Geopolitical risks are heating up, and countries are strengthening semiconductor support policies! Semiconductor Opportunities and Challenges

2024/05/24

TechNews
May 23, 2024
Author: Taiwan Banker

On the east side of Hokkaido New Chitose Airport, along the JR Chitose Line, there is a construction site enclosed by white steel plates. It is so wide that the boundary is almost invisible, with only occasional serpentine openings. There was only one security guard standing there before, surrounded by trees. . Except for the sight of a few cranes through the steel plate and the dump trucks carrying sand and gravel coming in and out of the entrance, there is no sign that this is a large-scale project.

In order to achieve the localization of advanced logic semiconductors, Japan quietly established the Rapidus Industrial Construction Park in August 2022. Although surrounded by the unique tranquility of Hokkaido, the success or failure of Japan's economic security when it comes to semiconductors depends on it.

U.S. semiconductor technology hegemony is difficult to shake
In World War II, U.S. electronic superiority made a huge contribution to the Allied victory. The electronic systems of radar and short-range ballistic control systems used vacuum tubes, which later developed into transistors and integrated circuits (ICs). However, the Apollo Project and other projects in the 1960s further improved U.S. semiconductors, and its technological hegemony has never been shaken except for certain periods. Certain periods were the 1980s, when Japanese companies rose rapidly. By 1988, Japanese-made semiconductors accounted for more than half of the global market. Japanese companies' semiconductor sales revenue ranked among the top three in the world, with six Japanese companies in the top ten.

Japan is allied with the United States. However, Japanese-made semiconductors are widely used in weapons, production equipment, and military command and communication systems. Therefore, vigilance over "U.S. military technology is too dependent on Japan" emerged. At the time of the publication of Ezra Vogel's "Japan First" (1979), the security threat to the United States shifted from Soviet military power to Japanese technological power.

During the period of rapid growth from the 1960s to the 1970s, steel was called the core "food" of industry, but by the late 1980s, semiconductors replaced it. Therefore, semiconductors began to become "strategic materials."

Japan's semiconductor industry faces internal and external troubles
The problem facing Japan's semiconductor industry was that at first integrated electrical manufacturers regarded semiconductor production as part of their business, but later specialized semiconductor manufacturers became dominant. Although Samsung is also involved in home appliances, it focuses more on semiconductors and information equipment.

The semiconductor business is part of a diversified operation, and investment decisions need to be coordinated with other departments, increasing transaction costs. In addition, the semiconductor industry has market changes that are independent of the general economic cycle and lacks predictability. When the bubble economy collapsed in 1991, diversified operations and consensus decision-making were detrimental to the semiconductor business, which was caused by internal worries.

The yen sharply appreciated after the Plaza Accord in September 1985. The Japan-US Semiconductor Agreement forced Japan to purchase semiconductors made in the United States. Japanese companies' acquisition of U.S. semiconductor companies was also blocked by U.S. political pressure and was considered a foreign invasion. The Japanese semiconductor industry tried to recover during the "lost 30 years", but it never succeeded.

The threat of geopolitical risks
Although semiconductor manufacturers have experienced booms and busts, semiconductor supply has never been in trouble. But the COVID-19 epidemic that started at the end of 2019 caused big changes. Unlike the Cold War, the semiconductor supply crisis is seen in the context of economic security in the field of civilian products. The use of semiconductors in 5G and data centers has increased, and working from home and living at home have become more popular during the COVID-19 epidemic, driving increased demand for information equipment and home appliances. At the same time, the U.S.-China trade war has excluded Chinese-made semiconductors from the Western market. Coupled with major fire accidents in Japan in 2020 and 2021, and a power outage in the United States in 2021, semiconductor factories have stopped production and supply has decreased.

The COVID-19 epidemic has caused a slump in automobile sales, and automotive semiconductor production lines have turned to other-purpose semiconductors. Even if the demand for automobiles recovers, the supply of automotive semiconductors cannot keep up immediately, causing car manufacturers in various countries to be forced to suspend production. Recently, the demand for image processing semiconductors developed for artificial intelligence has increased sharply.

When the semiconductor supply chain was defined as a challenge to economic security, countries began to include containment. However, in the context of global economic integration, U.S. manufacturing has moved overseas. Although U.S. companies accounted for 54% of the global semiconductor production market in 2021, only 11% of semiconductors are produced in the United States. It is urgent to improve the situation.

In addition, the concentration of semiconductor production bases in East Asia also increases geopolitical risks. As of 2021, the top three countries in semiconductor production are still South Korea, Taiwan and China. These areas are not only the highly tense Taiwan Strait and Korean Peninsula, but China also controls one-sixth of the world's semiconductor production, so it is possible to regard semiconductors as an economic threat ( such as export restrictions) tools.

