Always brutally competitive, the semiconductor industry was also buffeted by political winds in 2020. What might Joe Biden’s election as president mean for the U.S.-China semiconductor rivalry?
Many businesses have disappeared or suffered losses, but one Taiwanese company has prospered in the midst of a global pandemic: Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, reported a 36 percent rise in its third-quarter net profit compared with the same period in 2019.
Of course, TSMC is not alone among tech companies in making big profits this past year. Amazon’s profits have doubled from a year ago. Facebook’s profits have jumped 98 percent. TSMC is not as profitable or high profile, but the company’s success is revealing. Because of their economic and strategic importance, the semiconductor industry is heavily scrutinized by government regulations. TSMC fabricates semiconductors designed by others or uses foreign manufacturing technology, thus, U.S. sanctions on Huawei forced it to stop shipments to Huawei in September.
Douglas B. Fuller, a political economy specialist at City University of Hong Kong, has followed the semiconductor industry since the mid-1990s when researching Taiwan’s economy.
“Taiwan is still quite a manufacturing-centric economy, but within manufacturing, the crown jewel is the semiconductor industry. The heart of that is TSMC,” Fuller says. “[The semiconductor industry] is a sector where there is a lot of government intervention. It’s not just … China [that does] it, but there’s been subsidization to one degree or another in all of the countries that have semiconductor industries.”
Examining the semiconductor industry is important because of the industry’s geopolitical implications. TSMC produces miniscule chips that play an outsized role in U.S.-China trade politics. Whether or not to change policies on semiconductors is one of the questions the Biden administration will need to answer. TSMC, like other semiconductor companies around the world, has stakeholders in both the U.S. and China, and strives to please customers and governments in both places. TSMC’s financial planning and its financial well-being requires navigating difficult waters.
Challenges for the Industry: Export Controls and COVID-19
The semiconductor industry is one of America’s top exports with over $46 billion in 2019. In fact, according to the 2020 State of the U.S. Semiconductor Industry Report published by the Semiconductor Industry Association (SIA), over 80 percent of semiconductors sold today are sold outside of the U.S. market. Although the U.S. has led other countries in the semiconductor industry, export controls adopted by President Trump and the COVID-19 pandemic have brought challenges along the way for both the U.S. and China.
In May, the Trump administration moved to prevent global chip suppliers from selling to Huawei Technologies, the world’s second-biggest smartphone maker, due to security risk. This means that TSMC can no longer take orders from Huawei, who was one of their largest clients before the restriction.
“The U.S. is trying to cut off some Chinese firms from U.S. capital equipment,” Fuller says. “Preventing Huawei from using TSMC wasn’t to prevent Huawei from learning how to make chips, but it was to make it impossible for Huawei to find anywhere to make its chips. Because all of these leading fabs have American equipment in them.”
Semiconductor chips aren’t designed and manufactured in one country alone. The U.S. remains the global leader in semiconductor design and R&D, but nearly 80 percent of chip manufacturing is concentrated in Asia because U.S. and other chip firms outsource fabrication to .
“I think industry by-and-large is totally against these export controls,” says Fuller. “The U.S. doesn’t make end-to-end 5G telecommunications infrastructure equipment. There’s no U.S. firm that gains from causing trouble for Huawei. Samsung gains. Nokia gains. Ericsson gains. None of those are American firms.”
Fuller says that many players in the semiconductor industry are already figuring out ways to get around governmental regulations.
“Already, there’s a lot of American equipment made in Southeast Asia,” Fuller says. “If they completely de-Americanize that supply chain, they no longer have to pay attention to these stupid controls. Huawei is going around setting up shell companies that aren’t on the entity list, and it’ll be harder and harder for American government to figure out what firms are owned by Huawei.”
One way U.S. semiconductor players are trying to “de-Americanize” the supply chain, as Fuller say, is by setting up joint ventures (JVs) in China to get around export controls.
“They’re setting up JVs with Chinese firms to set up plausible deniability,” Fuller says. “To be liable under these entity list laws, the American vendors have to know that they’re supplying Huawei. But if you set up a bunch of intermediaries, you can go, ‘Oh I had no idea,’ even if they did have an idea.”
Roselyn Hsueh, a political scientist at Temple University, pointed out that countries have historically attempted protectionism at all stages of development. Protectionism refers to governmental policies of protecting a country’s domestic industries from foreign competition by restricting international trade, a practice which has defined the Trump administration’s foreign policy. She says that the call for protectionism was already gaining steam during the Obama administration because China was gaining from globalization while regulating foreign competition within its domestic market.
