Chip War
Semiconductor
applications
The smartphones in our pockets, the data centres that power the Internet, cars, hypersonic fighter jets, and Mars rovers all share an essential piece of technology: semiconductors. The list could get longer, considering that more than 1 trillion chips are sold yearly. In other words, about 140 chips for every person on Earth. This number is estimated to double by the end of the decade, bringing the semiconductor industry’s global value to 1.4 trillion of dollars.
From smartphones to cars
About one out of two of all the chips produced this year ended up in a smartphone, Pc, or server. Manufacture and automotive also represent an essential slice of the semiconductors’ final market. Indeed, on average, each car contains 1,400 semiconductors that enable the operation of almost every major component, from the engine and power steering to safety devices. The centrality of these chips to the automotive industry was highlighted in 2021 when their shortage contributed to a 26% drop in global car production.
Chips are not all the same
Today a new chip shortage seems a remote possibility. Recent weakness in some end markets, such as consumer electronics, has even resulted in an oversupply of semiconductors. However, in the second half of the year, demand is expected to pick up strongly for specific chips, such as those needed to train generative artificial intelligence algorithms. For instance, U.S. chipmaker Nvidia, the market leader in GPU processors used by services such as ChatGPT, had quarterly revenue more than 50% higher than analysts' initial estimates.
Global semiconductor demand
The word “chip” encompasses a very diverse ecosystem, to be broken down according to the different functionality of semiconductors. In each smartphone, for example, we find logic chips (such as CPU and GPU), which represent the brain of the device. These chips are complemented by memory ones, which store information on the device. Given the wide spread of smartphones in our society, it's not surprising that logic and memory chips are the most sold.
Analogue chips are also top sellers. They receive and transform information based on nonbinary parameters such as temperature and voltage to enable the operation of sensors and energy management processes. With an 8% market share, opto semiconductors are also high in rank, as they are an essential element for LEDs, solar cells, and lasers.
Chips’ state of technological advancement is a further element of classification. It is measured by the size of a specific component (gate) of transistors: miniature switches that can turn an electric current on or off. The smaller the transistors, the more of them can be installed on the chip, the greater its power and efficiency.
For the past 50 years, the electronics industry has been driven by the so-called "Moore's Law", formulated by Intel co-founder Gordon Moore, which stated that the number of transistors embedded on a chip would double roughly every two years. In 2022, the ceiling of 100 billion transistors per chip has been exceeded by miniaturising gates down to 3 nanometers (nm, equal to one-millionth of a millimetre), or 25,000 times smaller than the diameter of a human hair.
Moore's law in action
Different sizes of chips correspond to different uses. For example, chips with 65-nm gates are the most widely used by the automotive industry because they are best suited for technical characteristics and production costs (18 times lower than the most advanced chips). On the other hand, top-of-the-line smartphones, cloud computing, autonomous driving, and artificial intelligence use 3- or 7-nm chips, which only a small number of companies and countries can produce.
The global
value chain
The semiconductors value chain is among the most complex ever conceived: from design to production, more than 1,000 steps are required across 70 different countries, involving 300 materials from 16,000 suppliers. It is, therefore, a highly segmented industry in which very few companies hold market leadership concerning specific processes and types of chips.
THE GLOBAL SEMICONDUCTOR VALUE CHAIN
The first step in manufacturing a chip is the design of its architecture. The U.S. is the undisputed leader in this phase, especially for logic and analogue chips. Only for memory chips the US leadership is challenged by South Korea. Furthermore, the U.S. market share reaches near-monopoly percentages relative to intellectual property licensing and Electronic Design Automation (EDA) software, considered state-of-the-art for automating the design process.
Some companies, such as Intel and Samsung, design and manufacture their chips. However, most U.S. (and non-U.S.) companies such as Qualcomm, Nvidia, and AMD only make the design and contract the production to foundries concentrated in the Far East. Indeed, Taiwan, South Korea, and China account for more than 80% of the value added in this market segment.
MARKET SHARE BY CHIP TYPE
Taiwan's role becomes even more central when considering chips with transistors smaller than 10 nm: 92% of the market share. 9 out of every 10 chips found in the latest smartphones, computers, and cutting-edge technologies are thus produced by the Taiwanese company TSMC. Beijing is a bystander in this segment, with a share that increases the larger the size of transistors on the chips.
The manufacturing processes then require the fabrication of silicon wafers onto which the integrated circuits are etched as well as the use of chemicals to change their electrical conductivity. These steps are again dominated by Asian companies, including Japan's JSR and Shin-Etsu Chemical. European companies such as Merck, BASF, and Solvay manage to carve out a leading niche for themselves. However, Europe has an actual leadership position in the machinery segment alone.
The Dutch company ASML is the only one in the world capable of producing extreme ultraviolet radiation lithography machines (EUV). EUVs technology use lenses from German company Zeiss (the exclusive supplier in the world) to etch with very high resolution the silicon wafers on which most-advanced microchips are fabricated. Without ASML, the 7 nm, 5 nm, and 3 nm levels of miniaturisation would be impossible. That is why ASML is an essential ally for the U.S. in their geopolitical competition with China on semiconductors.
