Global semiconductor market tilts against China as chip wars escalate

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SEOUL, South Korea — Japan and India are poised to rise as manufacturing hubs as the worldwide semiconductor landscape undergoes massive expansion and geopolitical shifts, boosting U.S. hopes to curb China’s clout in a critical 21st-century market.

More than a quarter of the chip manufacturing plants coming online through 2026 are in China, which already supplies 50% to 60% of the world market for less-sophisticated low-end chips. U.S. officials and private analysts were rocked when China took an unexpected technological leap and produced a homegrown 5G smartphone chip after foreign supply chains were cut off.

Given China’s strengths, the rise of two democratic supply nodes looks positive for Washington, which since 2017 has been trying to corral allies into its corner to maintain dominance of leading-edge semiconductors. Japan and India also have security contentions with China, influencing economic policies.

Tokyo is allied with Washington and is suspicious of Beijing’s moves toward Taiwan and the East China Sea. New Delhi administers the world’s largest democracy. Although politically nonaligned, India is China’s natural rival for influence across South Asia and has clashed directly with Beijing in the Himalayas and the Bay of Bengal.

Chips with everything

All this is of intense interest to Ajit Manocha, the Indian American president and CEO of SEMI, the semiconductor industry’s lead trade voice. In a wide-ranging interview with The Washington Times, Mr. Manocha, a 43-year veteran of the industry, recalled that he was first inspired to enter the sector by an American science fiction TV series that now doesn’t seem far-fetched.

“I used to watch ‘Knight Rider,’ though I thought it was sort of unreal,” Mr. Manocha said. “But it is real now. You can tell a car where to take you.”

For decades, semiconductors, the central component in digital technologies, fascinated only manufacturers and technology-minded enthusiasts. That changed with Donald Trump’s presidency, which identified chips as strategic weapons in a larger economic and political clash with China.

The sector is massive. Last year, according to SEMI data, global revenue was $580 billion. Mr. Manocha predicts that figure will almost double to $1 trillion by 2030, meaning the growth of the past 60 years will be replicated within 10 years.

“Semiconductors are central to every industry,” he said. “There are a lot of convergences.”

Seventy-one major chipmaking sites have been announced for completion worldwide from 2022 through 2026.

The largest number, 21, are in China, 16 are in Taiwan, 11 are in the U.S. or Mexico, 10 are in Europe and the Middle East, eight are in Japan, and three each are in Southeast Asia and South Korea.

New technologies are giving high-end chips a central role in the global struggle for economic supremacy. “We used to have a killer app every three to four years,” Mr. Manocha said. “Now we have multiple killer apps.”

Technology pipelines are loading up with next-generation 6G and 7G mobile telecommunications, the Internet of Things, autonomous vehicles, autonomous machinery, AI, quantum computing and neuromorphics — the interface between the human brain and the digital world.

All generate and consume data, spurring an explosion of demand for data centers. Mr. Manocha anticipates 70 to 80 semiconductor fabrication plants, known as “fabs,” breaking ground within a decade, above and beyond the 71 already announced.

That’s the good news. The bad news is the number of risks, including the impact of climate change, the data centers’ vast appetite for power sources, plummeting Western scientific and engineering talent, and the U.S.-China geopolitical rivalry that threatens to decouple the world’s two most powerful economies.

Sectoral specialties, strategic competition

Political leaders seeking chip sovereignty and a dependable source of chips should tensions and trade barriers rise are bringing fabrication capacity home, Mr. Manocha said. Countries are in a desperate hunt for competitive advantage.

“Every country can invest. … It’s strategic for every country,” he said. “But it’s a competitive world.”

Cutting-edge chip design is created primarily in the U.S., while the Netherlands and Japan sell top-end chip manufacturing equipment. Japan is the lead supplier of advanced chemicals.

China dominates the mass fabrication of older, less powerful “legacy” chips, and Taiwan and South Korea control the production of more powerful modern chips. Packaging is handled across the Indo-Pacific, and chip testing is primarily the province of U.S. firms.

