Amid the covid-19 pandemic, the world was shocked by the severe shortage in the supply of medical ventilators. To address this crisis, most of the automotive factories turned part of their production lines to manufacture advanced ventilators. Such competition between vehicles and medical equipment highlighted the importance of a highly scarce component that both industries share, namely the semiconductors.
Semiconductors; The Century’s Oil
Semiconductors, the tiny computer chips that power most of the advanced machines from smartphones to satellites, medical and defense systems, are often referred to as the "oil" of the 21st century. Their shortages during the pandemic have shut down some auto assembly lines and made equipment showrooms scarce. These market shocks were very alarming to countries and firms around the globe, affecting international trade and value chain mechanisms of many industries and increasing the appetite for a more secured vertical integration through the acquisition of upstream operations to mitigate the risk of any future under-supply.
About 92% of the world's most advanced chips are made in Taiwan. China's President Xi Jinping's repeated warnings that he is ready to use force, if necessary, to regain control of Taiwan have forced US policymakers to consider the worst scenario, which involves the possibility of cutting off the US military from accessing the needed chips. The rising tensions around Taiwan can not be detached from the chip war context.
Chips Market & Supply Chain
China imported about 90% of its chip industry needs in 2022. More than 75% of the world's semiconductors are consumed in China. Only 15% of the global semiconductor production comes from it. Chip imports cost China more than USD 400 billion annually. China has set ambitious goals to increase its domestic semiconductor production. These goals are part of a broader political vision for China to become the dominant technological powerhouse by the year 2049, the 100th anniversary of the founding of the People's Republic of China.
Semiconductor is also a national target industry. “Made in China 2025” is an industrial policy concept launched by the Chinese government in 2015. The initiative aimed to boost domestic chip production from less than 10% of demand at that time to 40% by 2020 and further to 70% by 2025.
America's legacy as the world's dominant power in the semiconductor industry is engraved in the name of the country's most famous tech hub, Silicon Valley. However, over the decades, the art of making microchips from silicon wafers has become a lucrative global business. American companies still lead in the design of devices. Netherlands produces the most important machines to make them. While, Taiwan, Korea and increasingly China are the manufacturers.
The US Sparks Chip War
In early October 2022, the US government introduced sweeping new restrictions on China's access to advanced semiconductors and the equipment used to manufacture them. The restrictions require hard-to-get licenses to sell advanced semiconductors to Chinese companies and deprive the country of much of the computing power needed to train artificial intelligence (AI) at scale. The measures also extend the restrictions on chip-making tools further to industries that support the semiconductor supply chain, excluding both US personnel and the components that make up the chip-making tools. Taken together, these restrictions represent the US government's most significant move yet to undermine China's technological capabilities.
US restrictions were envisaged by many observers to be targeting the slowdown of China’s efforts to indigenize semiconductor manufacturing capabilities. The US Department of Commerce's Bureau of Industry and Security has put Chinese memory chip maker Yangtze Memory Technologies (YMTC) and 21 other big players in the AI chip space on a blacklist called the "Entity List." The move prevented these companies from buying semiconductors and manufacturing tools made by US technology anywhere in the world. After years of lobbying, in January 2023 the United States, Japan and the Netherlands agreed to tighten export controls on chip-making equipment to Chinese companies.
US Treasury Secretary Janet Yellen said last month that " China's economic growth need not be incompatible with US economic leadership" In other words, the Chinese government should promote strategic industries that do not challenge the US's dominant role. This is a question of technical capabilities in the race for power. However, it is difficult to predict revolutionary developments; the danger of the geo-politicization of technology is that it undermines international cooperation in critical areas such as clean energy and drug discovery, and the whole world suffers.
Chinese Retaliation
China, in turn was expected to respond to these restrictions. The Chinese government has banned Micron Technologies, the largest US memory chip maker, from selling its products to China's "national critical infrastructure operators." The move came after the Cyberspace Administration of China (CAC) completed a seven-week investigation launched in March 2023. CAC Report Identifies "serious network security risks, which pose significant security risks to China's critical information infrastructure supply chain, affecting China's national security," from micron products. Later this month, the Chinese government announced that buyers of two extremely scarce metals (gallium and germanium) will have to apply for export licenses starting August 1st. The two metals are used in the manufacturing of computer chips, solar panels and military applications.
