Semiconductors, commonly known as chips, are crucial parts of our daily lives. In every electronic device we use, from smartphones to computers and automobiles to coffee machines, chips constitute one of the most critical components. Chips are packed with thousands or billions of transistors on a piece of small, coin-sized silicon or germanium. They function as the brains of electronic devices by storing, moving, and processing data.
With the onset of the Covid-19 pandemic, the surge in demand for electronic devices and the shock in the global supply of chips have resulted in a global chip shortage. Many industries, such as automotive, computer and smartphone, were negatively affected by the global chip shortage and had to cut down their production capacity. This recent development, along with the great rivalry on technological development between the United States and China, necessitates developing countries to have a long-term strategy to access chips for their domestic industries.
Global Chip Industry and the Impact of Covid-19 Pandemic
According to the State of the US Semiconductor Industry Report 2021, in 2020, the computer industry was leading the global demand for semiconductors with a 32.3% share, followed by the communications (31.2%), consumer (12%), industrial (12%), automotive (11.4%), and government (1%) sectors. During 2020, the annual growth of demand for chips was highest for the computer industry (21.2%), followed by the industrial sector (8.2%). Consumer, automotive and government sectors saw a decline in annual demand growth in 2020 (Table 1).
Table 1: Semiconductor demand in 2020 by end-use
|2020 Demand by End-Use|
|Annual Growth (%)||21.20||1.20||-3.00||8.20||-0.30||-11.80|
|Total Value (USD, billion)||142.20||137.60||53.00||52.90||50.10||4.60|
The United States is the leading country in terms of global semiconductor market share, with a 47% share. Following the United States are South Korea (20%), Japan (10%), Europe (10%), Taiwan (7%), and China (5%). While these figures underline the end value of semiconductors for the globally leading firms by their country-of-origin, numerous companies and countries take part in the complex semiconductor production process (Figure 1). Since different phases of semiconductor production take place in different countries and regions, value capture in different phases corresponds to different countries. For instance, the United States maintains market leadership in R&D-intensive activities such as electronic design automation (EDA), core intellectual property (IP), logic, DAO (discrete, analog, and other), memory, and manufacturing equipment. On the other hand, Asian countries are leading the global market share in more capital-intensive activities such as raw materials and manufacturing, wafer fabrication and assembly, test, and packaging. Since research and design activities have higher value added, global companies based in the United States have higher market share in the semiconductor industry. On the other hand, many Chinese companies take part in low value-added stages such as assembly and testing for American semiconductor companies. The dependence on Chinese companies for these stages is one of the critical factors behind the rivalry between the United States and China.
Figure 1: Semiconductor Value Chain Steps
Source: Semiconductors: U.S. Industry, Global Competition, and Federal Policy, p. 10.
Figure 2 illustrates the value-added in different stages of the chip value chain and the share of different regions.
Figure 2: Semiconductor Industry Value-Added by Activity and Region (2019)
With the onset of the Covid-19 pandemic, twin supply and demand shocks to the global economy has affected the semiconductor industry and resulted in a global shortage of chips, with spillover effects to other industries. According to the United States Department of Commerce, even before the Covid-19 pandemic, there were already challenges in obtaining inputs for production and components used in electronic assembly such as diodes, capacitors, and substrates. Moreover, the demand for chips was increasing even before the pandemic because of the global shift to more semiconductor-intensive products such as electric vehicles and 5G technology. With the impact of the Covid-19 pandemic, these challenges have been exacerbated and resulted in a global shortage.
The US Department of Commerce’s recent survey with more than 150 semiconductor value chain players indicate that the median demand for chips is 17% higher in 2021 compared to 2019; semiconductor buyer median inventory has fallen from 40 days in 2019 to less than five days in 2021, and the inventory levels are much lower in key industries; the major obstacle for chip producers is wafer production capacity.
On the supply side, Covid-19 related shutdowns and disruptions in the production process such as congestions in ports and cargo bottlenecks contributed to the shortage. In addition, some big technology companies increased stockpiling and advance ordering of chips in anticipation of shortages. Chinese companies joined the stockpiling of semiconductors before the Covid-19 pandemic in anticipation of sanctions, which prevented targeted Chinese firms to access semiconductors of American origin. This resulted in global chip shortages in automotive, computer, and other semiconductor-intensive industries and many companies had to reduce their production capacity due to lack of access to chips. The global chip shortage coupled with the reliance of American companies on Chinese dominance in assembly and testing of semiconductors and American sanctions against Chinese companies, have intensified the strategic technological rivalry between the United States and China in achieving self-sufficiency and reducing their dependence on each other in key technological developments.
