What’s next for the chip industry
The year ahead was already shaping up to be a hard one for semiconductor businesses. Famously defined by cycles of soaring and dwindling demand, the chip industry is expected to see declining growth this year as the demand for consumer electronics plateaus.
But concerns over the economic cycle—and the challenges associated with making ever more advanced chips—could easily be eclipsed by geopolitics.
In recent months, the US has instituted the widest restrictions ever on what chips can be sold to China and who can work for Chinese companies. At the same time, it has targeted the supply side of the chip industry, introducing generous federal subsidies to attract manufacturing back to the US. Other governments in Europe and Asia that are home to major chip companies have introduced similar policies to maintain their own positions in the industry.
As these changes continue to take effect in 2023, they will throw a new element of uncertainty into an industry that has long relied on globally distributed supply chains and a fair amount of freedom in deciding who they do business with.
What will these new geopolitical machinations mean for the more than $500 billion semiconductor industry? MIT Technology Review asked experts how they think it will all play out in the coming year. Here’s what they said.
The great “reshoring” push
The US committed $52 billion to semiconductor manufacturing and research in 2022 with the CHIPS and Science Act. Of that, $39 billion will be used to subsidize building factories domestically. Companies will be able to officially apply for that funding in February 2023, and the awards will be announced on a rolling basis.
Some of the funding could be used to help firms with US-based factories manufacture military chips; the US government has long been concerned about the national security risks of sourcing chips from abroad. “Probably more and more manufacturing would be reinstated within the US with the purpose to rebuild the defense supply chain,” says Jason Hsu, a former legislator in Taiwan who is currently researching the intersection of semiconductors and geopolitics as a senior fellow at Harvard’s Kennedy School. Hsu says that defense applications are likely one of the main reasons the Taiwanese chip giant TSMC decided to invest $40 billion in manufacturing five- and three-nanometer chips, currently the two most advanced generations, in the US.
But “reshoring” commercial chip production is another matter. Most of the chips that go into consumer products and data centers, among other commercial applications, are produced in Asia. Moving that manufacturing to the US would be likely to push up costs and make chips less commercially competitive, even with government subsidies. In April 2022, TSMC founder Morris Chang said that chip manufacturing costs in the US are 50% higher than in Taiwan.
“The problem is going to be that Apple, Qualcomm, and Nvidia—they’re going to buy the chips manufactured in the US—are going to have to figure out how to balance those costs, because it’s going to still be cheaper to source those chips in Taiwan,” says Paul Triolo, a senior vice president at the business strategy firm Albright Stonebridge, which advises companies operating in China.
If chip companies can’t figure out how to pay the higher labor costs in the US or keep getting subsidies from the government—which is hard to guarantee—they won’t have an incentive to keep investing in US production in the long term.
And the United States is not the only government that wants to attract more chip factories. Taiwan passed a subsidy act in November to give chip companies large tax breaks. Japan and South Korea are doing the same.
Woz Ahmed, a UK-based consultant and former chip industry executive, expects that subsidies from the European Union will also be moving along in 2023, although he says they likely won’t be finalized until the following year. “It’ll take them a lot longer than it will [take] the US, because of the horse trading amongst all the member states,” he says.
Navigating a newly restricted market
The controls the US introduced in October on the export of advanced chips and technologies represented a major escalation in the stranglehold on China’s chip industry. Rules that once barred selling this advanced tech to a few specific Chinese companies were expanded to apply to virtually all entities in China. There are also novel measures, like restricting the sale of essential chipmaking equipment to China.
The policies put the industry in uncharted enforcement territory. Which chips and manufacturing technologies will be considered “advanced”? If a Chinese company makes both advanced and older-generation chips, can it still source US technologies for the latter?
The US Department of Commerce answered some questions in a Q&A at the end of October. Among other things, it clarified that less advanced chip production lines can be spared the restrictions if they are in a separate factory building. But it’s still unclear how—and to what extent—the rules will be enforced.
We’ll see this play out in 2023. Chinese companies will likely look for ways to circumvent the rules. At least one has already tried to make its chips seem less advanced. Non-Chinese companies will also be motivated to find work-arounds—the Chinese market is gigantic and lucrative.
“If you don’t have enough enforcement people on the ground, or they can’t get the access, as soon as people realize that, lots of people will break the rules,” Ahmed says.
Several experts believe that the US may hit China with yet more restrictions this year. Those rules may take the form of more export controls, a review process for outbound US investments, or other moves targeting chip-adjacent industries like quantum computing.