According to the Critical Raw Minerals Alliance, China produces 60% of the world's germanium and 80% of its gallium. It also dominates the supply chain for rare minerals used in many high-tech products, as well as lithium, cobalt and graphite, which are used in batteries.
Chinese media perceived the metal curb as a practical response to the Western moves against China’s ambition to remain part of the international supply chain of semiconductors. The curb came on the eve of the US Independence Day and the visit of the US Secretary of Treasury, Janet Yellen, to Beijing.
The Chip War brings to light the escalating conflicts between North and South regarding the fair pricing of upstream raw materials against high-tech finished goods. Each party is eager to maximize the profit from the sale of goods in which it has a significant comparative advantage. Another excellent illustration of such conflicts is the fluctuating price of fossil oil, and the repeated attempts of developed nations to bring it down. (See previous article entitled “Unveiling the Bias in Global Regimes”).
Implications on the Chip Industry
Germanium and gallium are not naturally found metals; rather, they are usually found as by-products of the refineries of other metals. Germanium is obtained as a by-product of zinc production. “Fellow soft, silvery metal Gallium, meanwhile, is a by-product of processing bauxite and zinc ores.”
The United States and Europe do not import large amounts of these materials. The United States received USD 5 million worth of gallium metal and USD 220 million worth of gallium arsenide in 2022, according to governmental data. Germanium imports are even higher, with the country absorbing USD 60 million worth of germanium, while the EU imported USD 130 million worth of germanium in 2022, according to S&P Global Market Intelligence.
The availability of alternative producers in the market helps mitigate the concentration risk of production for such metals. Countries such as Belgium, Canada, Germany, Japan, and Ukraine can produce germanium, while Japan, South Korea, Ukraine, Russia, and Germany currently produce gallium. However, China's economies of scale enabled it to produce diverse metals at a reduced cost; this is how international commerce promotes efficiency and the best resource allocation in the first place. Another risk-mitigation strategy can be developed by introducing alternatives to the two rare curbed metals into the chip industry, according to metallurgical experts.
Prospects for the Global Market
According to the World Semiconductors Trade Statistics (WSTS);
“After observing a modest growth of 3.3 percent in the year 2022, World Semiconductors Trade Statistics (WSTS) has adjusted its forecast to reflect a more substantial, double-digit decrease in the worldwide semiconductor market for 2023. The estimated market size is projected to reach US$515 billion, indicating a decrease of 10.3 percent…The global semiconductors market is forecasted to surge by 11.8 percent in 2024, amounting to US$576 billion. This expansion is anticipated to be primarily driven by the Memory segment, which is projected to recover to US$120 billion in 2024, marking an over 40 percent increase compared to the previous year. Nearly all other key categories, including Discrete, Sensors, Analog, Logic, and Micro, are projected to exhibit single-digit growth. In terms of regional perspectives, all areas are expected to see sustained growth in 2024. Notably, the Americas and Asia Pacific regions are estimated to showcase robust double-digit year-over-year growth”
The above forecasts account for global inflation waves and weakening demand in end markets, but it did not take into consideration the latest Chinese restrictions. A sluggish chips market could be witnessed in the next year if these restrictions cause more disturbances to the industry’s supply chain.
The Chinese restrictions are intended to serve as a warning to the US, rather than a genuine threat to the semiconductor industry. This industry's supply chain is mostly reliant on the United States, China, South Korea, and the Netherlands. None of these countries can crowd out the other, not in the near or medium term, and certainly not with the same degree of current efficiency.
However, the Chinese warning masks a higher risk of commodities war, which could quickly spread to other industries at an excruciating cost of interrupted international supply chains, which would undoubtedly be passed on to the end consumer in the form of hyperinflation and commodity shortages. China's semiconductor sector has lagged behind global competitors like Taiwan, South Korea, and the United States. Some argue that Chinese semiconductor equipment manufacturers are four to five years behind foreign competitors, while others argue that the gap may be a decade or two.
