Market Intelligence
November 29, 2022

The Semiconductor Industry and the US-China Tech War: Where We Are Now

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In a move this October that sent shockwaves throughout the global chip industry, the US issued a restriction that rearranged the landscape overnight. With this restriction, any advanced semiconductor, as well as the equipment, software and blueprints used in the manufacturing of these chips, that contains American technology is now banned from companies in mainland China. 

By leveraging their 47% global chip industry market share, the US’s restriction has a global scope that restricts American and foreign-based companies alike. So, China is not only cut off from receiving advanced chips from their top AI component source, Nvidia, but it is also facing disruptions in getting supply from global equipment giant ASML. 

While the move has posed as a massive impediment to China, it has also had countless downstream effects on companies all throughout the semiconductor industry. In order to effectively move forward in this new chapter of the US and China’s tech conflict, it’s helpful to examine the issues at the conflict’s core, and to be aware of each government’s nuanced actions.

Currently, China finds itself in the midst of a $1.4T tech revolution, but also generations behind the world’s leaders of chip development. It’s no secret that advances in semiconductor sophistication drive virtually all technological innovation, and China is keenly aware of this. In the last few years, it has strived to develop an advanced, self-sustaining semiconductor industry that can drive this movement. 

However, the prospect of a more technologically advanced China is perceived as a severe threat by their western rival. 

The US has long had major concerns over cyber-attacks, intellectual property theft and economic espionage from China, labeling these acts as the greatest long-term threat to their economic vitality. The US also repeatedly cites a strengthened Chinese military as one of its greatest concerns. The US fears that technological advances in China would lead to more complex cybersecurity breaches and a stronger military, posing a threat to the US and it’s “allied interests.”.  

Both they and the China have identified the rapid progression of China’s domestic chip industry as the key to the country’s advancement. 

China has a lot of ground to cover — and that ground is where the tech war is being fought. 

The move this October ultimately halts any path forward for China to catch up with the likes of Japan, Taiwan and South Korea in advanced semiconductor manufacturing, thus curbing their mammoth tech campaign.

Most Recent Development

On November 14, President Joe Biden and China’s Xi Jinping met for the first times as leaders of their respective countries. The tone of conversation was optimistically “candid,” as the two etched out common ground and set up avenues for future communication. 

While this is ostensibly a step in the right direction, both sides dug in their heels on the fundamental matters that spurred the trade war. The meeting reaffirmed their diametrically opposed stances on China and Taiwan; they also seemed to make no progress on the topic of China’s economic and state practices that are at the heart of the US’s semiconductor bans. 

Timeline of Events

The current situation was born out of a trade war between the US and China dating back to 2018. Evolving from tariffs on goods to restriction on tech, the trade conflict gradually escalated into the tech war we find ourselves in today. 

For a timeline of events that shows how the trade war unfolded into our current day situation, click here.

Silicon Chess Pieces

Given the semiconductor industry is the battleground on which this tech war is now being fought, moves and countermoves will likely come from in and around this area. A development can come from many different angles, but unraveling the possibilities can keep you one step ahead in the event of a major shift. Here are some of the most important factors in and around the chip industry that Washington and Beijing may look to leverage in their decision making. 

Research and Development

While China’s domestic semiconductor industry is highly dependent on the rest of the world, the US is also critically reliant on the global market. The US’s competitive edge has been the ability to consistently innovate cutting-edge design, made possible through massive capital expenditure on R&D. A report from the Boston Consulting Group in 2020 determined that if China and the US were to completely decouple their semiconductor industries, US-based companies would see their R&D spending drop by as much as 60%. This would likely be enough for the US to lose its competitive edge, and subsequently drop out of the top spot in the market. 

This competitive edge in superior chip design is what allowed the US to sustain a 47% market share in the semiconductor industry in 2021, and why chip giants like Intel, Nvidia and Applied Materials were born out of Silicon Valley. A complete decoupling of economies would have graver implications for the US than for China, putting Beijing in a position to bargain.

Raw Materials

China also has another point of leverage against the US that would likely be triggered before an economic decoupling; China is the source of the majority of the US’s rare earth metal supply, as the US imports 80% of their materials from their economic rival. These materials are key for semiconductor manufacturing, along with industries like renewable energy. 

China already has a track record of leveraging its exports of rare earth metals during conflict as it denied Japan these resources in 2010 amid territory disputes.  

Washington is already aware of this acute strategic vulnerability, and the government is issuing private grants to companies to open processing facilities in the US. However, these measures are more of a long-term solution and with a rise in demand for renewable energy, an export halt on China’s end could leave the US in an instant shortage during an upswing in demand. 

Possible Conflict in Taiwan

Above any economic sanction, what stands to change the landscape of the semiconductor industry the most is China’s looming specter over Taiwan. President Xi has recently vowed to bring Taiwan under its control and stated that it would use force if “outside forces” were to interfere. Taiwan vehemently opposes any form of Chinese intervention, and the US has already publicly declared that they would deploy forces if China were to attempt to take the island.  

China is keeping the pressure on, even conducting a four-day military exercise around Taiwan just two days after Nancy Pelosi visited. A Taiwanese military representative stated that an exercise of that sophistication would have taken “several months” to orchestrate, implying that China had been laying the groundwork for such an invasion and used the visit to showcase its abilities. The US is already sending defense weapons to the island as part of a 14% defense budget increase, the largest in Taiwan’s history. 

An invasion of Taiwan would put 65% of the world’s chip manufacturing and 90% of the global supply of advanced chips in the crosshairs. Other countries are likely to join the conflict, resulting in a slew of economic and political consequences. 

Moving Forward

While we can only make educated guesses as to what the industry’s landscape might look like in the months to come, one thing is certain: a domestic semiconductor industry that can outcompete its rivals is of the utmost importance for both countries. It is estimated that China has committed more than $250B to its chip industry over the next decade. That’s similar to the $280B figure that was injected into US industry this August.  

The US has further solidified the importance of maintaining a competitive technological edge over China with its move this October, showing that they are willing to absorb the significant economic recoil that comes with a sweeping ban if it means a chokehold on China’s technological advancement. 

Secretary of State Antony Blinken is expected to meet with senior Chinese state officials early next year. Both sides have been steadfast in their stances on Taiwan, China’s use of state power, and other important topics that shaped the ban, but if progress can be made on these fronts during the meeting, we could see a step towards a more fertile industry landscape. 

If not, we can expect to see some form of push back from China. As it stands, there is no clear path towards the rapid semiconductor innovation that China has been fervently pursuing in order to catch up with the world’s major players. If in-person communications prove unfruitful, another blow in the trade war may follow suit.

Fusion Worldwide will be monitoring this situation closely. Follow our social media to catch our updates and learn how new developments will impact the semiconductor industry.  

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