“Protectionism is not new,” Hsueh says. “I don’t think it’s globalization that should be laissez faire. This whole idea of the free market is just not true, right? We learned in economics that [the free market is] a theoretical premise. You always need to have regulation, even to ensure a fair and competitive playing field. I think that in the same way, we should regulate globalization. No country in the world should try to control or overtake globalization.”
Hsueh believes that national security is an important issue for the semiconductor landscape, and the U.S. should continue to be nuanced in identifying semiconductor companies to blacklist. Hsueh believes that export controls should not be held on “a full industry or even a whole entire sub-sector.”.
“I think [the U.S.] should be selective. It’s a matter of how you intelligently and thoughtfully identify products an d companies associated with certain countries, per se, that are violating American national security. I think those investigations need to be very thoroughly done,” Hsueh says.
The Worldwide Semiconductor Industry
Semiconductors are also called integrated circuits (ICs) or chips. They are the brains of a wide variety of electronic devices. Semiconductors power the machines and products in a wide range of industries including telecommunications, healthcare, transportation, clean energy and military systems. These chips are key to innovations in 5G technology, artificial intelligence (AI) and quantum computing. They also serve as a critical element to smart cities and the Internet of Things (IoT) network.
Advances in semiconductors have enabled considerable economic changes and growth. According to the SIA, the U.S. has been the global sales market share leader since the late 1990s with almost 50 percent annual global . In 2019, the U.S. had 47 percent of the global market, followed by South Korea at 19 percent, Japan and Europe tied at 10 percent, followed by Taiwan and China.
The industry is concentrated in just a few countries for two reasons: one, because the most advanced semiconductors can only be produced in sophisticated and expensive factories; two, because design is dominated by a handful of powerful companies.
There are three stages to the production of semiconductors: design (known as a “fabless” company), manufacturing (“foundries”), and assembly, test and packaging (ATP). Chip design is an area that the U.S. leads in, according to Fuller.
“The U.S. strengths are in chip design and the critical inputs to the industry which are software tools called electronic design automation (EDA) to design the chips and capital equipment to make the chips,” Fuller says.
In addition to the three stages of production, there are two key operating models: the Integrated Device Manufacturer (IDM) model, and fabless-foundry model. The IDM model is implemented by a company that carries out all stages of production from design to ATP. Some of the top IDMs include Samsung, Texas Instruments, Intel and Micron.
The fabless-foundry model splits production into “fabless” companies that focus on design and innovation, and “foundry” companies that concentrate on manufacturing. Fabless companies include Broadcom and Qualcomm; foundries include SMIC and TSMC.
SMIC, short for Semiconductor Manufacturing International Corporation, is China’s largest semiconductor foundry company that is tasked with closing the chip-design gap for China.SMIC is a key component for China’s “Made in China 2025” plan to produce 70% of semiconductors that are domestically demanded by 2025.
A third group of companies that are known as outsourced semiconductor assembly and test companies (OSATs) perform ATP. The three top global OSAT companies (as of April 2019) are ASE Technology Holding Corporation headquartered in Taiwan, Amkor Technology headquartered in Arizona and JCET (STATS ChipPAC) headquartered in China.
TSMC’s Unique Positioning
After the Second World War, the Taiwanese government promoted economic development in certain areas, one being the IC industry. According to “Securing the Future: Regional and National Programs to Support the Semiconductor Industry” (2003), the beginning of the IC industry was traced back to the packaging industry that began in 1976. By the end of 1999, Taiwan had 237 IC firms, and the IC industry continues to grow.
TSMC was one of the byproducts of the Taiwanese government’s efforts to invest in the country’s semiconductor industry. TSMC was founded in 1987 by Morris Chang, who was born in China and earned degrees in mechanical and electrical engineering at MIT and Stanford. After spending 25 years at Texas Instruments, Chang was recruited by the Taiwanese government in 1985 to help develop the emerging industry, and two years later, formed TSMC as a joint venture between the Taiwanese government, Dutch multinational electronics giant Philips and other private investors.
“TSMC is important in many ways because it’s part of the global supply chain,” Hsueh says. “Semiconductors are key inputs into telecommunications equipment. TSMC’s fabrication facilities produce chips that semiconductor companies like Qualcomm and other companies design, and so they, in collaboration with the designers of integrated circuits, produce semiconductor chips.”
Chinese firms are extensively using Taiwan’s fabs and hiring TSMC engineers, but there’s a reason that Taiwan continues to maintain a strong positioning in semiconductor manufacturing.