“It’s all interdependent: From start point to end product, [a chip] travels 20,000 miles,” Mr. Manocha said. “If one country sneezes, it causes a chain of disruption.”

With South Korea and Taiwan facing strategic challenges from North Korea and China, the U.S. government has sought to spread risk by diversifying fabrication infrastructure. It has been luring investment from companies such as Taiwan’s TSMC and South Korea’s Samsung and SK Hynix to build facilities in the United States.

Although China remains the leading mass-market manufacturer, its chips are “one or two generations behind the U.S.,” Mr. Manocha said.

China in catch-up mode

Despite heavy government aid, analysts say, Chinese rivals are likely incapable of reverse-engineering the machinery required for high-end chip production, such as equipment made by the Netherlands-based ASML and Japan’s Tokyo Electron.

“There are a lot of trade secrets, a lot of sophistication that gives you productivity and precision,” Mr. Manocha said. “It is an uphill battle for companies that don’t have these high-precision tools.”

A further challenge to Beijing’s hopes to play catch-up may be two nascent entries into the chipmaking market.

Japan has announced its return to manufacturing via conglomerate Rapidus, whose investors include national flagships NEC, Sony and Toyota. Dutch machinery maker ASML has pledged support, and IBM is providing technical expertise.

Japan “has all the ingredients you need for the industry,” Mr. Manocha said. “It can easily step up.”

A key supplier of ultra-high-purity chemicals and machinery, Japan boasts a skilled workforce and a history of successful government-led industrial initiatives. One question is whether Rapidus can generate the massive capital required for high-production, high-end fabrication.

The second entrant is India, which boasts homegrown talent in engineering, chemistry and physics, core strengths in software and chip design, and a vast internal market.

“What it lacks is an eco-system” to support chip fabrication facilities, Mr. Manocha said, “but new policies may bring that into the country.”

Indian Prime Minister Narendra Modi is intensely interested in the chip wars, and Japan has promised support. U.S. chip giant Micron last month broke ground on a fab and testing center in India, which Mr. Manocha expects to be a “catalyst.”

War and peace

Despite post-Cold War supply chain interdependencies, political flare-ups are not new.

Tokyo’s alleged dumping of below-cost memory chips in the U.S. in the 1980s generated severe trade tensions with Washington. In 2017, the Trump administration began adding chip tariffs on China. In 2018, Japan imposed export restrictions on crucial chemicals to South Korea amid bilateral tensions on other matters.

Most recently, the Biden administration placed an embargo on high-end chip and equipment sales to China, arguing that Beijing could use the chips to boost its defense sector. That effort has enlisted — or pressured — U.S. allies such as Japan, the Netherlands, South Korea and Taiwan to curb sales to China.

Beijing returned fire with bans on exports of raw materials, including rare earth minerals vital to a range of high-tech uses, including cellphones and electric cars.

Mr. Manocha said SEMI, which includes Chinese and U.S. companies, is neutral in the chip wars. Its principle for membership is compliance with international trade rules. Beyond that, it has a diplomatic role “to bring industry to policymakers,” he said.

Near panic erupted in global technology circles in 2018 when Japan announced punitive measures against South Korean chipmakers. SEMI stepped in as a backdoor channel.

“My advice to South Korea was not to retaliate, and to Japan was how to minimize impact,” Mr. Manocha said. “The result was we got the export control process down to 30 days.”

South Korean chip output was not affected, and global players breathed a sigh of relief.

Mr. Manocha approves of recent trips to Beijing by leading Biden administration officials, including Secretary of State Antony Blinken and Commerce Secretary Gina Raimondo, for direct talks after a long period of nearly frozen bilateral diplomacy.

“In the past, I wanted governments to stay out of the sector. Now, I want them in!” Mr. Manocha said. “Governments need to work together to solve national security problems and not disrupt supply chains.”