October 1, 2022


Leading chip-making countries, including the U.S., are forming alliances in part to secure their semiconductor supply chain and prevent China from reaching the top of the industry, analysts told CNBC.

Places including the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have sought to form partnerships around the critical technology.

“The immediate reason for all of this is definitely China,” Pranay Kotathane, chair of the High Tech Geopolitics Program at the Takshashila Institute, said of the alliances.

The tie-up underscores how important chips are to economies and national security, while underscoring countries’ desire to stop China’s advances in critical technology.

Kotathane made a guest appearance in the latest episode CNBC’s Beyond the Valley podcast published on Tuesday, which deals with the geopolitics behind semiconductors.

Why chips are in the geopolitical spotlight

Semiconductors are a critical technology because they go into many of the products we use – from smartphones to cars and refrigerators. They are also key to the application of artificial intelligence and even weapons.

The importance of chips was put in the spotlight during an the ongoing shortage of these components, caused by the Covid pandemic, amid rising consumer electronics demand and supply chain disruptions.

This alerted governments around the world to the need to secure chip stocks. The United States, under President Joe Biden, sought to redirect production.

But the semiconductor supply chain is complex—it involves areas ranging from design to packaging to manufacturing and the tools that go into it.

For example, ASML, based in the Netherlands, is the only company in the world capable of building the highly complex machines required to produce the most advanced chips.

The United States, although strong in many areas of the market, has lost its dominance in manufacturing. Over the past 15 years or so, Taiwan’s TSMC and South Korea’s Samsung have become dominant in the production of the world’s most advanced semiconductors. Intel, the largest chipmaker in the United States, is far behind.

Taiwan and South Korea account for about 80% of the world foundry market. Foundries are facilities that produce chips designed by other companies.

Read more about technology and cryptogram from CNBC Pro

The concentration of critical tools and manufacturing in a small number of companies and geographies has put governments around the world on edge, as well as pushed semiconductors into the realm of geopolitics.

“What’s happened is there’s a lot of companies around the world doing a little bit of it, so there’s a geopolitical angle to it, right? What if one company doesn’t supply the things you need? What if, you know, one of the countries on kind of puts the espionage stuff through the chips? So those things make it a geopolitical tool,” Kotathane said.

The concentration of power in the hands of a few economies and companies poses a risk to business continuity, especially in contested places like Taiwan, Kotathane said. Beijing considers Taiwan a rogue province and has vowed to “reunify” the island with the Chinese mainland.

“The other geopolitical significance is just related to Taiwan’s central role in the semiconductor supply chain. And as tensions between China and Taiwan have increased, there’s a fear that, you know, because there’s a lot of manufacturing going on in Taiwan, what would happen if China were to occupy or even just that there are tensions between the two countries?” Kotathane said.

Alliances are being created that exclude China

Quad goes beyond military exercises - and China is watching

And semiconductors are a key part of cooperation between the United States, India, Japan and Australia, a group of democracies known collectively as the Quad.

The US has also proposed a “Chip 4” alliance with South Korea, Japan and Taiwan, all powerhouses in the semiconductor supply chain. However, the details of this have not been finalized.

There are several reasons behind these partnerships.

One is about bringing countries together, each with their own “comparative advantages,” to “unify alliances that can develop secure chips,” Kotathane said. “It doesn’t make sense to go it alone” because of the complexity of the supply chain and the strengths of different countries and companies, he added.

US President Joe Biden met with South Korean President Yoon Suk-yeol in May 2022 during a visit to the Samsung Electronics Pyeongtaek Campus. The US and South Korea, along with other countries, are seeking to form semiconductor alliances with the goal of ousting China.

Kim Min-Hee | Getty Images

The pursuit of such partnerships has one thing in common — China is not involved. In fact, these alliances are designed to cut off China from the global supply chain.

“In my opinion, I think that in the short term, China’s development in this sector will be severely limited [as a result of these alliances]”, Kotathane said.

China and the US view each other as technology rivals in areas from semiconductors to artificial intelligence. As part of that battle, the US has sought to cut off China from critical semiconductors and tools to make them through export restrictions.

“The goal of all these efforts is to prevent China from developing advanced semiconductor manufacturing capacity domestically,” Paul Triolo, head of technology policy at consulting firm Albright Stonebridge, told CNBC, discussing the goals of the various partnerships.

Chinese ‘state-of-the-art’ chips in doubt

In the long run, I think they are [China] they will be able to overcome some of the current challenges… but they won’t be able to peak like many other countries.

Pranay Kotathan

Takshashila Institution

According to Kotathane, manufacturing is the “Achilles heel” for China. China’s largest contract chip manufacturer is called SMIC. But the company’s technology still lags significantly behind the likes of TSMC and Samsung.

“It requires a lot of international cooperation … which I think is a big problem for China now because of the way China has kind of antagonized its neighbors,” Kotathane said.

“What China was able to do three, four years ago in terms of international cooperation will not be possible.

That casts doubt on China’s ability to reach the leading edge of chip manufacturing, especially as the U.S. and other major semiconductor powerhouses form alliances, Kotathane said.

“In the long run, I think they are [China] they will be able to overcome some of the current challenges … but they will not be able to reach the heights that many other countries are at,” Kotathane said.

Tensions in alliances

However, some cracks are beginning to appear between some partners, especially South Korea and the United States.

In an interview with Financial TimesAhn Duk-geun, South Korea’s trade minister, said there were disagreements between Seoul and Washington over further restrictions on exports of semiconductor tools to China.

“Our semiconductor industry has a lot of concerns about what the US government is doing these days,” Ahn told the FT.

The US will take a long time to match Asia in chip production, the strategist says

China, the world’s largest chip importer, is a key market for chip companies globally, from US giants like Qualcomm to South Korea’s Samsung. With politics and business mixing, the stage could be set for more tension between nations in these high-tech alliances.

“Not all U.S. allies are eager to sign up to these alliances or to expand their control over China-related technology because they have large stakes in both manufacturing in China and sales in the Chinese market. Most do not want to clash with Beijing.” around this issue,” said Triolo.

“The main risk is that attempts to coordinate parts of the global semiconductor supply chain development undermine the market-driven nature of the industry and cause major collateral damage to innovation, increasing costs and slowing the pace of new technology development.”



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