What’s next for the chip industry

What’s next for the chip industry

In 2023, aggressive new US policies will be tested. They could eventually lead to fragmentation of the global semiconductor industry.

Engineer in sterile coveringall holds microchip with gloves for examination

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Already, the year ahead was shaping up to be difficult for semiconductor companies. The chip industry is known for its cycles of high and low demand. This year, it is expected to experience a decline in growth as consumer electronics demand plateaus.

Geopolitics could easily overshadow concerns about the economic cycle and the challenges associated making ever more advanced chips.

The US has imposed the most restrictive restrictions ever on chips that can be sold to China and the number of workers who can work for Chinese companies in recent months. It has also targeted the supply side, introducing generous federal subsidies in order to bring manufacturing back to the US. Similar policies have been adopted by other governments in Europe and Asia, which are home to major chip company headquarters.

These changes will continue to take place in 2023 and will add uncertainty to an industry that has relied on global supply chains and a fair amount freedom in choosing who it does business with.

What will these new geopolitical maneuverings mean for the semiconductor industry worth more than $500 billion? MIT Technology Review asked experts to explain their views on how it will all unfold in the next year. Here’s what they had to say.

The great “reshoring push”

The US has committed $52 billion to semiconductor research and manufacturing in 2022 through the CHIPS and Science Act. $39 billion will go to domestic subsidies for building factories. The funding will be available to companies in February 2023. Awards will be announced on an ongoing basis.

Some funding could be used for companies with US-based factories to manufacture military chips. The US government has been concerned about the national security implications of sourcing chips from overseas. Jason Hsu, an ex-legislator from Taiwan who is currently a senior fellow at Harvard Kennedy School, says that “probably more manufacturing would be restored within the US with a purpose to rebuild the defence supply chain.” Hsu believes defense applications are the main reason Taiwanese chip giant TSMC invested $40 billion to manufacture five- and three nanometer chips, which are currently the most advanced generation in the US.

However, “reshoring” commercial chips production is another matter. Most chips used in consumer products and data centers are made in Asia. Even with government subsidies, moving manufacturing to the US could increase costs and make chips less competitive commercially. Morris Chang, founder of TSMC, stated that in April 2022. The US has 50% higher chip manufacturing costs than Taiwan..

“The problem will be that Apple, Qualcomm and Nvidia-they’re going buy the chips manufactured in America–they’re going have to figure out the best way to balance those costs, since it’s still cheaper to source those chips from Taiwan,” says Paul Triolo. Triolo is a senior vice president at Albright Stonebridge, a business strategy firm that advises companies in China.

If chip companies are unable to pay the higher labor cost in the US, or continue to receive subsidies from the government–which can be difficult to guarantee–they won’t be able to invest in US production long-term.

The United States is not alone in wanting to attract more chip factories. In November, Taiwan passed a subsidy law to give large tax breaks to chip companies. South Korea and Japan are doing the exact same.

Woz Ahmed, a UK-based consultant who was once an executive in the chip industry, believes that the European Union’s subsidies will be moving along in 2023. However, he states that they are unlikely to be finalized until next year. “It will take them a lot more than it will.” [take] He says that the US was affected by horse trading among all member states.”

Navigating a market that is newly restricted

The October US controls on exports of advanced chips and technologies were implemented by the US a major escalation China’s grip on the chip industry. The rules that used to prohibit the sale of this advanced technology to certain Chinese companies were extended to cover all Chinese entities. There are also new measures, such as limiting the sale of essential chipmaking equipment in China.

These policies place the industry in an uncharted enforcement territory. What chips and manufacturing technologies are considered “advanced?” Can a Chinese company make both advanced and older-generation chips?

Some questions were answered by the US Department of Commerce In a Q&A The deadline was October 31st. It clarified, among other things that less advanced production lines for chip production can be exempted from the restrictions if they are located in a separate factory. It’s not clear how and to what extent the rules will be enforced.

This will be the case in 2023. Chinese companies will likely seek out ways to bypass the rules. At least one of them has Already tried to make Its chips are less advanced. Non-Chinese businesses will also be motivated by the Chinese market’s enormous and lucrative potential.

Ahmed says, “If there aren’t enough enforcement officers on the ground or they don’t have access, people will break the rules.”

Experts believe that the US could impose additional restrictions on China this year. These rules could include more export controls, a review of outbound US investments or other moves that target chip-adjacent industries such as quantum computing.

