Beware of zero-sum game in US-China chip war that could last a decade

The White House issued National Security Strategy on October 12, revealing plans for the "decisive decade" for competition between democracies and autocracies. Out-competing China and constraining Russia is seen as the top priority. Days later, China's leader Xi Jinping vowed his country has no fear in confrontation with the West, and will "resolutely win the battle of key core technologies." Where would the superpowers' zero-sum competition take the world?

The chip war may last for years, if not decades. Rocky Uriankhai, chief editor of DIGITIMES, pointed out, "The US-USSR Cold War took 45 years to end, but the technology cold war that the world is being forced into now may take longer, or shorter with a hot war, depending on the mutual perception between the US and China."

Uriankhai, who has been watching closely the US-China competition and the geopolitics of critical technologies, explained, "We are in a critical juncture for power shift - if China successfully speeds up its technology self-reliance to achieve 'National Rejuvenation,' it will replace the US as the world's dominant nation and manifest a power shift; if the US successfully frustrates the rise of China and weakens its ability to compete, then 'Rise of the East and Decline of the West' will only be a temporary phenomenon."

For sure, the Chip War would be the ultimate test of the fate of a nation. But at what cost? And where would that take the rest of the world? How should companies prepare for tumultuous times?

Is decoupling inevitable?

Is decoupling between the two superpowers inevitable? Decoupling will lead to lesser interdependence, and eventually loss of influence over the other. Since power is derived from asymmetrical interdependence, that's why the US has chosen semiconductor as the battlefield. What would be the area that China has the greatest asymmetrical power over the US? Will the inward-looking Xi drive China backward to the time before 1979, and give political ideology priority over economic growth?

If the US-China relationship continues to deteriorate, Taiwan's semiconductor industry not only will be pushed to the frontline of confrontation between the two powers but also will be tested in the eye of the storm. "The changing geopolitical is reshaping the industrial landscape. The US now gives China issues the top priority in its national strategy; the G2 rift has no place for bilateral relations; and the peace and prosperity that we have taken for granted are already far away from us," writes DIGITIMES president Colley Hwang in his column. But he emphasizes that companies should strive to survive in the long haul - when the going gets tough, the tough get going.

"Decoupling is not just about US-China relations, but a global decoupling," Richard L Thurston, former general counsel of TSMC, has said. The US failed to count on a number of factors that would gut its semiconductor initiative, most important of which strong anti-American sentiment. "Prior to the Chip Plus legislation, globalization had contained manufacturing which benefited US chip designers, now the beasts inside Pandora's Box have been unleashed - the rise of eco-techno nationalism country by country."

Thurston believes Taiwan's best protection in the US-China Chip War would be to invest in its microelectronics industries and supportive infrastructure to ensure sustainable developments. "Taiwan must take the offensive to ensure that it is not marginalized by the US initiative," said Thurston.

Trillion-dollar meltdown?

The Economist called it a "trillion-dollar meltdown": "Whether or not it makes strategic sense for America to bring more chip production home and to hamstring its geopolitical rival with export bans, the combination of more supply and less demand is a recipe for trouble." The US and the EU have each committed US$52 billion and EUR43 billion to boost domestic chip production capacities, respectively.

The domestic capacity expansion is justifiable in the case of geopolitical risks over Taiwan and the trend of regionalization. It is the danger of making big-buck investments without meeting true demands that is worrisome. That would create a vacuum on the mature supply and over-supply on the advanced side.

Although the Chips Act of both the US and EU are focusing on boosting their domestic capacity of leading-edge advanced processing nodes, industry leaders from Infineon to Siemens quoted by Frankfurter Allgemeine (FAZ) argued that more focus should be cast on mature nodes, because that is where Europe's main demands lie.

Another issue is the cost of mature node chips produced in Europe and America probably cannot compete with that made in Asia. China is already aggressively importing DUVs beyond the models restricted by the US export control to ramp up output to achieve self-sufficiency, but by the time the European and US factory buildings are ready to install equipment, global supply probably may already exceed demand.

