Rakesh Kumar is a professor in the Department of Electrical and Computer Engineering at the University of Illinois and The Reluctant Technophile: India’s Complicated Relationship with Technology.
In a shocking example of how geopolitical powers can limit rivals’ access to chips while taking steps to spur domestic chip production, TSMC and ASML now have the ability to remotely disable chipmaking tools if China invades Taiwan. With the recent intense action surrounding chips, people are beginning to question what the new status quo will look like. Will some countries spend more than others and crowd out others? Or will there be multiple centers of power, perhaps targeting different niches?
There are three different motivations behind the hubbub we’re seeing around wafer manufacturing. For some, this is about economics and national security. Semiconductors are critical to both, so ensuring access to chips through local manufacturing provides assurance. For others, it’s about geopolitical leverage. Control of the chips can control the economies and defenses of competitors. For many, it’s about ownership of a massive and growing industry – the chip market is expected to double to more than $1 trillion by 2033.
However, political and economic realities must be taken into account. In addition to acquiring the tools and technology needed, advanced wafer fabs require tens of billions of dollars in investment each year to start up and maintain. Not many countries can make such a commitment. These tools and techniques may not be available to others. Traditional wafer manufacturing costs less, but these wafers have lower profit margins and require cheap labor and resources.
Once these two factors are taken into account, the possible balance begins to come into focus. For advanced chip manufacturing, only the United States, China, Japan and the European Union can afford the patient funding required. However, for Japan and the EU, chip access is not an issue and the incentive for any geopolitical leverage is weak, especially in their currently troubled economies.
With limited access to advanced chips and chipmaking tools and technology, China has a strong incentive to invest. They may also succeed, either by developing homegrown versions of restricted tools and technologies, or by developing alternative technologies such as advanced packaging to build equally powerful chips.
The United States also has strong economic and national security motivations. It may soon enter the advanced chip manufacturing sector, either as U.S. chip companies such as Intel catch up, or foreign companies such as TSMC or Samsung are forced to build advanced chip manufacturing plants locally. Overall, advanced chip manufacturing will reach a steady state similar to oil: there will be a handful of producers (Taiwan, South Korea, the United States, and China) producing what everyone needs.
For traditional wafers, the situation may be different. Making traditional wafers is much cheaper and less risky. Relatively low-cost countries such as India will enter traditional wafer manufacturing mainly to become a player in this growing but low-margin industry and use their large local markets to support the industry. Countries such as Turkey, Malaysia, Indonesia and Vietnam are likely to follow suit because they have large enough local markets or existing ecosystems to smoothly transition to high-volume traditional wafer manufacturing. The UK, Japan, US and EU are also likely to step up their traditional chip manufacturing, primarily to ensure access to these chips. However, since manufacturing costs are higher in these countries, they may use tariffs to support local manufacturing. Overall, traditional chip manufacturing might look like the automotive industry—vibrant and full of players.
What does this new chip world order mean for producers and non-producers? Since a few countries will have advanced chip manufacturing, they will use it as leverage and potentially control access. This will heighten geopolitical tensions and accelerate geopolitical adjustments as geopolitical allies become advanced chip allies and vice versa. Second, since it may be easier to obtain conventional chips, only a small group of non-producing countries will have to choose a side. In fact, we may see legacy wafers from multiple producers in the same geographic market, some more dominant than others. For both chip types, manufacturers will try to spend more money to beat the competition. However, given the incentives involved, the major players will continue to hold on, with some adopting protectionist measures.
Countries standing aside need to be especially careful. They will be tempted, but with low margins and high costs, it often doesn’t make sense to get into chip manufacturing. In this new chip world, chip nationalism needs to be avoided at all costs.
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