Recently, the United States has not only invested in Texas Instruments, Intel, Micron Technology and other companies, but also has large-scale investments by foreign companies such as TSMC and Samsung.

In 1986, Fujitsu tried to acquire the American semiconductor giant Fairchild Semiconductor, but was strongly opposed by the U.S. Congress. The United States' reaction was characterized by "semiconductor nationalism", but now it is showing a trend of "localized production and consumption of semiconductors", and corporate nationality is no longer an issue.

TSMC undertakes the production of semiconductors for fighter jets, missiles, and command and communication systems for the U.S. military, but the production location is in Taiwan. However, the United States has recently begun to allow these semiconductors to be produced in the United States. For Taiwan, this means giving up the security tool of "providing semiconductors to the US military."

Japan, as mentioned earlier, invested 5 trillion yen in Rapidus. In addition to Japanese companies Kioxia, Toshiba, and Mitsubishi Electric, the total announced investment by foreign-funded enterprises exceeds 1 trillion yen, including TSMC, Micron Technology, and Veton Electronics. Japan’s Ministry of Economy, Trade and Industry’s revised budget for 2022 requires a semiconductor support fund of 1.3 trillion yen, and an additional 3.4 trillion yen is required for 2023.

Countermeasures to avoid geopolitical risks include strengthening the self-sufficiency system for semiconductor finished products. In October 2022, the Biden administration of the United States banned the export of China's advanced semiconductors and manufacturing equipment technology, requiring Japan and the Netherlands to take simultaneous action. However, power semiconductors and other products are not the most advanced products and therefore can be manufactured using equipment that is not subject to export controls. Chinese automakers are working to produce power semiconductors in-house.

In addition, Chinese semiconductor foundry giant Semiconductor Manufacturing International Corporation (SMIC) successfully manufactured 7-nanometer wafers using equipment exempt from export controls. Advanced semiconductors can be used in smartphones, artificial intelligence, and supercomputers, but they may also be used in the military sector.

Controls on Russian semiconductor exports
After Russia invaded Ukraine, Japan and Western countries imposed export controls on Russia, including semiconductors, manufacturing equipment, and raw materials. The export controls were initially economic sanctions because Russia relies on Western imports for about 90% of its semiconductor supplies. After the Russo-Ukrainian war evolved into a protracted war, semiconductor controls were not only economic sanctions, but also a means to weaken combat effectiveness. The production and maintenance of high-tech weapons require semiconductors, including analog semiconductors and power semiconductors.

Ukraine and Russia both mass-produce military and civilian drones and both rely on semiconductors. The Russian satellite navigation system "GLONASS" uses American-designed semiconductors. Although semiconductor export controls have had an impact on Russia, there are still some countries that bypass the controls, such as Hong Kong, China, Turkey, etc., to import semiconductors and conduct so-called "semiconductor money laundering." These semiconductors are also used in home appliances and then exported to Russia, where they are dismantled for repair in military supplies.

Modern warfare relies heavily on semiconductors, so the source of supply is regarded as a key factor in combat effectiveness. Although there are many roundabout ways to break export controls, Western countries are still trying to find the most effective way to restrict Russia's access to semiconductors.

Japan adopts national security strategy
In December 2022, the Japanese government adopted the "National Security Strategy" to determine the importance of semiconductor supply, including strengthening the supply chain and establishing a manufacturing base. Semiconductor manufacturer equipment investments are also in line.

Aircraft engines and gas turbine engines on ships are equipped with a large number of sensors to collect relevant information. Semiconductors are crucial for processing information. Semiconductor demand for automobiles is also growing rapidly, especially in the field of electric vehicles. Japan's semiconductor manufacturing equipment and materials still face challenges. Some equipment markets are dominated by American and Dutch companies, and rising prices of neon and palladium after the Russo-Ukrainian war have affected the supply chain.

It is unrealistic to realize "purely domestically produced" semiconductors. Instead, it is necessary to improve the negotiation strength of other equipment and materials, while strengthening technological advantages and talent training. Japan has also strengthened cooperation with other countries in defense equipment to cope with challenges.

While the global semiconductor industry faces many challenges, there are also unlimited opportunities. From supply chain vulnerabilities to geopolitical risks, the semiconductor industry is on the eve of change. These challenges have also prompted governments, businesses and research institutions to work harder to deal with supply chain instability, promote the development of innovative technologies, and promote industry sustainability.

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