From Poject Syndiate, by Keun Lee – When Joe Biden landed in South Korea last month – his first official trip to the country as US president – he headed straight for the massive semiconductor factory in Samsung outside Seoul.
There he met South Korean President Yoon Suk-yeol and Samsung Electronics Vice President Lee Jae-yong and hailed the construction of a $17 billion Samsung semiconductor factory in Texas. The economic and strategic importance of semiconductors could not be clearer.
During the COVID-19 pandemic, semiconductor supply disruptions have forced a range of industries – from automotive to consumer electronics – to slow down or halt production. Reliable supplies of semiconductors, it has become clear, are critical to a country’s economic resilience. For the United States and China, they are also at the heart of a strategic competition in which leadership in cutting-edge industries plays a crucial role.
As it stands, the US has a bigger slice of the global semiconductor pie, due to its strength in chip design and in the fabless segment of the industry. But the vast majority of chips are made far from US shores, including at Samsung’s factory in Xi’an, the hometown of Chinese President Xi Jinping. And China – the world’s biggest chip market – is investing heavily in the sector as part of its effort to boost local innovation. So, is the US about to lose its edge in semiconductors?
So far, China has struggled to catch up. First, the typical strategy of laggards – focused on building cheaper low-end products – cannot be applied to semiconductors., as a more advanced “next generation” memory chip tends to cost the same or less than its predecessors. Less advanced chips are therefore virtually worthless.
That’s not to say the incumbents’ position is unassailable. After all, South Korean companies like Samsung have managed to overtake more established Japanese companies like Toshiba in semiconductors. The key is a “leapfrog” strategy: developing more advanced versions of a technology before the incumbent can. Such a strategy requires the development of a technology to follow a relatively predictable trajectory – in the case of chips, going from a capacity of one kilobyte to 2K, then 4K, etc. – and that companies have access to technology from abroad.
South Korean companies like Samsung have never made the lower capacity chips. Instead, they used equipment and facilities imported from Sharp in Japan, and circuit designs licensed from Micron Technology in the United States, to begin developing 64K chips as soon as they entered the market.
Later, Samsung set up a research and development center in California’s Silicon Valley, to develop high-capacity (256K) chip designs ahead of Japanese companies. His use of “stacking method” to increase the complexity of the chips – rather than the “trench method” used by companies like Toshiba – helped propel progress. But Samsung continues to rely on high-tech components, parts and supplies from Japanese and foreign sources, as well as software from the United States.
At a time when China’s access to foreign technology and equipment is increasingly limited, the country will find it difficult to replicate this leapfrog strategy.. Semiconductors and other high-tech industries are dominated by a very small number of companies. In some cases, only one or two companies can supply a particular input or equipment.
These companies are largely concentrated in the United States and Europe. A Dutch company, ASML, is the only producer of extreme ultraviolet (EUV) lithography machines, which are essential to the chip-making process, and American companies dominate software.
This does not mean that China has no chance of developing an advanced, even world-class semiconductor industry.. While this certainly won’t happen overnight, there are opportunities to boost China’s outlook.
To begin with, while the memory chip market is uniform – devoid of high-end or low-end segments – the market for system chips (or application-specific integrated circuit chips) is segmented based on application. Car manufacturers, for example, do not use the most advanced fabrications, made by the state-of-the-art process of lithography below ten nanometers (10 nm). Instead, they use 20nm or 30nm process technologies, for which technology transfer is not tightly controlled. In this segment, Chinese founder SMIC is reaping huge profits, which can be channeled into investments in advanced or next-generation chips.
However, the real success of the leap forward will likely depend on whether China can chart a new technological path that diverges from the path taken by the incumbents and therefore relies less on Western technologies. For example, Micron Technology says next-generation chips can be developed using a next-generation processing machine — “deep ultraviolet lithography” (DUV) — instead of EUV. This kind of alternative thinking could go a long way to boosting the prospects for semiconductors in China.
Ici, China’s rapidly growing scientific capabilities will work in its favour. From 2013 to 2018, China’s share of IT journal articles rose from 22.4% to nearly 40%, while America’s rose from over 20% to 16%.
Either way, restrictions on China’s access to foreign technologies may soon begin to be eased. Some argue that by limiting supply, restrictions on Chinese manufacturers, including chipmakers, are contributing to rapidly rising inflation in the United States. The US Innovation and Competition Act is supposed to counter this effect by channeling $50 billion in subsidies to semiconductor companies, possibly including foreign-based companies like Samsung or TSMC. But critics point out that companies could squander the subsidies by using them for, say, stock buybacks, rather than investing in factories. And the law might not be enforced at all.
As the midterm elections approach, the Biden administration faces a dilemma. If he eases restrictions on Chinese companies, including chipmakers, it could help offset inflationary pressures – the “absolute national priority” de Joe Biden – all in potentially allowing China to move forward in an overshoot strategy. If not, semiconductor shortages will likely continue to exacerbate inflation, and China may ultimately find its own alternative tech path and jump in anyway.
Keun Lee, Vice Chairman of the National Economic Advisory Council for the President of South Korea, is Emeritus Professor of Economics at Seoul National University and author of China’s Technological Leapfrogging and Economic Catch-up: A Schumpeterian Perspective (Oxford University Press, 2022).
Copyright: Project Syndicate, 2022.