U.S. and allies are making chips. This could prevent China from progressing

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U.S. and allies are making chips. This could prevent China from progressing, Analysts told CNBC that the United States and other top chip producers are banding together in order to protect their semiconductor supply chains and prevent China from becoming a technological leader.

Countries with developed semiconductor industries have sought out collaborations with other countries, such as the United States, South Korea, Japan, and Taiwan.

Pranay Kotasthane, chairman of the High Tech Geopolitics Programme at the Takshashila Institution, stated, “The immediate reason for all this is clearly China,” in regard to the alliances.

Countries are banding together to slow China’s development of semiconductors because of the threat they pose to their economies and national security.

On Tuesday’s episode of CNBC’s “Beyond the Valley” program, Kotasthane discussed the geopolitics of semiconductors as a guest.

Reasons for chips’ prominence in international politics

Semiconductors are an essential technology because they are included in so many of the things we use every day, from cellphones to automobiles to refrigerators. Plus, they play a significant role in the development of AI programs and even in the creation of weapons.

The continuous shortage of these components, initiated by the Covid epidemic, has brought the significance of chips into sharp focus, what with the spike in demand for consumer devices and supply chain disruptions.

That sounded the alarm that governments everywhere needed to start protecting their chip sources. Under Vice President Joe Biden, the United States has actively sought to return manufacturing to the country. But the semiconductor supply chain is intricate, encompassing not just the design and packaging stages, but also manufacturing itself and the equipment used for it.

For instance, the Netherlands-based company ASML is the only one in the world with the expertise to create sophisticated machinery used in the production of cutting-edge semiconductors.

Although still a global power, the United States is no longer the world leader in manufacturing. Over the past 15 years or more, TSMC of Taiwan and Samsung of South Korea has emerged as the world’s two primary producers of cutting-edge semiconductors. American semiconductor giant Intel has lagged considerably behind the competition.

About 80% of the world’s foundry production comes from Taiwan and South Korea. To put it simply, foundries are factories that produce chips for other companies. Semiconductors have entered the domain of geopolitics due to the concentration of crucial tools and manufacture in a small number of organizations and geographies.

What has happened is that numerous corporations in different parts of the world are each doing a little bit of it. This suggests a geopolitical dimension, right? What if you require some products, but they’re not offered by any one company? What if one country uses chips to communicate secret information? “Those features make it a geopolitical tool,” Kotasthane said.

Business continuity is threatened by the accumulation of wealth and influence in the hands of a few, especially in tense regions like Taiwan, according to Kotasthane. Beijing sees Taiwan as a rebellious province and has pledged to “reunify” the island back into the Chinese mainland.

“Taiwan’s prominent role in the semiconductor supply chain is directly tied to its geopolitical relevance. There is concern that if tensions between China and Taiwan continue to increase, China may eventually invade Taiwan, threatening the island’s manufacturing sector. It was Kotasthane who made the remark.

Formation of anti-Chinese alliances

The global nature of the chip supply chain makes it impossible for any single nation to meet demand.

Over the past few of years, countries have been actively seeking out chip agreements. When Vice President Biden was in South Korea this past May, he stopped by a Samsung semiconductor factory. It was around this time that Gina Raimondo, the U.S. secretary of commerce, met her Japanese counterpart, Koichi Hagiuda, in Tokyo to talk about “cooperation in industries such as semiconductors and export control.”

Tsai Ing-wen, president of Taiwan, recently told Arizona’s governor, Doug Ducey, that she is looking forward to working with the United States to manufacture “democracy chips.” The TSMC chip factory in Taiwan is the most advanced in the world.

And the Quad, an alliance of democracies including the United States, India, Japan, and Australia, relies heavily on semiconductors as a platform for collaboration.

Additionally, the United States has proposed a “Chip 4” alliance with South Korea, Japan, and Taiwan, all of which are major players in the semiconductor supply chain. The specifics, though, are still being worked out.

These alliances are formed for various reasons.

First, as Kotasthane put it, “string together alliances that can develop secure chips.” This refers to the concept of bringing together countries with different “comparative advantages” to create a more powerful whole. To further emphasize his point, he said, “It doesn’t make sense to go it alone” due to the supply chain’s complexity and the relative advantages of other nations and businesses.

One consistent feature of this desire for collaborations is the absence of China. In reality, these coalitions aim to isolate China from the international supply system.

As a result of these agreements, “I think over the short term, China’s progress in this industry will be severely restricted,” Kotasthane added.

The United States and China compete in a number of technological fields, including semiconductors and artificial intelligence, where they both see the other as a threat. To that end, the United States has sought to restrict China’s access to key semiconductors and the manufacturing equipment needed to produce them through export restrictions.

According to Paul Triolo, technology policy lead at consultancy company Albright Stonebridge, “the goal of all this effort is to prevent China from obtaining the competence to create advanced semiconductors domestically.” Triolo made this statement to CNBC.

China’s’state-of-the-art chip production could be in jeopardy

What does that mean for China now?

China has invested heavily in its homegrown semiconductor industry over the past few years in an effort to increase self-sufficiency and lessen reliance on international suppliers.

The previously discussed intricacy of the supply chain and the concentration of power in the hands of very few firms and governments make this a very unlikely scenario.

Even while it makes strides in areas like chip design, China continues to rely largely on imported technology and resources.

Kotasthane claims that China’s weak point is its manufacturing sector. SMIC is the most prominent contract chip manufacturer in China. However, when compared to competitors like TSMC and Samsung, the company’s technology is severely lacking.

Because of how China has “kind of antagonized neighbours,” Kotasthane believes that “it requires a lot of international collaboration… which I think is now a significant difficulty for China.”

“What China could achieve in terms of international cooperation three or four years earlier won’t just be conceivable.”

As the United States and other global semiconductor powerhouses create alliances, Kotasthane argues that China’s potential to reach the leading edge of chipmaking is uncertain.

Even while China “will be able to overcome some of the existing challenges,” Kotasthane believes the country will never catch up to the technological forefront.

Disputes within the coalitions

A few fissures are starting to show themselves between some of the partners, most notably South Korea and the United States.

Ahn Duk-geun, the South Korean trade minister, recently told the Financial Times that Seoul and Washington can’t agree on whether or not to lift export restrictions on semiconductor tools to China.

According to an interview Ahn gave to the FT, “our semiconductor industry has a lot of concerns about what the US administration is doing these days.”

Chip manufacturers from the United States’ Qualcomm and South Korea’s Samsung all look to China as a crucial market. More conflict between countries already presents in these high-tech alliances could arise from the inevitable mingling of politics and commerce.

Not all U.S. allies are ready to join these coalitions or strengthen controls on technology destined for China since they have substantial investments in both manufacturings in China and selling into the China market. According to what you heard from Triolo, most people do not want to get in trouble with Beijing over these concerns.

“Attempts to coordinate elements of the global semiconductor supply chain development undermine the market-driven nature of the industry and create significant collateral damage to innovation, increasing costs and stifling the rate at which new technologies are developed,” the article warns.