When the chips are down: The politics of the semiconductor


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Faseeha Hashmi


Semiconductors are the brains of all our everyday products. They are in almost every electronic item we use, supplying the world’s burgeoning hunger for computers, smartphones, appliances, factory machinery, medical equipment and cars. From cities that never sleep to remote rural villages, one technology is changing how we live and work. Yet they are in short supply.


Taiwan, a major global supplier of semiconductors, has seen a significant slow down in production due to COVID-19 lockdowns and the island’s worst drought on record. Currently, China and the United States are investing large amounts of into their semiconductor industries in order to fill the gap and catch up to the world’s major producers, Taiwan and South Korea.


Once considered a benign electronic commodity, semiconductors are now viewed as indispensable national security assets in the global race for technological supremacy. These supply chains are now causing a strain between China and the USA, as both states grapple to gain control of the semiconductor market. So what does this mean for major global fabrication and supply for electronic items, and could this race create greater political friction and trigger geopolitical tensions?


What are semiconductors?


Semiconductors, also known as microchips, are an essential component of most electronic devices. It is not an overstatement to say that semiconductors power the modern world. Life without the semiconductor is hard to imagine as they are used in virtually every product and power the very factories that make the electronic products we use. These miniature materials harness the highly conductive properties of silicon, controlling the use of electric or magnetic field currents within an electrical device. Semiconductors are built in layers on silicon wafers into integrated circuits. Silicon is a unique element and one of the most ubiquitous on the planet. It is found in minerals that make up 90% of the Earth’s crust. It is reported that silicon feeds a $500 billion microchip industry that in turn powers a global tech economy worth an estimated $3 trillion.


These tiny but strategically vital products have enabled enormous advances in communications, computing, healthcare, military systems, transportation, and clean energy. The pace of semiconductor innovation has been unprecedented, as early transistors could be seen with the naked eye. Now, supercomputers are powered by the most miniature version of microchips, hurtling us toward a technology revolution. One might wonder how something as small as five nanometers (the width of two strands of DNA) could be of consequence to the complex political relationships between the USA, China, South Korea and Taiwan. This is because the semiconductor industry is one of the most interlinked industries in human history, as microchips must make it around the globe several times before it ends up in the device in our hands.


Global production slowdown


Today, data and artificial intelligence are the equivalent of 'new oil', generating much of the same profits, as well as risks, as other crucial resources. As such, the global shortage of semiconductors is increasingly serious. According to Goldman Sachs, the reduction has already created a ripple effect impacting at least 169 different industries to varying degrees. The automotive industry has been hit particularly hard, exemplifying the scale and complexity of modern supply chains. Though a car is made of about 30,000 components, if even one of these components is not available at the time of assembly, the system grinds to a halt.


The semiconductor shortage is set to hamstring the production of electronic products well into 2022 and potentially beyond. Though it may be easy to blame the COVID-19 pandemic for this situation, the truth is that issues with the global semiconductor supply chain have been forecasted for some time. The impact has recently been felt by Apple, whose shares has taken a nosedive after announcing it would be slashing the production targets of iPhone 13. Nevertheless, the pandemic has placed significant strain on the technology sector as more of us are dependent on remote work for the foreseeable future.


The market entry barriers into semiconductor manufacturing are also astronomically high. It requires an approximate upfront investment of $10-12 billion and then at least 3 years of development to become production-ready. Unpredictable price pressures can also mean that there are a lot of risks to profitability. Consequently, the cost of production is transferred to customers. Due to such harsh economic constraints, only a handful of large global players have invested in and maintained semiconductor manufacturing capabilities.


A thirsty business


There are other considerations in the semiconductor manufacturing process which hamper production. Like many other commodities, semiconductor manufacturing is a resource-intensive product. In particular, water availability represents a considerable constraint on production. It is estimated that 11356 litres of water are used to produce just one mobile phone. Water is needed for mining the metal, making the glue and plastic for assembly packaging, and then diluting the wastewater produced throughout the process. However, this is not simply water as we know it. A great deal of this water is ultra-pure water that is thousands of times purer than ordinary drinking water. This water is so clean that it is regarded as an industrial solvent. The generated wastewater also contains heavy metals and toxic solvents taking a heavy toll on our environment and are major considerations in the obstruction to semiconductor production and manufacturing.


