An industry caught in the crosshairs of geopolitics needs global emeritus leadership
The semiconductor industry is at the epicenter of great power politics. An ascendant China is on a quest for a unified global system with China as the leading power. The United States seeks to maintain its position as leader of the liberal democratic order and arbiter of the global economy. The flash points span trade, human rights, national security, and digital technology leadership. Can chip firms protect decades of investment and navigate access to China’s lucrative market under increasing US constraints?
The semiconductor industry and China are deeply integrated. As China captured roughly 50% production share of global electronics, chips became its leading import. China became “coupled” through its position in the global supply chain. Chip companies beat a path to China’s door for access to its fast-growing indigenous market and multi-billion-dollar subsidies. Intel, ARM and AMD formed joint ventures. Samsung, SK Hynix, TSMC, UMC, GF and Intel built 300mm fabs on the mainland. A vibrant Chinese communications sector (Huawei, ZTE, Xiaomi, Oppo, Vivo) consumed high volumes of chips from Qualcomm, Broadcom, Qorvo, Skyworks, Micron, and others. HiSilicon leveraged IP and design services from the industry and manufactured its chips in Taiwan using TSMC’s leading-edge technology. China established venture funds to invest in global firms and sent legions of engineering students to foreign universities. Chinese firms joined Industry Associations (SIA, GSA, SEMI, IEEE) to build relationships, acquire IP and influence standards. China was projected by SEMI (pre-COVID) to become the largest market for semiconductor equipment suppliers by 2021, powered by its “Made in 2025” strategy and push for self-sufficiency in chip production.
But there was a long-standing undercurrent of abusive business practices by China including IP theft, forced technology transfers, “pay-to-play” schemes and disregard of WTO obligations. The US pressed for remediation by leveraging tariffs, Huawei 5G security concerns and CFIUS expansion. Then, tragically, came COVID-19. Calls for “de-coupling” grow in frequency and volume. But modifying supply chains in a capital-intensive industry is not simple. Fabs are rarely “relocated” and replacing capacity is expensive. Moving design centers leads to dismantling high-performance design teams central to product development and customer relationship management. Firms face the loss of billions of dollars in revenue and profit along with significant market share by being blocked from access to China’s demand.
How can a firm best optimize shareholder value in this environment? The default of complying with US policy carries potentially severe economic and shareholder value impact. A recent BCG study highlights a loss of 37% in revenue and 18-points in market share for US firms in a 100% de-coupling scenario. Firms can exit non-strategic investments, migrate asset-lite missions to alternate geographies and modify plans for future capacity (e.g. TSMC in Arizona). They can change country of incorporation through merger with a foreign entity (inversion) or divest assets to a “friendly” foreign company with broader freedom of action to address China’s market. These strategies must survive oversight of the Foreign Investment Risk Review Modernization Act (enhanced CFIUS); each carries economic and political risk.
Global emeritus leaders (CEOs, CTOs, academia, government) and Industry Associations must play a more effective role in protecting the interests of the semiconductor industry. Advocacy efforts to-date have fallen short. A public “chip diplomacy” initiative could marshal respected industry emeriti to leverage their global networks and build a compelling picture of the benefits of an open and vibrant industry model. They could help parties envision the benefits of applying the emerging technologies of AI, IoT, blockchain, 5G and quantum computing to shared societal issues such as hunger, climate, and health. They could provide a technology roadmap enabling US-China commercial collaboration in space and sea exploration. Technology solutions to safeguard critical IP, reduce cyber threats and verify end-application use of commercial technologies could be defined. Revisions to the Wassenaar Arrangement governing export controls could help both countries address concerns. Confidence building measures and multilateral support (South Korea, Japan, EU) are critical.
Industry Associations could sponsor a series of “chip war games” to underscore the adverse outcomes of sequential escalation. One scenario might find China withholding shipment of precious metals, revoking licenses to do business in China, threatening market access to South Korea, Japan and other South East Asian countries and nationalizing the semiconductor assets of foreign companies. It could threaten military occupation of Taiwan and control of its vibrant chip sector. The US might in turn sequentially terminate visas for Chinese students, revoke licenses from Chinese companies doing business in the US and expand tariffs on a range of Chinese imports. It could supplement the denied parties lists and broaden the foreign direct product rule (a.k.a. Huawei chip ban) into a full-throated technology embargo, including semiconductor equipment, licenses to design tools and IP and the shipment of chips, denying China access to the lifeblood of its digital economy.
The case for de-escalation is clear. The desired semiconductor industry model is one of open markets, free trade, IP protection, full leverage of geographic competencies, innovation by a multi-cultural workforce, global collaboration in research and standards, all funded by private equity and efficient global capital markets. The US and China need to walk back from the precipice, stand-down the acerbic rhetoric and resolve issues underlying the battle for digital technology supremacy. Perhaps a truce on chips and a “co-opetition” model can pave the way for progress on the other bi-lateral flash points. A tall order, but a preferable outcome to mutually assured destruction of the industry and our nations.
Individual companies must take actions required to protect and optimize shareholder value. But if there were ever a time for global semiconductor emeritus leaders and Industry Associations to cash in on their decades of well-earned global relationships and activate chip diplomacy, it is now. We need both the US and China at the table. The stakes are too high to stand idly by and let the chips fall where they may.
Terry Daly is a retired semiconductor industry executive