Not everyone agrees. Chris Miller, an international history professor at Tufts University, thinks the US administration may take a break and focus on the current restrictions. “I don’t expect major expansion of export controls on chips [in 2023],” says Miller, the author of the new book Chip War: The Fight for the World’s Most Critical Technology. “The Biden administration spent most of the first two years in office working on those restrictions. I think they are hoping that the policy sticks and they don’t have to make changes to it for some time.”
How China will respond
So far, the Chinese government has had little response to the new US export controls except for some diplomatic statements and a legal dispute that it filed with the World Trade Organization, which is unlikely to yield much result.
Will there be a more dramatic response to come? Most experts say no. China doesn’t seem to have a big enough advantage within the chips sector to significantly hit back at the US with trade restrictions of its own. “The Americans own enough of the core technology that they can [use it] against people who are downstream in the supply chain, like the Chinese. So by definition, that means [China doesn’t] have tools for retaliation,” says John Lee, the director of East West Futures Consulting.
But the country does control 80% of the world’s refining capacity for rare-earth materials, which are essential in making both military products like parts for fighter jets and everyday consumer device components like batteries and screens. Restricting exports could provide China with some leverage. The Chinese could also choose to sanction a few US companies, whether in the chip industry or not, to send a message.
But so far, China doesn’t seem interested in a scorched-earth path when it comes to semiconductors. “I think the Chinese leaders realized that that approach will be just as costly to China as it would be to the US,” says Miller. The current Chinese chip industry cannot survive without working with the global supply chain—it depends on other companies in other countries for lithography machines, core chip IP, and wafers, so avoiding aggressive retaliation that further poisons the business environment is “probably the smartest strategy for China,” he says.
Instead of hitting back at the US, China is likely to focus more on propping up the domestic chip industry. It’s been reported that China may announce a trillion yuan ($143 billion) support package for domestic companies as soon as the first quarter of 2023. Offering generous subsidies is a tried and tested method that has helped boost the Chinese semiconductor industry in the last decade. But there remains the question of how to allocate that funding efficiently and to the right companies, especially after the efficiency of China’s flagship government chip investment fund was questioned in 2022 and shaken by high-level corruption investigations.
The Taiwan question
The US doesn’t call all the shots. To pull off its chip tech blockade, it must coordinate closely with governments controlling key processes of chipmaking that China can’t replace with domestic alternatives. These include those of the Netherlands, Japan, South Korea, and Taiwan.
That won’t be as easy as it sounds, because despite their ideological differences with China, these places also have an economic interest in maintaining the trade relationship.
The Netherlands and Japan have reportedly agreed to codify some of the US export control rules in their own countries. But the devil is in the fine print. “There are certainly voices supporting the Americans on this,” says Lee, who’s based in Germany. “But there’re also pretty strong voices arguing that to simply follow the Americans and lockstep on this would be bad for European interests.” Peter Wennink, CEO of Dutch lithography equipment company ASML, has said that his company “sacrificed” for the export controls while American companies benefited.
Fissures between countries may grow bigger as time goes on. “The history of these tech restriction coalitions shows that they are complex to manage over time and they require active management to keep them functional,” Miller says.
Taiwan is in an especially awkward position. Because of their geographical proximity and historical relationship, its economy is heavily entangled with that of China. Many Taiwanese chip companies, like TSMC, sell to Chinese companies and build factories there. In October, the US granted TSMC a one-year exemption from the export restrictions, but the exemption may not be renewed when it expires in 2023. There’s also the possibility that a military conflict between Beijing and Taipei would derail all chip manufacturing activities, but most experts don’t see that happening in the near term.
“So Taiwanese companies must be hedging against the uncertainties,” Hsu says. This doesn’t mean they will pull out from all their operations in China, but they may consider investing more in overseas facilities, like the two chip fabs TSMC plans to build in Arizona.
As Taiwan’s chip industry drifts closer towards the US and an alliance solidifies around the American export-control regime, the once globalized semiconductor industry comes one step closer to being separated by ideological lines. “Effectively, we will be entering the world of two chips,” Hsu says, with the US and its allies representing one of those worlds and the other comprising China and the various countries in Southeast Asia, the Middle East, Eurasia, and Africa where China is pushing for its technologies to be adopted. Countries that have traditionally relied on China’s financial aid and trade deals with that country will more likely accept the Chinese standards when building their digital infrastructure, Hsu says.
Though it would unfold very slowly, Hsu says this decoupling is beginning to seem inevitable. Governments will need to start making contingency plans for when it happens, he says: “The plan B should be—what’s our China strategy?”
This story is a part of MIT Technology Review’s What’s Next series, where we look across industries, trends, and technologies to give you a first look at the future.