We already know that multinational chipmakers and venture capitalists in Silicon Valley are fine with doing business with Chinese chipmakers. They are either looking for low-cost, massive economies of scale or low cost of entry into a segment of the Chinese economy that the CCP has promised to be key to its future.
Fine. Unless we are going to put the breaks on private industry and private capital, then the question for Washington is: if everyone is investing in China chips, who is investing in ours?
Intel said in March that it would be investing $20 billion in semiconductor manufacturing facilities, best known as foundries. They broke ground in September.
At the same time, Intel is investing in Chinese companies that make the all-important chip design tools that the U.S. currently leads in making, the WSJ reported. These are the pieces of software and industrial equipment needed at the chip design and manufacturing level to make semiconductors of all kinds.
This report by the Journal, published Friday, comes just three weeks after the National Counterintelligence and Security Center, part of the U.S. official intelligence agencies, warned about China’s ascendant semiconductor industry.
The counterintelligence center’s acting director, Michael Orlando, said the U.S. “can’t afford to lose” ground to China in several key areas, including artificial intelligence, autonomous systems, quantum computing, semiconductors and biotechnology. Orlando also noted that Chinese businesses and academics are beholden to the Chinese Communist Party and are required to serve the party’s interests.
“Although we’ve been saying this for year after year, people are not digesting this,” he said.
The Center said it will only encourage efforts to control intellectual property and implement security measures. Though none of this will go anywhere as American companies have never been willing gifters of their IP to the Chinese. It has, more often than not, been stolen, or simply used as a base model thanks to open-source codes available to anyone.
Silicon Valley venture capital firms, led by Sequoia Capital in Asia, have invested in 67 semiconductor operations in China in the last 18 months, based on findings reported in the WSJ article.
“While the overall funding was not disclosed, (American investors) raised billions of dollars for China chip startups,” the report authors wrote, adding that those investments were complicating “Washington’s efforts to preserve America’s lead in the critical technology.”
This brings us to the CHIPS Act, which was a provision passed in the Senate’s massive U.S. Innovation and Competition Act this year. Senator Majority Leader Chuck Schumer has asked House Speaker Nancy Pelosi to get a move on and vote on their vision of the bill. The CHIPS Act, at a minimum, is needed to counterbalance the billions of dollars American investors and corporations are willing to give to China to pay to be replaced one day by them.
The CHIPS Act would provide up to $50 billion in funding to build new foundries in the U.S. Once that is passed and running, it would increase the U.S. share of addressable foundry capacity from a very weak 12% (and falling) to a larger figure, perhaps as much as 24%. Even with $50 billion, China would still be No. 1, Boston Consulting Group and the Semiconductor Industry Association said in a report last September.
There is a chance the CHIPS Act gets added to the end of the year spending bill if Pelosi does not get a floor vote on their version of USICA. This needs to be a must-have on Congress’s holiday wish list. Because at this rate, thanks to Silicon Valley and even Intel, $50 billion won’t be enough to swap positions with China.
In an even worst-case scenario, envisioning a day when China reunites with Taiwan, as they are fond of saying in Beijing, there is no reason to doubt that the first order of business would be to nationalize Taiwan Semiconductor, arguably the biggest fab for American chips. Even if the U.S. and China were bosom buddies by then, is it sound national security policy to be almost wholly dependent on another country for such an integral part of the high tech economy? It is like asking if it makes sense to be dependent on the Middle East for oil and gas supplies.
Taiwan currently accounts for 47% of the global capacity in the leading and advanced nodes (10 nanometers or below) used for advanced logic devices such as high-performance processors that power smartphones or data centers. In memory, which accounts for about 30% of the total semiconductor demand, South Korea has more than 40% of the global capacity. As the COVID-19 crisis has shown, high concentration in one country or region makes a global supply chain vulnerable to crises. – Semiconductor Industry Association, September 2020.
Domestic manufacturing is essential to ensure that the U.S. semiconductor industry has a resilient supply chain. The WSJ makes it clear that we cannot count on Silicon Valley and multinational chip companies looking for market share in Asia to be fully invested in the national security angle of semiconductors in the U.S. supply chain.
The current semiconductor supply chain problem has nothing to do with trade war tariffs and everything to do with pandemic supply and demand mismatches caused by lockdowns, and China hoarding just like it did PPE prior to the pandemic in 2020.
The CCP will invest over $150 billion from 2014 through 2030 in semiconductors, or roughly $9.5 billion annually. That number can double when U.S. and private Chinese capital is added to the mix.
As it is, some 75% of the world’s capacity to manufacture semiconductors is in Asia. That number is expected to rise, fueled by strong cluster effects in China’s new Greater Bay Area and capital flows from the U.S.
China is forecast to be home to 25% of global manufacturing capacity by 2030, which makes it easier for them to churn out chips like rain from a rain cloud, depressing prices and ultimately making it impossible for Intel foundries to compete on certain types of chips.
For now, Chinese chip firms are not present in the high-end logic, advanced analog, and leading-edge memory chips. But that is because China’s domestic semiconductor industry is relatively new. It also lags behind Taiwan and South Korea in advanced logic foundry production and chip equipment tools, but as the WSJ report suggests, there is no shortage of American firms willing to help them with that.
So the question is, who is willing to help build out a foundry base here? The CHIPS Act could achieve that.
“When you see famous Silicon Valley names like Sequoia, Lightspeed, Matrix, and Intel Ventures investing in dozens of Chinese startups, it’s clear that those Chinese companies are gaining access to priceless knowledge and experience from many U.S. industry veterans,” said Jeff Ferry, CPA’s chief economist.
See CPA’s recent report on this topic here.
“That knowledge is even more important than the billions of dollars of capital going their way,” Ferry said. “China’s goal of course is to use that knowledge to overtake the U.S. in semiconductor design and manufacturing, and dominate the global industry. With the rise of artificial intelligence and other transformative technologies, the U.S. needs to enact the CHIPS Act, but go further, and find a way to make U.S. chipmakers invest more of their profits in design, manufacturing, and education in semiconductors and related technologies.”