Politics of the chips


As a result of the world's increasing reliance on semiconductors, and the associated supply chain issues, semiconductors are now a focal point of geopolitical competition. Recognising the insufficient global supply of semiconductors, US President Joe Biden signed an executive order calling for a review of supply chains for critical products. The order highlighted the decades-long decline in US semiconductor manufacturing capabilities. It represents a significant step in determining the investments needed to improve the prospects for America’s semiconductor industry and reduce its reliance on states in the South China Sea. Biden also pledged $37 billion to cover the short-term costs of rebuilding and securing America’s supply of semiconductors. Similarly, China currently relies heavily on imports of semiconductors and lags behind American corporations; aiming to invigorate its own local production. One example of this is the Chinese company HiSilicon, which currently lacks the manufacturing experience to produce advanced semiconductors at scale. In fact, China spends more on importing semiconductors than oil. Hoping to change this, Beijing’s ‘Made in China 2025’ initiative outlined steps to develop its domestic semiconductor capability sufficient to meet 70 percent of its domestic production needs.


The “Silicon Shield”


The lack of production capability in the US and China has meant that Taiwan has had an enduring pivotal role in the international semiconductor supply chain. The Taiwan Semiconductor Manufacturing Company (TSMC) produces about half the world’s annual supply of microchips, and its technical prowess is virtually unrivalled. The industry has greatly aided the island’s economy, entrenching joint American and Chinese interests in Taiwan’s ongoing stability and autonomy. However, while Beijing has vowed to work towards unifying the island with the Chinese mainland, the US maintains an intentionally vague policy towards whether it would go to war to protect Taiwan’s independence. There are still persisting fears that military aggression by China against Taiwan could cut off a large portion of America’s supply of these highly integrated products. Any damages to Taiwanese companies such as Acer, Quanta Computer and TSMC could be an indirect but potentially lethal blow to giant US firms such as IBM, Dell Computer, Hewlett-Packard and Cisco Systems that rely on Taiwan for essential componentry and manufacturing.


In 2000, American tech commentator Craig Addison wrote a piece in the International Herald Tribune arguing that a “Silicon Shield” protects Taiwan from China contending that Taiwan’s technological prowess currently acts as a shield in a trade conflict centred around high-tech, intellectual property rights and patents. With Taiwan as a key battleground for geopolitical strategists, the article notes that semiconductors could emerge as the front line of a “new Cold War”. This is best epitomised by TSMC’s recent contract with the US company Marvell, which is building a $12 billion factory in Arizona. This move is seen as a way to placate America’s administration and Pentagon officials who are growing uneasy over TSMC’s trade relationship with China. Moreover, India has raised similar concerns as part of the Quad alliance, as it too seeks to become more self-reliant in high-tech investments; reinforcing trade tensions around the globe.


South Korea is another example of an advanced semiconductor manufacturer pursuing a balancing act between the US and China. Nevertheless, the same pressure points also exist in South Korea as Samsung Electronics Co. is set to follow TSMC’s example, constructing a $10 billion facility in Austin, Texas. Given that both Taiwan and South Korea have developed semiconductor industries that far exceed American production, and that as much as 70% of the world’s semiconductors are manufactured by TSMC and Samsung, the actions of both Taiwan and South Korea will continue to be tightly scrutinised by both China and the US.


Final remarks


It seems rather difficult to fathom a world without hyperconnectivity, and semiconductors have facilitated the expansion of globalisation in profound ways. Ensuring strong supply chains remain unimpeded is in every state’s interest, as healthy market competition is beneficial for all. Nonetheless, it is increasingly important that multiple production channels exist around the world to fuel the semiconductor industry when production is down. Indeed, the toll on the environment is extensive and increasingly overlooked. The CSIRO regards the necessity for a 'circular economy', whereby materials such as plastic can be redesigned, reused and recycled for the enhancement of industries, jobs, reducing emissions and increasing efficient use of precious resources. Should not semiconductors also be considered a similar light, as it too is also readily available? Given the intense water usage of semiconductor producers, states should work to ensure industries remain economically and environmentally viable both now and into the future. More investment is necessary beyond developing multiple avenues of production, and should be directed towards research and development of sustainable semiconductor production. This lateral solution would aid global considerations as the world gears up for the Climate summit in Glasgow by acknowledging our finite resources. Moreover, the advancement of this modern era in technological development cannot come at the cost of our planet.


Although it may appear that political tensions are simmering between China and the US as both parties jostle for access to this prized commodity, it is imperative to recognise how the semiconductor has interwoven economies across the world. Neither party wants to limit market access, as the repercussions may come back to bite them by causing disruptions to global trade. A prime example of this was the Ever Given vessel that blocked the Suez Canal in August, showcasing how vulnerable the global supply chain truly is at this current juncture and exemplifying how the preciousness of any potential incident in the South China Sea could have devastating consequences for global trade. Something as significant as a semiconductor has a crucial role in creating harmony and cooperation between national states with diverging political interests. Indeed, a thriving global marketplace that allows for robust technological development and competition is in the interest of all states.