US-China tech war: battle over semiconductors, Taiwan stokes trade feud
Semiconductors are the cornerstone technology of the information age and key to the US-China tech war, as well as both nations’ relationship with Taiwan
China trails the US, South Korea and Taiwan in the production of chips but is rolling out a suite of measures to
Semiconductors have emerged as a new battleground between China and the US. Illustration: Dennis Yip
As voters in the United States prepare for the presidential election on November 3, the South China Morning Post is exploring the potential ramifications for China. The 12th part in the series looks at the importance of semiconductors in the deteriorating US-China relationship. Read the entire series
A spiralling tech war between the United States and China has reinvigorated Beijing’s ambitions for semiconductor independence in recent months and turbocharged efforts in Washington to thwart its plans, leaving chip-making powerhouse Taiwan caught in the crossfire.
Tensions have escalated between the countries on multiple fronts this year, from the coronavirus pandemic to Hong Kong, but it is in the field of trade and technology where the Trump administration has worked most diligently to put pressure on Beijing.
The US has embarked on a two-pronged technology strategy of cutting China’s access to hi-tech supply chains through sanctions on companies like Huawei, while bringing Taiwan closer into its orbit.
What’s at stake is mastery of the tiny electronic devices – usually smaller than a postage stamp – that power the modern economy by acting as data-processing brains for products, from smartphones to cars and spacecraft.
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The semiconductor industry is also critical to a suite of advanced technologies- including the next generation of wireless networks, artificial intelligence and connected devices – that could give either country an economic edge in the future.
“The current [US] administration is looking for a simple way to gain control over China’s industrial growth,” said Jim Handy, semiconductor analyst from Objective Analysis in California. “Since probably every semiconductor in the world is made using at least one tool from a US-based company, the US Department of Commerce expects to be able to use semiconductor trade restrictions to give it control over China’s participation in the electronics market.”
Even after several decades and billions of dollars of investment, China trails the US, South Korea and Taiwan in the fiendishly complex and capital intensive production of semiconductors.
China imported US$312 billion and US$305 billion worth of chips in 2018 and 2019 respectively, exceeding the amount it spent on oil, data from the General Administration of Customs showed.
Huawei in midst of US-China rivalry This year will be the third consecutive year the number will exceed US$300 billion, Wei Shaojun, vice-chairman of the China Semiconductor Industry Association said at the World Semiconductor Conference 2020 in Nanjing late August Last year the US placed Huawei Technologies, Hikvision and other Chinese tech firms on its entity list on national security grounds, effectively barring them from buying components from American companies without a special US government waiver.
It further tightened the screws on Huawei in May by passing a new law that requires a special license to sell semiconductors made with US software and technology to the Chinese tech giant.
The move in essence blocked Huawei’s HiSilicon unit from accessing chips made by the Taiwan Semiconductor Manufacturing Company (TSMC), the most valuable chip company in the world, which both China and the US depend on to manufacture the strategic products out of its fabrication plants, or fabs.
At the same time, the legislation opened a new and especially sensitive front for China in the tech war: Taiwan.
China regards the self-ruled island as a renegade province and its reunification with the mainland as a core national interest.
But amid the escalating strategic rivalry between Beijing and Washington, Taiwanese firms like TSMC have been caught in the middle. In response to the May legislation, TSMC said it would stop taking orders from Huawei, its second largest customer behind Apple, and announced it would build a US$12 billion
semiconductor factory in Arizona.
While Taiwan’s semiconductor giant has sought to cash in on the fast-growing Chinese market, most of TSMC’s revenue still comes from US businesses and it relies on key US design software and manufacturing equipment to produce its chips.
Arisa Liu, research fellow at the Taiwan Institute of Economic Research in Taipei, said that both China and the US were important markets for Taiwan, with the US in possession of key technology in the semiconductor ecosystem and China as the world’s largest buyer of semiconductors.
Taiwan is a very important link between these two major powers, and is a target that both China and the US are trying to draw over to their side Arisa Liu“Taiwan is a very important link between these two major powers, and is a target that both China and the US are trying to draw over to their side,” she said. “There will be some short-term impact from the loss of Huawei, but Taiwanese semiconductor businesses will still take other Chinese companies’ orders.”
Still, the development will have added more urgency to China’s push for technological independence in the face of advancing US threats. The country aims to produce 40 per cent of the semiconductors it uses by the end of 2020, and 70 per cent by 2025.
“The actions of the US government is actually accelerating China’s plans to catch up with cutting edge companies in terms of intellectual property, fabless semiconductor design companies, and semiconductor fabs,” said Phil Solis, research director of connectivity and smartphone semiconductors at IDC. “The US is currently hurting China in the short-run but helping China in the long run.”
Beijing is going to grant its chip plan the same priority as it accorded to building its atomic capability, adding a suite of measures to bolster research, education and financing for the semiconductor industry to the country’s 14th five-year plan, Bloomberg reported this month citing anonymous sources.
In early August, the State Council, China’s cabinet, also issued new rules, including tax, investment, research and development and talent incentives to boost the growth of the semiconductor industry, aiming to accelerate the localisation of semiconductor manufacturing in China.
But experts say China’s technology is still several years away from Taiwan, and will be further hampered by US actions, including the expected sanctions of China’s biggest chip maker, Semiconductor Manufacturing International Corporation (SMIC).
Despite China introducing tax incentives for the semiconductor supply chain, many of its planned manufacturing plants have struggled with poor planning and funding issues.
Stewart Randall, who follows the chip sector at Shanghai-based consultancy Intralink, said China has ploughed money into semiconductors for years, with some advances in design and memory, but not in other areas.
It would be difficult for China to develop and produce cutting-edge seven-nanometre chips or even smaller, he said.
The US is the world’s supplier of semiconductors and Taiwan is number two, so of course there are benefits of the two strongest powers working together Arisa Liu “It’s very hard to do, and even harder when you have zero access to the best equipment, in the medium term I can’t see it happening,” he said. “It will force China in the long-term to find ways of doing all this themselves. It could happen but will take many years of spending with no returns on investment.”
Experts said they expected the US to incentivise more American and Taiwanese chip makers to manufacture in the US, and to encourage US allies to prevent China from accessing technologies Beijing would need to build its domestic semiconductor sector.
“Because cross-strait relations are so low, Taiwan-US relations are developing strongly, so the US will roll out policies more friendly to Taiwan’s semiconductor companies and some US firms will also invest in Taiwan,” said Liu, from the Taiwan Institute of Economic Research.
“The US is the world’s supplier of semiconductors and Taiwan is number two, so of course there are benefits of the two strongest powers working together.”
China’s had active industrial policy around semiconductors for almost forty years, as long as semiconductors have been around, and they just can’t make it happen because it’s so difficult to do Alexander Capri But the presence of strategic semiconductor technologies in Taiwan also exposes the US, given Beijing’s persistent threats that it would bring the island into its fold, by military force if necessary. There have also been concerns that China would step up its poaching of Taiwanese semiconductor engineers to accelerate its domestic development.
But Alexander Capri, visiting senior fellow at the National University of Singapore’s Business School, said that SMIC for instance was still at least five or 10 years behind TSMC in terms of producing commercial, high yield microchips, and was still highly dependent on US technologies.
“China’s had active industrial policy around semiconductors for almost forty years, as long as semiconductors have been around, and they just can’t make it happen because it’s so difficult to do,” he said. “It’s a very complex ecosystem, so you can’t go out and replicate all of that.”