The Semiconductor Rivalry between the U.S. and China

In the aftermath of the pandemic and the invasion of Ukraine, energy supplies have become more expensive and unreliable. Because of unstable energy supplies and tumultuous global politics, many countries are accelerating their transition to green energy and are reviving investment in crucial industries such as semiconductors and rare earth metals. For example, the Biden administration has been offering general incentives from bills such as the Chips Act and the Inflation Reduction Act to encourage reshoring these vital industries and transitioning to green and sustainable energy.

Congress enacted the $53 billion Chips Act to strengthen the domestic semiconductor industry. Roughly $ 39 billion is dedicated to manufacturing incentives for chip plans, material, and equipment factories and over $13.2 billion to research and workforce training. The U.S. share in global semiconductor production has fallen from 37% in 1990 to 10% in 2023. In addition to the decline in general semiconductor production, the U.S. does not mass produce the most advanced semiconductor chips — those smaller than 5 nanometers. In fact, the U.S. relies on one company in Taiwan, Taiwan Semiconductor Manufacturing Company (TSMC), for 92% of these sophisticated chips.

However, given the rise of the political and military tension between China and Taiwan in recent years, the U.S. wants to move away from reliance on foreign semiconductor suppliers. Instead, the Pentagon will receive semiconductors manufactured from facilities covered by Chips Act funding, allowing the U.S. military to develop increasingly modern weapons.

The Chips Act has already spurred investment. Top U.S. manufacturers including Intel Corp., Micron Technology Inc. and Texas Instruments Inc. have plans to expand their capacities, including investment in manufacturing facilities and plants. In fact, TSMC has a $40 billion project underway in Arizona, with plans to upgrade the factory with more advanced chip-making technology and begin producing microchips by 2024.

Two of South Korea’s biggest chip makers, Samsung Electronics Co. and SK Hynix Inc., find some of the requirements under the Chips Act to be controversial, making them hesitant to apply for the U.S. federal funding. The Chips Act requires subsidized companies to profit share with the U.S. government if their business exceeds initial projections. This raises concerns for South Korean investors. Companies are suspicious that the profit-sharing clause takes away any subsidies chip manufacturers are given. Companies are also worried about allowing the U.S. government access to their trade secrets through disclosure of profit projections and factory productions.

Furthermore, firms that receive chip subsidies are banned from engaging in joint research or expanding their semiconductor manufacturing capacity in China for 10 years. Because Samsung and SK Hynix also invested in production bases in China, accepting the Chips Act subsidies would limit their business opportunities in China, which is another important concern. The hesitancy and pushback from South Korean companies against the Chips Act highlights the challenges the U.S faces in attracting semiconductor investments while nudging its allies, such as South Korea, to isolate China.

Responding to the U.S. Chips Act, China is drafting similar proposals to boost China’s semiconductor self-sufficiency. One proposal asks the National People’s Congress, the country’s top legislature, to enact a law similar to the U.S. Chips Act to further chip technology research and production. This proposal would legally require industry stakeholders to focus on the development of advanced process nodes and software which are U.S. technologies and currently inaccessible to Chinese firms due to trade restrictions.

The semiconductor rivalry between the U.S. and China will force chip manufacturers around the world to balance business interests and potential sanctions. Along with the Chips Act, the U.S. has significantly ramped up export restrictions targeting China’s access to advanced semiconductors, chip-making tools and software. In response to export controls, ASML, the world’s leading semiconductor lithography equipment maker, directed its U.S. staff to stop serving Chinese customers while it assesses the new U.S. sanctions. With the progressive implementation of the Chips Act, we will continue to observe how leading semiconductor manufactures and their governments walk a tightrope balancing their market interests in both China and the U.S.