Inside The $1 Trillion War To Make More Chips

Why is every major economy today trying to make their own semiconductors?

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EquitiesTracker

7 min readAug 14, 2022

The 2016 election of President Donald Trump marked a turning point in U.S.-China relations. Trump doubled down on long-standing disputes between the U.S. and China, such as those concerning intellectual property.

The Trump administration soon set its sights on Huawei, China’s biggest technology company.

For years, Huawei had been accused by the U.S. of stealing intellectual property and being a threat to national security. Under Trump, things got dialed up a notch. In 2019, the U.S. restricted local companies from doing business with Huawei. It also banned Huawei from buying American products without the government’s permission.

In 2020, TSMC (NYSE:TSM, TWSE: 2330) stopped accepting chip orders from Huawei. Why would a Taiwanese company kow-tow to the U.S.?

The fact is, while TSMC is a Taiwanese company, it “can’t make new, advanced fabs without equipment from the U.S.,” says Steve Blank, a U.S. national security advisor and a member of Applied Materials (NASDAQ:AMAT)’s board of advisors.

In other words, if the U.S. cuts off TSMC’s access to equipment, TSMC risks losing its edge in chip-making technology.

The U.S. also managed to stop ASML (NASDAQ: ASML), a Dutch equipment maker, from selling EUV lithography machines to Semiconductor Manufacturing International Corporation (SMIC) (HK:981), China’s biggest chip foundry and a Huawei supplier.

ASML had been selling its EUV machines to TSMC. If SMIC got hold of those machines, it could potentially start producing the most advanced chips in the world — and supply them to Huawei.

To ensure it could still make smartphones for the next twelve months, Huawei began stockpiling chips. It bought up most of what could be supplied in the short and mid term, according to Neil Shah, a partner at market research firm Counterpoint. This launched a race among Huawei’s rivals to stockpile chips for themselves.

It was this panic buying that sparked the global chip shortage, Huawei chairman Eric Xu reportedly said a conference last year.

There were other reasons for the chip shortage. The pandemic disrupted semiconductor plant operations around the world. Then the work-from-home trend caused a surge in sales of PCs and notebooks. This clashed with growing demand for chips used in cars and other devices, which has increased as all machines become increasingly intelligent.

By late 2020, the chip shortage was getting serious. Facing a shortage of chips, carmakers in the U.S., Europe and Japan were forced to halt production, putting millions of jobs at risk. The chip shortage became a global economic issue.

A chip on the geopolitical chessboard

For some governments, particularly the United States, chips also became a national security issue.

Much has this to do with the fact that TSMC is based in Taiwan, just a short distance away from China. China claims Taiwan as one of its territories, but Taiwan insists on remaining independent. Tensions with China hit multi-decade highs last year, according to Taiwanese military officials.

As most investors know, the U.S. and China are locked in a geopolitical conflict.

We have previously discussed how AI has become essential to the success of many of the world’s biggest companies. But AI is not just important for corporations. AI will also be key to military supremacy.

The U.S. government is worried that if China takes over Taiwan, it might lose access to advanced chips, which the U.S. needs to build high-tech weapons and machines. TSMC also makes chips for U.S. fighter jets and supercomputers.

Taiwan produced the “vast majority of cutting-edge chips” a short distance from America’s “principal strategic competitor,” the U.S. National Security Commission on Artificial Intelligence said last year. “If a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off US access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare.”

China also relies heavily on Taiwan-made chips to make its electronic devices. Last year, the U.S. Army War College published a paper that suggested that the U.S. and Taiwan should destroy TSMC’s facilities in Taiwan in the event of a Beijing invasion, crippling China’s technology industry.

TSMC’s rivals have seized on the China-Taiwan situation as a talking point, hoping to win backing from investors, customers and international governments.

“Taiwan is not a stable place,” Intel (NASDAQ:INTC) CEO Pat Gelsinger said in December. “Beijing sent 27 warplanes to Taiwan’s air defense identification zone this week. Does that make you feel more comfortable or less?”

Over USD1 trillion to be spent to boost global chip manufacturing capacity

Since mid-2021, the world’s biggest chip makers and major governments have announced spending of more than USD1 trillion (roughly SGD1.3 trillion) to boost global chip manufacturing capacity over the next eight years. These investments are aimed to meet the boom in demand for chips, and reduce the world’s dependence on chip manufacturing in Taiwan.

It is worth noting that this USD1 trillion figure does not include the tens of billions that Chinese companies are pouring into the local semiconductor industry.

China, which currently makes up 60% of global chip demand, has long wanted to develop self-sufficiency across its electronic supply chain. While China dominates the world in electronics manufacturing, it relies heavily on imported chips it needs to make appliances, cars and smartphones.

China’s initial plan was to produce 40% of its required chips in 2020 and 70% by 2025. So far, China has fallen far short of its goals. It made just 16% of its semiconductors domestically last year, according to IC Insights, a market research firm. The figure is even lower, at 6%, after excluding foreign manufacturers with facilities in China, including TSMC and Korea’s SK Hynix (KRX:000660).

But the trade war with the United States has only appeared to strengthen China’s resolve. In 2020, China became the world’s biggest buyer of chip equipment for the first time. According to a report commissioned by the U.S.-based Semiconductor Industry Association, unless the U.S. and other countries increase their own production, China will add 40% of all new chip-making capacity from now up to 2030.

The push by China and other governments to diversify chip production is a bonanza for equipment makers. Semiconductor equipment sales exceeded USD100 billion in 2021, a historical record, according to SEMI, an industry group.

In 2021, two of Asia’s four best-performing large-cap stocks were semiconductor equipment makers: Naura Technology (SZSE:002371), China’s biggest maker of chip equipment, and Lasertec Corp. (TYO: 6920), a Japanese equipment maker. Both stocks ended the year up 160% and 103% respectively, according to data published in The Nikkei Asian Review.

Lam Research (NASDAQ:LRCX), among the four biggest chip equipment makers, recently launched a new plant in Malaysia. In December 2020, Lam said within the next five years, this plant would become its largest global production facility.

“One of the reasons we’ve come to Malaysia is because we foresee a need for more capacity,” Lam’s corporate vice-president of manufacturing Mike Snell said in an interview published in The Edge, a Malaysian newspaper. “After a period of slow growth, we believe the industry is going to experience extremely rapid growth in the coming years.”