“Just because you use TSMC to manufacture your chips, it doesn’t mean you suddenly learn to manufacture chips like TSMC,” Fuller says. “TSMC benefits from very close relationships with leading EDA toolmakers and capital equipment makers, so nobody has caught up with TSMC yet except for maybe Samsung.”
Almost all of TSMC’s fabrication plants are in Taiwan, except for two facilities in China and one facility in the state of Washington. Last year, TSMC has announced that it will build a new fabrication plant in Arizona that will be in production until 2024. TSMC’s expansion will further heighten their presence in the U.S.
China’s Ambition for Chip Independence
China has long relied on semiconductor imports for its own consumption and for products that are exported. The “Made in China 2025” plan, announced in 2015, accelerated the Chinese government’s efforts to realize the goal of semiconductor independence. The Chinese government expects its largest semiconductor manufacturer, SMIC, to help achieve its “Made in China 2025” plan. It has invested heavily in the company and SMIC has recruited engineers from TSMC and other Taiwanese firms.
However, Fuller argues that it is difficult for SMIC to be the one-stop-shop company to complete China’s semiconductor value chain. There are two types of chips at a high level: memory and logic. SMIC’s emphasis on the latter means that it will be difficult for China to achieve complete semiconductor independence.
As a regulatory state, China has invested billions of dollars to develop its domestic semiconductor industry for decades, yet has seen little success. Fuller claims that there is no correlation between the amount of money invested in a firm and its performance.
“[China] tends to favor state-owned enterprises that have a lot of management challenges,” Fuller says. “I also think that they don’t really have competitive metrics for choosing who they support. [Throwing] more money … at a firm doesn’t necessarily enhance their performance. If the firm knows that they’ll be bailed out by the government no matter what it does, it tends to let its capabilities atrophy.”
According to Hsueh, the question is not ‘Will China surpass us?’ but ‘How can the U.S. maintain our capacity and continue to be on upward growth?’ Although China is better positioned today than they were 25 years ago due to globalization, the U.S. continues to hold ground in semiconductor technology.
“I think the United States, right now, still has some of the world’s best engineers and scientists,” Hsueh says. “What the U.S. needs to do is continue to invest in human capital, vocational education and skilled training, so that those who have been left behind by the forces of globalization can be retrained to operate and program the machines and the software that our top scientists and engineers are still creating today.”
Biden and Post-Election Era for the Semiconductor Industry
Both Fuller and Hsueh believe the Biden administration will loosen some of Trump’s export controls against China. Possible moves could include dropping the entity list or issuing export licenses. Fuller says that even though there is a fair amount of anti-China sentiment and fears about national security and economic competitiveness in Democratic administrations, Democrats have other priorities as well.
“There was fear in Congress that Trump was going to make a deal with China and not be tough on Huawei. So a lot of Democrats joined with Republicans to pass laws to try to narrow the options Trump had,” Fuller says. “But will they do that when they have their own president in their office? … With a Biden presidency, how many of his voters really care about these detailed little issues about export controls? I’m guessing very few.”
According to Hsueh, the U.S. public collectively has a greater awareness of China’s globalization strategy than before, so we may see calls for stricter regulation. However, a Biden administration will likely seek to use alliances to pressure China.
“I think the main difference with Biden is that there would be, ‘Let’s work with our allies. Let’s work with other critical countries and companies involved in the global supply chain. And together, we could find new markets. If we need to bypass China, we will,’ and I could see that happening even under Biden’s administration,” Hsueh says.
Biden’s U.S. Trade Representative nominee is Katherine Tai, a trade lawyer who has family roots in both China and Taiwan. Tai is affiliated with the Democratic Party, but she has publicly acknowledged at a panel held in August 2020 that the “Trump administration has not been 100% wrong on trade policies and push” regarding U.S. trade with China. However, it is likely that the new administration led by Tai will carefully consider the consequences of the Trump administration’s efforts for a technology decoupling between the U.S. and China, and possibly loosen restrictions for U.S. chipmakers.
The next four years may look different than the last four years for the semiconductor industry. The U.S. government must maintain a fine balance between protecting national security and easing regulations to allow the prosperity of semiconductor businesses. A thoughtful, multilateral agreement seems to be the optimal route.
“I do think that part of leadership is to stand up and say to China, ‘If you want to continue to trade and invest globally, you need to also reciprocate by opening up your market,” Hsueh says. “I am for leadership in the United States that will not alienate us from the rest of the world, so that we could also maximize the benefits of globalization and minimize the cost.”
Cover Image: bittbox on flickr
