prices in this segment and trigger allegations of dumping and trade disputes.
China’s government subsidies to Yangtze Memory Technologies Corporation, a maker of NAND memory chips, appear to be bearing fruit immediately. Apple is considering using YMTC’s chips in new iPhones. In the past, this type of chip was bought by South Korean, Japanese or American companies.
China’s subsidies and America’s chip choke are also forcing downstream changes. Apple, whose finely tuned supply chains determine how the entire industry sources components, is increasing device assembly in Vietnam and India. The biggest signal is that Apple may use different components for phones destined for Chinese customers than for those sold abroad. Apple has told US lawmakers that it will only use YMTC’s memory chips in phones it sells within China. Operating separate “Chinese” and “non-Chinese” supply chains is the definition of decoupling.
https://www.ft.com/content/3bab2b03-0cd9-4e91-86ab-dcda499fb231 The chip war between the US and China is changing tech supply chains