From phones, cars and washing machines to satellites, military weapons, and medical devices — in order for these devices to work as they are intended, they need microchips for the basis of their circuitry. Increased demand and the zero-COVID policy in China powered the global supply chain disruptions, and the world witnessed a chip shortage that halted production in many sectors.
Many auto-manufacturers left vehicles unfinished, waiting for chips and other parts. Others, like General Motors are dropping features like heated seats and steering wheels from certain models. Touch screens and satellite navigation are some of the tech features that other manufacturers decided to drop as well. China’s own auto sales decreased by 31.6% from 2021, according to official figures. Similarly, in the EU, the shortage caused production in the auto sector to decrease by one third.
In the wake of COVID-19 supply chain disruption, many countries are looking to subsidise their local chip manufacturing in order to reduce reliance on exports and to steer away from geopolitical tensions.
In March of last year, the European Commission set a target to increase chip production within the EU to be 20% of the global market, double their market share in 2020. The European Chips Act aims to ensure that the EU has the necessary tools, skills and technological capabilities to become a leader in this field. The proposal currently consists of three pillars: supporting R&D in Europe and bringing innovation ‘from the lab to the fab’; providing the legal basis for EU member states to use subsidies to lure cutting-edge manufacturers; a framework with trade measures to intervene in the supply chain in times of emergency.
Firms’ market share of semiconductor production steps by headquarter location, pure foundry business model, 2019
In 2019, East Asia accounted for 80% of semiconductor production capacity. The sector is currently dominated by Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung, especially when it comes to producing the latest chips. In the first quarter of 2022, TSMC recorded a market share of just over 53% in the global semiconductor foundry market.
It’s no surprise that the EU has its eyes set to be a key player in the global supply chain. Especially as the U.S. and China now view semiconductor self sufficiency as linked to both their economic and national security, and a tech trade war is likely.
In China’s current five year plan, a development initiative outlining the country’s plan for the years 2021-2025, technology is a major focus. Integrated circuits are listed as one of the seven frontier technologies that will benefit from substantial investment through national key science and technology projects.
Meanwhile in the US, the CHIPS Act – a US$250 bn bill to boost microchip production – passed in July as part of a larger package of investments in science and technology. The legislation was signed into law by President Biden on August 9, 2022
After being first introduced in 2020 — a version has passed the Senate but was stalled in the House — the bill has passed with support from both Republicans and Democrats. It includes $24 bn in tax cuts and $52.7 bn of direct subsidies, and prevents recipients of federal funds from expanding certain chip manufacturing in China and “other countries of concern.”
Before the bill had passed, in a virtual meeting between the US president and industry leaders held in July, Biden described semiconductors as the building blocks for the modern economy. Jim Taiclet, CEO of Lockheed Martin, aerospace and technology corporation, stated his belief that “ a robust, secure supply of microprocessors is essential both to national security and to the health of the defense industrial base in the aerospace industry as a whole.”
China is firmly opposed to the bill, Foreign Ministry Spokesperson Wang Wenbin stated in a press conference, saying that the bill is “entrenched in the Cold-War and zero-sum game mentality.”
Chip production is a particularly complex and costly process. Many companies create their chip designs and take them to a manufacturing plant, commonly called fab in the microelectronics industry — short for a fabrication plant. It takes years to build these plants, not to mention extremely high costs. It now costs about $20 bn to build a big chip plant with the latest technologies, according to the Semiconductor Industry Association last year’s state of the industry report. And the more complex chips become, the greater development costs are.
Supply chain disruptions are also affecting the building of the chip plants, says Veteran semiconductor analyst Arisa Liu of the Taiwan Institute of Economic Research. Even after the plants are constructed, self-sufficiency is not guaranteed for any country.