The Geopolitics of Semiconductors



Paul S. Triolo | Kevin Allison | Eurasia Group

Although serious market challenges remain, the new US industrial policy on semiconductors taking shape will be in place well beyond November’s election. Democratic challenger Joe Biden will almost certainly support the effort to attract more cutting-edge fabs to the US if he wins the presidency, while also maintaining a tough approach on Huawei. At the same time, he would continue to promote broader US technology policy initiatives, likely to include 5G, AI, and quantum computing.

Beijing’s eventual reaction to US pressure may complicate US efforts to build trusted semiconductor supply chains in multiple ways. A strong reaction from Beijing that seeks to punish Taiwan or TSMC would roil markets, provide added impetus to US attempts to bring advanced semiconductor manufacturing to US shores, and throw industry supply chains into turmoil, accelerating the bifurcation of the US and Chinese tech ecosystems.

Although this could occur swiftly in many aspects of US-China economic integration—such as the internet, electric vehicles, and 5G decoupling in the technology underpinning all of these—vast changes to the semiconductor sector would be more difficult and painful. Constraints on capital, personnel, and technology will limit the potential emergence of two wholly separate systems. But the process is likely to be messy and costly, creating new risks for the $5 trillion ICT industry and market participants throughout 2020 and beyond.

For leading technology firms in China such as Huawei, which are used to easy access to advanced manufacturing in Taiwan or elsewhere, the search is on for an alternative semiconductor manufacturing ecosystem. Beijing will be there to help, with the National IC Investment Fund, preferential policies for the industry including new ones released in August, and an expedited listing process for semiconductor firms on the new high-tech STAR market in Shanghai.

Yet major challenges will persist for some time given constraints such as a shortage of domestic talent, lack of experience with cutting-edge manufacturing technologies, and the steady advance of the global cutting edge. A slowdown of Moore’s Law and a stretched-out industry roadmap below 3 nm, coupled with the sky-high costs of building and operating a cutting-edge fab, will mean that the pace of growth in the gap between Chinese domestic players and global industry leaders will likely slow in the coming years, improving prospects for Chinese companies to move faster up the curve. Huawei’s deep pockets, industry experience, management system, and entrepreneurial attitude will also enable progress in some areas. Other efforts will be aimed at devising system-level solutions with less advanced semiconductors that are “good enough” for some applications.

China’s advantages in this competition, including its STEM education system, dedicated industrial ministries, funding mechanisms, and market size will eventually produce breakthroughs, but the US will continue to hold key advantages and harbor a willingness to use punitive measures. If the US decides to further restrict semiconductor manufacturing equipment exports to China in addition to other measures such as the foreign direct product rule, China’s timeline for achieving greater self-sufficiency will be pushed further out.

In any case, the global semiconductor industry will be in for a prolonged period of adjustment as the US-China-Taiwan triangle moves toward a new and hopefully more stable equilibrium.


Paul S. Triolo is the practice head for geo-technology at the Eurasia Group.

Kevin Allison is a director in Eurasia Group’s geo-technology practice, based in Berlin, Germany.

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This report is based on the opinions of Eurasia Group analysts and various in-country specialists. Eurasia Group is a private research and consulting firm that maintains no affiliations with governments or political parties. Report issued September 2020 | © 2020 Eurasia Group