The modern semiconductor industry is a manufacturing miracle. In 1961, a state-of-the-art computer chip contained only four transistors. Such has been the extraordinary innovation of the industry since Nvidia’s latest graphics chip contains 76 billion. According to a calculation by historian Chris Miller, the global chip industry last year manufactured more transistors than the combined amount of all other goods produced by all other industries in all of human history.
The astonishing expansion of the semiconductor industry, which powers everything from smartphones to ballistic missiles, has been driven primarily by the ingenuity of chip designers and the dynamism of the market. But, given its strategic importance, it has been periodically stimulated and piloted by governments. The risk today is that geopolitical tensions between the United States and China threaten to tear this complex and highly interconnected sector apart. It is possible that the intensification of competition could still induce more innovation.
Since 2020, the United States has imposed a “chip chokehold” on China, prohibiting the export of cutting-edge semiconductor technology to Beijing. In response, China has invested billions in developing its own chip industry. Costs are rising for the global industry and production efficiency is declining as existing supply chains are rewired. But national security now trumps economic logic.
This standoff is already hurting semiconductor companies in countries allied with the United States, especially in East Asia, where so much manufacturing capacity is clustered. The Taiwanese and South Korean companies that dominate the industry are reluctantly forced to choose between Washington and Beijing. Without China, they lose access to one of their biggest markets, but they also face increasing competition from the United States itself. Passed in July, the US Chips Act, which provides $52 billion in subsidies to the domestic semiconductor industry, signaled Washington’s determination to revive domestic manufacturing.
This week, South Korea’s science minister warned that a “sense of crisis” is gripping his country’s much-loved semiconductor industry amid an escalating global chip war. In an interview with the Financial Times, Lee Jong-ho expressed concern that the competitiveness of South Korea’s chip industry could be threatened both by Washington’s campaign to lure the country’s manufacturers to the United States and by the Beijing state’s massive support for the chip industry in China.
According to a report by New Street Research, the governments of China, the United States, the EU, Japan and India have collectively pledged $190 billion in subsidies over a decade as they seek to locate manufacturing capacity. The sheer scale of state intervention will likely lead to overcapacity in some segments, which could trigger future dumping and trade disputes. But the money wall can also amplify the wild cyclical swings that have historically characterized the industry.
Two years ago, the Covid pandemic disrupted global supply chains, causing severe shortages of chips in the automotive industry and leading to a subsequent increase in investment. This year, the slowdown in the global economy is dampening demand. Gartner predicts semiconductor revenues will fall 2.5% to $623 billion next year. Governments may be pumping money into the sector just when excess capacity is coming online and prices are falling.
However, Pierre Ferragu, managing partner of New Street Research, says it will be several years before the subsidies feed into the extra capacity, giving manufacturers time to calibrate supply. “I don’t think it will affect the long-term cycle much. It will be positive for the industry,” he says.
This new wave of investment may well stimulate innovation. “I guess when we look back on the Chip Act 10 years from now, we’ll think the money spent on investment in manufacturing wasn’t as big as the money spent on R&D,” Miller says. , author of Flea war, a new book about the semiconductor industry. “While companies tend to have a two to three year time horizon, governments have a 10 to 15 year time horizon.”
The big unknown that still overshadows the industry is whether China is trying to take control of Taiwan. Tsai Ing-wen, president of Taiwan, says her island is protected by a “silicon shield”, given the importance of its cutting-edge chips to the global economy. But the United States is showing how much it prioritizes national security over economic efficiency. It would not be surprising if one day China made a similar point.