The Great Strategic Rivalry: The United States vs China in Global Chip Industry
With China’s aim to increasingly shift production capacity to higher technology investments, self-sufficiency in key technological components became a key policy objective. For instance, in 2015, the Made in China 2025 industrial upgrading plan included the targets of attaining 40% self-sufficiency in total integrated circuit (IC) consumption by 2020 and 70% by 2025. China identified semiconductors as a priority area in 2015 and allocated USD 20 billion to develop the industry.
In 2017, Chinese authorities established a national “IC Industry Technical Innovation Strategic Alliance” to reach internationally leading levels in IC industry technology innovation capabilities in five to ten years. With the imposition of the economic sanctions against Chinese companies starting from 2018, Chinese authorities began providing targeted support to technology companies through tax relief, direct financing, subsidies, regulatory guidance and skills development.
A crucial dimension for semiconductor production competitiveness between the US and China is the manufacturing technology for logic. Broadly, semiconductors can be categorized in three categories, logic, memory, and discrete, analog, other (DAO). Logic provides the highest share of revenues for semiconductors with 42% revenue share. Logic can be considered as the fundamental building blocks of computing. Logic consists of microprocessor, microcontroller, and general purpose products, which are critical in computer and mobile phone technology. Logic is one of the fastest developing areas of semiconductor technology and represents an area of fierce competition between rivalling countries. For instance, there is currently no logic capacity below 10 nanometers in the USA. On the other hand, in Asia, 5 nanometer process technology has been achieved, and 3 nanometer technology is under development (Figure 3). These dynamics result in the US becoming more aggressive in ensuring self-sufficiency in chips and reducing their dependence on other countries, especially China.
Figure 3: Breakdown of Global Logic Process Technology by Region (2019, %)
According to reports, China aims to establish a special “cross-border semiconductor work committee” to facilitate collaboration between domestic firms and foreign chip producers to foster common development of software, material and manufacturing equipment. Despite the efforts of the Chinese government, China’s self-sufficiency rate for semiconductors in 2020 has stayed at 16%, while China’s own estimate of self-sufficiency is around 30%.
Implications for Developing Countries
The global outlook on the semiconductor industry underlines that the prominence of the industry will accelerate in the coming years, and developing countries need to have long-term, strategic objectives to be resilient to shocks and facilitate access to chips for their domestic industries. For instance, some developing countries such as Indonesia and Turkey have been negatively affected by the global chip shortage and the automotive production facilities in these countries had to cut their production capacity due to lack of access to chips. Another country, Malaysia, with its 13% global share in chip packaging and testing and 7% global share in semiconductor trade, aims to ease the chip shortage especially in automotive industry by increasing its production capacity. Since the semiconductor value chain is very complex, it is hard for one single country to carry out all the stages of production. However, increasing trade and investment relations with resource-rich countries and others with higher production capacity, new avenues of win-win cooperation can be developed.
The competition between the US and China and their race for more investment and production might bring opportunities to developing countries by facilitating access to high-quality and cheaper semiconductors. Moreover, developing countries can attract investment from these countries to be key players in a diverse and fragmented semiconductor value chain. Malaysian experience, as one of the few developing countries with significant presence in the semiconductor value chain, underscores the key strategies that can be implemented to be an active player in the industry. First of all, fostering foreign direct investment and establishing partnerships with key firms is key to acquiring technological capabilities in the chip industry. Secondly, developing countries can establish special economic zones to develop the semiconductor industry and supplement it with support in the form of tax relief, subsidies, access to finance opportunities, employment incentives, and export promotion policies. Thirdly, state-owned enterprises can form partnerships with private companies to foster the development of the industry and can facilitate initial investment and technological breakthroughs. Fourth, countries can implement incentives for research and development. Finally, the ecosystem of the semiconductor industry should be supported with complementary institutions, education policies and training of the skilled workforce, especially in the science and engineering fields. These policies and incentives require a long-term and strategic orientation on the part of the governments.
The world has witnessed three industrial revolutions, and we are on the verge of the Fourth Industrial Revolution. The semiconductor industry is one of the key areas where countries aim to be ahead of the competition and technological advancement. With the emergence and development of key technologies such as artificial intelligence, electric vehicles, 5G and supercomputing, the importance of chips will increase exponentially, and countries that stay ahead will be in a very advantageous position. Furthermore, the Covid-19 pandemic has underlined the importance of productive capacities to weather the negative impact of global shocks. Being a global player in the semiconductor industry requires a long-term and strategic planning to attract the necessary investments to develop the necessary skills, technologies, and business environment. The United States vs China rivalry can create new opportunities for developing countries to improve their productive capacities and build the necessary ecosystems to become key players in certain technological areas, such as semiconductors. Improving production, investment, and trade relations between developing countries can help them build their productive capacities and facilitate their access to key technological components.