The geopolitics of chips
MARKET SHARE BY COUNTRY
The U.S. market share (based on sales) in the semiconductor industry is expected to decline strongly, from about 50% in 2000 to 36% in 2030. Only considering the manufacturing segment, this decline is not less sharp: in 1995, the U.S. locally manufactured 26% of all semiconductors sold in the world. Now this percentage has dropped to 12%. The same trend is true for Europe and Japan.
In parallel, China is grabbing an increasing share of sales. And its views on Taiwan (President Xi would like to see its reunification with mainland China by 2049, the centenary year of the birth of the People's Republic of China) imply a potential strategic vulnerability for Western (and other) technological development, which cannot do without Taipei-made chips.
To prevent the Chinese semiconductor industry from taking over the global market, the response strategy of the U.S., Europe and Japan is twofold. On the one hand, it is based on a particularly active industrial policy to increase the share of domestically produced semiconductors. The most obvious example is the 52 billion of dollars in incentives and tax breaks provided by the U.S. Chips and Science Act. These funds have, for instance, convinced TSMC to triple from 12 billion to 40 billion of dollars in its investment in Arizona, where it aims to produce chips with 3-nm nodes by 2026.
The European counterpart is the European Chips Act and its 43 billion of euros. While on the Japanese side, an agreement has been reached between the government and TSMC to open a new plant for the company in Kumamoto, joining Samsung's newly announced factory in Yokohama.
WHERE IS PRODUCTION CAPACITY INCREASING?
Trade policy is the second tool the U.S., Europe, and Japan chose to counter China's rise. In October 2022, the Biden administration blocked the export of chips made with American technology to China. Then in March 2023, the so-called guardrails provisions of the Chips and Science Act were announced, introducing a decade-long prohibition for companies receiving federal subsidies from expanding their advanced chip production capacity in China by more than 5%. In short, they were forced to take a side.
Since 2019, the Dutch government has imposed export controls on chip tools, restricting the sales of ASML’s most advanced EUVs machinery to China. Reportedly pressure from White House officials pushed the Netherlands to include older EUVs among these restrictions. It is not an isolated case: Washington is running a full-fledged campaign to enlist critical players in the semiconductor supply chain in its competition against Beijing. On March 31, Japan joined the American line by banning exports of 23 types of chip-making machinery to China.
CHINESE CHIP IMPORTS
These restrictions are proving particularly effective considering how last year Chinese chip imports dropped for the first time in two decades. In November alone, the annual volume drop was equal to 25% (i.e., just after the U.S. ban went into effect). And the trend continued in the first months of 2023. Since chips are China's number one import item, more than oil, its reaction was inevitable.
China has banned its strategic companies from buying technology from the American multinational Micron, which used to derive 11% of its turnover from selling its memory chips (including those for iPhones) in the Chinese market. Moreover, on July 4, Beijing announced restrictions on the export of gallium and germanium. These two critical metals are central to creating certain types of chips used in smartphones and satellite communications.
With China dominating the supply of both elements (94% of global gallium production and 60% of germanium), the European Union and Italy are increasingly compelled to find their strategic autonomy in the “chips war”.
The role of Europe and Italy
EUROPE'S SEMICONDUCTOR ECOSYSTEM
The EU aims to double its share in the global semiconductor market from less than 10% today to 20% by 2030. According to Commission President Ursula von der Leyen, by 2026, the EU will be able to produce state-of-the-art chips on a large scale. These ambitious goals and statements clash with a current limited semiconductors design and production capacity.
In Europe, only Intel's plant in Ireland can produce chips with nodes below 10 nanometers. And it is experiencing a downturn marked by job cuts. In December 2021, the mother company announced plans to build a new next-generation microchip factory in Magdeburg. But for now, everything is at a standstill in the absence of an agreement with the German government on the size of the subsidies: Intel would like 10 billion of euros, and Berlin wants to limit its support to 7 billion.
Overall, total investments (public and private) to 2025 in new chip capacity in Europe amount to 31 billion of dollars, a quarter of the ones in the U.S. and a third compared to Taiwan. The reason is simple: Europe has a low domestic demand for chips below 20 nanometers. Therefore, manufacturers are discouraged from investing in chip factories specialised in a lower dimension of chips.
EUROPEAN DEMAND FOR CHIP SIZES
The current expansion of production capacity in the EU is thus mainly relying on European companies specialised in chips for industrial and automotive applications: Infineon and STMicroelectronics. In early May, the former began the construction of a new five-billion euro plant in Dresden, Germany. In June, the Italian-French STMicroelectronics finalised an agreement with GlobalFoundries to create a new, jointly operated foundry in Crolles, southern France. ST is also particularly active on the Italian soil, building a three-billion euro mega fab near Milan and a 730 million euro plant for producing silicon carbide wafers in the Catania area.
The Etna Valley and the province of Monza-Brianza are two of the major hubs of the Italian semiconductor industry, together with Avezzano, in the province of L'Aquila, which is home to one of the most important chip foundries in the country: LFoundry. Overall, 1,900 companies employing 36,000 people are part of the Italian chips sector.
This year, the Italian government will present the National Plan on Microelectronics, which will translate the goals and objectives of the European Chips Act into national terms. Italy and Europe's ability to keep up with the technological frontier depends on implementing these policies. Failure and success are only few millionths of a millimetre apart.