CASE STUDY

The global semiconductor industry is a high-tech colossus. The microprocessor and memory chips that the industry produces are to be found everywhere, from computers to telecommunications equipment to mobile phones, automobiles, aircraft, and industrial machinery. The industry churns out about a trillion chips every year, or 128 for every person on the planet. There are over 25 chips in each iPhone, whereas an electric car can have 3,000 of them. In 2019, the industry generated around $412 billion in revenues. When the COVID-19 pandemic swept the world in 2020, demand for semiconductors didnt fall with the resulting economic recessionit jumped to $435 billion as people worked from home and spent more time playing video games or streaming shows. Looking forward, the fusion of high-speed 5G communications networks, the Internet of Things (IoT), and cloud computing technology will continue to drive strong demand growth for semiconductor chips far into the future.

American firms have long held a strong position in this business. The industry was born in Silicon Valley, California, in the 1960s, with Fairchild Semiconductor emerging as the first large enterprise. Today, some of the top firms in the world, including Intel, Nvidia, and Qualcomm, are based in California. The U.S. industry registered exports of $46 billion in 2019, as it supplied chips to foreign device makers, particularly in Southeast Asia. This puts the industry on par with automobiles as one of the most important export industries in the United States.

However, although exports are still robust, the geography of the industry has shifted considerably since the 1980s. While U.S. firms still produce around 44 percent of all the semiconductor chips they design at home, significant production has migrated to Japan, Taiwan, and South Korea. For high-end microprocessors in particular, there are now only three firms that produce efficiently at scale. One of these, Intel, has significant manufacturing activities in the United States. The other two are foreign entities: Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung of South Korea. While Intel designs and makes its own chips, companies such as Nvidia and Qualcomm specialize in chip design, outsourcing production to contract manufacturing companies such as TSMC and Samsung. Thus, while the United States still produces 85 percent of all chip design software and around 50 percent of chip design intellectual property and manufacturing equipment, its share of global chip manufacturing has slipped from more than 50 percent in the 1990s to 12 percent today.

The shift of manufacturing to SE Asia has been driven by several factors. Governments outside the United States have often offered hefty financial incentives to chip makers. This is particularly important given that the cost of a new fabrication facility can amount to $5 billion. Indeed, TSMCs latest factory, which opened in 2020, cost $19.5 billion. Chip companies also have been attracted by growing networks of suppliers outside the U.S. and an expanding workforce of skilled engineers capable of operating expensive manufacturing machinery.

Looking forward, semiconductor production is viewed across the globe as a national-security priority because of the powerful role chips play not only in consumer technology but also in the military and cyberwarfare. The sale of chips to China, in particular, has come under political scrutiny. Under the Trump Administration, the U.S. placed new restrictions on Chinas industry, including banning Chinese telecom giant Huawei Technologies Co. and preventing some Chinese chip-makers from buying American manufacturing equipment without a license. China is the worlds largest chip importer, buying $300 billion worth of foreign- made chips in 2019. As a producer, China is a bit player. Chinese firms only supply 5 percent of the world market, and Chinese chips are far less advanced, lagging behind their Taiwanese and U.S. counterparts by five years or more, experts say.

Moves by the Trump administration to block exports of semiconductor chips and technology to China have galvanized the Chinese. In response, President Xi Jinping called for accelerating the development of critical industries, including semiconductors. In 2020, Chinese semiconductor companies raised nearly $38 billion through public offerings, private placements, and asset sales. Six Chinese provinces and regions also pledged to invest about $13 billion in semiconductors. An article in The Economist estimated that the Chinese government may be planning to pump $100 billion in subsidies into Chinese chip makers. Chinese universities are now prioritizing programs dedicated to training a new generation of semiconductor experts. In addition, Chinas cabinet raised the status of university degrees tied to semiconductors, promising more funding and prestige. Meanwhile, Chinas elite Peking, Tsinghua, and Fudan universities have started to channel additional resources into their semiconductor programs.

China seems determined to reduce its reliance on foreigners (and particularly America) for semiconductor technology and chips. As one Chinese chip expert noted, Its about protecting the safety of your supply chain. You never know if youll be next on the U.S. blacklist. If the Chinese are successful, the geography of international trade in semiconductors may shift once again, with Chinese producers increasing their global market share. If they are successful, the biggest loser may be America.

Global Trade in Semiconductors

1: Discuss Chinas commitment to becoming chip-independent within a few years. Why is this important to China? How China can become chip-independent? Should the United States be making a similar commitment?

2. What changes are likely to the global semiconductor industry once China develops its own chip production? Is a chip-independent China good or bad for American producers?

3. The top three semiconductors are Samsung Electronics, Intel, and TSMC, discuss the future prospects of each company.

Should be 6 pages long.