The complexity of supply and demand under export control impact

Some may argue that the export ban also is effectively shutting down the 29 fabs in China currently under construction because even though the ban only restricts equipment and chips for advanced nodes, US persons are prohibited from assisting or facilitating Chinese semiconductor development. Applied Materials, KLA and Lam Research have already pulled out their US staff from the Chinese customers' sites that they are currently assisting in installing or maintaining the equipment. Well, other competitors would quickly pick up the business.

ASML said in its third-quarter 2022 result presentation that export controls imposed by the US government have a very limited direct impact on it because there is not a lot of US technology in its tools, and the fact that ASML is a European company also keeps it from being directly under the impact of US policy. "We can continue to ship non-EUV lithography tools out of Europe into China," said ASML CFO Roger Dassen. But he also acknowledged that at a certain point in time ASML would be in a position where it can no longer supply certain tools to certain customers in China, and that the indirect effect currently happening is that Chinese customers cannot get other complementary equipment from US suppliers for their need to produce chips in the fabs.

According to industry experts, the light source technology of ASML DUV came from Cymer, which was headquartered in Sandiago and was acquired by ASML in 2013. The US still has plenty of tools to stop China from developing advanced chips in 10 years.

American semiconductor equipment makers and advanced AI chip companies are the biggest losers in the latest round of export control; losing the Chinese market would mean losing a big chunk of their sales.

Source: Companies, compiled by DIGITIMES Asia, October 2022

"Now the new control measures announced on Oct 7 by the US is just a tactic under its strategy, and the purpose is to make China neither be able to produce advanced chips internally nor to purchase them externally," said Uriankhai. "If the marginal effect starts to diminish, the US will announce another round of sanctions targeting the loopholes."

Will China be able to boost domestic innovation and foster a comprehensive supply chain at home? Probably not that easy. A dozen China semiconductor company executives face the fate of either quitting their jobs in China or giving up their US citizenships or Green Cards. South China Morning Post cited a survey done by Harvard, Princeton and MIT, saying that at least 1,415 Chinese American scientists have quit their jobs in America so far in 2021 and now work for Chinese institutions - up 21.7% from the previous year. But it remains to be seen how many of them can help China build semiconductor production lines?

How far can China go without US semiconductor equipment and technology?

A research brief done by Stanford Center on China's Economy and Institutions (SCCEI) pointed out that the effect of decoupling boosting China's patent application booms mostly disappeared after two years. The self-sufficiency protectionist policy supporters often miss the point of extra costs incurred by "reinventing the wheels."

The latest series of new sanctions and export controls comes after evidence showed that SMIC has successfully developed 7nm process on DUV and has shipped chips to a Bitcoin miner. Some experts think that SMIC will be able to refine its 7nm processing yields by optimizing the processes and upgrading to 2nd generation in 2023. Although it is theoretically possible to go 5nm or even 3nm, without EUV it will be very challenging, and the cost would spiral. Nevertheless, sources said if abandoning the development of supercomputer chips or cloud computing chips that require the support of advanced process nodes, and instead focusing on edge AI chips carrying lower process requirements, China will still have a chance to gain a solid presence in the global AI market, according to a DIGITIMES report.

Although China has been showering capital to foster its domestic semiconductor supply chains and was able to have national champions such as YMTC, CXMT, as well as some equipment makers, their competitiveness will be limited because American companies like Apple are now having second thoughts about adopting their memory chips due to political pressure and the Entity List. Would the US sanction continue to expand? That remains to be seen.

How should companies prepare for the uncertainties to be inflicted by Chip War? Stay alert and avoid crossing the shifting red line. "Be extra careful, do check customers' use for your products as much as you can, and foundry makers especially should stay away from possible trouble such as taking orders for manufacturing ICs with unusual specifications and quantities," said an industry expert, citing cases of chip orders placed via multiple layers to avoid the true clients from being identified. "If one day you find yourself on the Unverified List without knowing why, at least you can prove you have tried your best to comply."