The competition between Asian countries for chips is fierce.
But not everyone is willing to give up the Chinese market
to satisfy Washington.

The global demand for semiconductors has been declining in the last six months: after years in which the demand for electronic devices had also skyrocketed the demand for semiconductors used for their production, and the market has reached a level of saturation. However, in anticipation of a strong recovery in this second half of 2023, investments by the large chip industries in the main Asian markets continue and so do government efforts to strengthen the domestic industrial fabric.

In fact, the achievement of self-sufficiency, even partial, in the sector remains a priority for the great world powers and the consolidation of competitive advantage positions for the leaders. Japan and South Korea have been particularly active in recent months.

Japan, a country that has lagged behind in the competition for chips after having been a leader in the past, is trying to close the gap by attracting investment and forming partnerships with today’s leaders, the Koreans and Taiwanese. On the other hand, South Korea and Taiwan, which already have a strong industrial base in the sector, are struggling to maintain their market share and stimulate domestic production.

In fact, Japan is now trying to catch up: holder of 50% of the market share in the 1990s, the country today controls only 10% having lost its dominance with the more competitive Taiwan and South Korea. Tokyo is now trying to secure its semiconductor supply by pursuing a 2030 goal of bringing domestically produced semiconductor sales to $112 billion – more than triple the current figure.

In this regard, the Government has promoted partnerships with leading companies in the industry and has provided tax breaks to facilitate the relocation of factories in the country. It is in this context that Japan has managed to finalize crucial agreements such as the one with the Taiwan Semiconductor Manufacturing Company (TSMC) for the opening of an advanced chip plant worth about 7 billion dollars in Kumamoto province and with the South Korean Samsung for a 221-million-dollar plant in Yokohama. But competition in the chip market is pressing, exacerbated by geopolitical tensions between the US and China, and Japan is looking for greater certainty.

With this in mind, on May 17, Prime Minister Kishida Fumio met with the executives of some of the major industries in the sector, including representatives of the US Intel, Samsung (leader in the production of memory chips), and TSMC (which produces the most technologically advanced semiconductors on the market). During the meeting, Kishida called for more investment in the country and the US Micron announced its intention to invest 3.6 billion dollars in a plant for the production of memory chips in the country, with government support.

The meeting between industry leaders comes as the United States is pushing allies to work together to curb China’s technological development. In October 2022, the Biden administration amended the Export Administration Regulations by adding advanced semiconductors and the machinery needed to produce them to the US Commerce
Control List.

This decision effectively blocked the export of semiconductors made with American technology, especially to China. In addition, in March 2023 the so-called guardrails provisions included in the CHIPS and Science Act were announced – the plan which provides state subsidies of 52.7 billion dollars for new plants opened on US soil. The latter means that an industry that has obtained CHIPS Act subsidies cannot expand its production plants in foreign countries considered a danger to American national security, starting with China.

Thus, if the CHIPS Act aims to bring semiconductor production back to US soil – in 1990 37% of semiconductor production was located in the US; in 2019 only 12% – export controls aim to prevent the Chinese semiconductor industry from taking over the market.

However, the semiconductor value chain is segmented and US restrictions alone are not enough to cut Beijing out of the market. For this Biden has started a campaign to enlist key allies in the supply chain, such as the Netherlands and Japan, both producers of machinery for the production of the most advanced chips. Tokyo, after its initial hesitation, has taken the American line, limiting exports to Beijing of 23 types of chip-making machinery.

Unlike Japan, not all US allies appear inclined to replicate its export controls, nor are they enthusiastic about the conditionality inserted to access the CHIPS Act subsidies. South Korea, for example, earns a lot of income from chip sales to China, which together with Hong Kong is worth 60% of the export market in the sector – the USA in comparison absorbs only 7.7%.

The Chinese market is therefore currently irreplaceable for South Korea. In addition, its flagship companies, Samsung and SK Hynix, have important factories in neighbouring Asia, where about 40% of Samsung’s NAND memory chips and 40% of SK Hynix DRAM chips are made. Samsung and SK Hynix already managed in October to obtain concessions, lasting one year, which allow the purchase of US machinery for the production of chips to be used in factories in China.

In a complex period for Korean industries, whose exports in the sector have been declining for months, Washington is expected to extend the concession to continue exporting machinery to China without
the need for a license.

However, the duration of these exemptions – expiring in October – worries the two leading Korean companies who fear the huge costs of moving to a country other than China and, at the same time, do not want to give up on expanding in the United States, with the risk of suffering competition from the companies that will benefit from American subsidies. In fact, both Samsung and SK Hynix have an interest in expanding into the design of production plants in the USA, precisely because they are attracted by the possibility of accessing
the CHIPS Act subsidies.

Even in Taiwan, not all the policies of the Biden administration have been appreciated. In the last month, in fact, it was reported that some senior Taiwanese officials have asked US allies to moderate their narrative on the risks of excessive dependence on Taiwanese chips (Taiwan controls 90% of the production of the most advanced chips).

Some US representatives have called this dependence “unsafe” due to a possible Chinese invasion of the island. With the real possibility that US policies to bring the chip supply chain home will be effective, the fear of the island losing its strategic advantage is growing stronger. Warren Buffett himself, head of Berkshire Hathaway Inc, said in May that he had sold all of his shares in the Taiwanese industry, concerned about the geopolitical risks associated with the island.

And so TSMC itself is particularly active in announcing manufacturing `facilities in the US – with projects in Arizona worth $40 billion. Taiwan does not want to be deprived of its most profitable industry and security guarantee. Considering recent investments in Europe, Japan and the US by major semiconductor manufacturers, Taiwan has something
to worry about.

Between countries that want to maintain their competitive advantage and others that aim to increase domestic production, the semiconductor market remains active. In the coming months, however, industries will have to find a balance between the attractiveness of American subsidies and the risk of losing the Chinese market. (Photo:123rf)

Paola Morselli/ISPI