Not everyone is on the same page. Chris Miller, an international historian professor at Tufts University thinks that the US administration might take a break to focus on current restrictions. “I don’t expect major expansions in export controls on chips.” [in 2023]Miller, the author and editor of the new book, says “Yes,” Chip War: The Fight for the World’s Most Critical Technology. “The Biden administration spent the majority of its first two years in office working to remove these restrictions. They hope that the policy will stick and they won’t have to make any changes to it for a while.

How China will respond

The Chinese government has not responded to the US new export controls. It has only made some diplomatic statements and filed a legal dispute with the World Trade Organization. This is unlikely to result in much.

Is there a more dramatic response? Most experts say no. China doesn’t appear to have a significant advantage in the chips sector that would allow it to respond to the US with trade restrictions. “The Americans have enough core technology to be able to compete with China.” [use it] Against people who are downstream in supply chains, such as the Chinese. That is what it means by definition. [China doesn’t] John Lee, East West Futures Consulting’s director, says that they have the tools to retaliate.”

However, the country controls 80% of the world’s rare-earth material refining capacity. This is vital in making parts and military products. fighter jets And Everyday components of consumer devices like screens and batteries. China could gain leverage by restricting exports. To send a message, the Chinese could also sanction some US companies, in the chip industry or otherwise.

China has not shown any interest in a scorched earth path for semiconductors. Miller says that Miller believes the Chinese leaders realized that such an approach would be just as costly for China as it would be for the US. He says that the current Chinese chip industry cannot survive if it doesn’t work with the global supply chain. It depends on other companies in different countries for lithography machines and core chip IP. Avoiding aggressive retaliation which further poisons China’s business environment is “probably” the smartest strategy for China.

China will likely focus more on supporting the domestic chip industry than retaliating at the US. It has been reported China may announce a trillion-yuan ($143 billion), support package for domestic businesses in the first quarter 2023. The Chinese semiconductor industry has seen a lot of success with generous subsidies over the past decade. However, it is still a question of how to efficiently allocate the funding to the right companies. This is especially important after the efficiency of China’s flagship government chip investment fund was questioned and shaken in 2022. high-level corruption investigations.

The Taiwan question

The US is not the only one who has to make decisions. It must work closely with other governments to control key processes of chipmaking that China cannot replace with domestic alternatives in order to pull off its chip tech blockade. These include the Netherlands, Japan and South Korea.

This won’t be easy, as these countries have an economic interest in maintaining their trade relationship, despite their ideological differences.

Japan and the Netherlands have According to reports, they had reached an agreement to codify some of the US export controls rules in their own countries. The devil is in all the fine print. Lee, who is based in Germany, says that there are certain voices that support the Americans on this. “But there are also quite strong voices arguing against following the Americans and locking foot on this would be detrimental for European interests.” Peter Wennink CEO of ASML, a Dutch lithography equipment manufacturer. he said His company “sacrificed,” while American companies profited.

As time passes, the gap between countries could grow. Miller says that the history of these tech restriction alliances shows they are difficult to manage over time. They require active management to remain functional.”

Taiwan is in a very awkward spot. Their historical relationship and geographical proximity make Taiwan’s economy highly intertwined with China’s. Many Taiwanese chip firms, such as TSMC, sell to Chinese businesses and build factories in China. The US granted TSMC a one year exemption from export restrictions in October. However, this exemption may not be renewed after it expires 2023. Experts don’t believe that there is any danger that a military conflict could break out between Beijing and Taipei, but that would be a major setback for chip manufacturing.

Hsu states that Taiwanese companies need to be prepared for the unknowns. They may not close all operations in China. However, they may look at investing in overseas facilities like the two chip fabs TSMC plans for Arizona.

As Taiwan’s chip industry moves closer to the US, and as an alliance forms around the American export control regime, the once globalized semiconductor sector is one step closer being divided by ideological lines. Hsu states, “Effectively we will be entering a world of two chips” with the US and its allies representing one world and the other including China and the various countries in Southeast Asia and the Middle East, Eurasia and Africa where China is pushing to adopt its technologies. Hsu states that countries that have relied on China’s financial assistance and trade deals will be more inclined to accept the Chinese standards for building their digital infrastructure.

Although it would take a while, Hsu believes that this decoupling is becoming more likely. He says that governments will need to make contingency plans in case it happens.

This story is part of MIT Technology Review.The Next Series:We provide a glimpse into the future by looking at different industries, trends and technologies.

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