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Semi-Conductor Race in Indo-Pacific

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The semiconductor industry is a rapidly growing and competitive field, and the Indo-Pacific region is a major player in this race. Countries such as Taiwan, South Korea, China and US have long been major producers of semiconductors, and they have invested heavily in research and development to stay at the forefront of the industry. The region is home to some of the world’s largest semiconductor companies, such as Samsung, Intel and TSMC. There is also a growing trend of countries in the Indo-Pacific region looking to develop their own semiconductor industries, such as India and Australia. The race for dominance in this field is driven by the growing importance in economic as well as security domain.

A semiconductor is a material that has electrical conductivity between that of a conductor and an insulator with specific electrical properties. They can be utilized to manage the electrical flow. They are a key component in modern technology and have revolutionized the way we live and communicate. Almost every modern technology requires semiconductor chips as their fundamental component. They are used in wide range of modern technology such as smartphones, electric cars, 5G, big airplanes and most importantly in Artificial Intelligence, and Modern military technology.

Analysis conducted by Counterpoint Research shows that Taiwan’s Taiwan Semiconductor Manufacturing Company (TSMC) holds 59% global semiconductor manufacturing foundry while South Korea’s Samsung and China’s SMIC holds 13% and 6% of manufacturing foundry respectively (Q3 2022).[1] Semiconductors varies in different sizes and functions. Most importantly not all components used in semiconductors come from single country that’s why it’s a difficult to analyze which country holds more importance in global supply chain. For instance, almost all advanced semiconductors which are being produced anywhere in the world has some specific components from United States but still USA holds only around 12% of chips manufacturing globally while Taiwan manufactures over 90% of most advanced semiconductors.[2] South Korea also holds important stake in manufacturing of semiconductors in global market while China although produces ordinary chips but it is mainly dependent on imports of modern semiconductors for its economic and security benefits.

Since Xi Jing Ping became president of China in 2013, China is becoming more assertive in the region and trying to take the lead in world which was a direct threat to US hegemony in the region that’s why US declared China its Strategic competitor. US is doing everything in its power to stop or even slow down China’s assertiveness in security as well as in economic realm. Indo-Pacific region is a main area of contention between China and USA and the current war between China and US in this region is the “War of Semiconductors”. And I believe that whoever will emerge victorious will be taking lead in the Global affairs.

Beijing’s “Made in China 2025” initiative which was introduced in 2015, has targeted US supremacy in semiconductors, AI, and supercomputers. Since then, China has closed the technological gap with the United States. For critical equipment and software, China is heavily reliant on foreign suppliers. Despite massive investments, China’s high degree of external dependence, particularly for high-end semiconductors has not changed significantly. China imports of semiconductors were around $300 billion in 2020[3]. At first it had gone unnoticed by United States but later US started to take it seriously as a threat to its national security when Trump’s administration imposed sanctions on Huawei to cripple it and right Now US has imposed heavy sanctions on the Chinese Companies for the imports of Semiconductors from all-round the world.

After more than two years of efforts on 9th August 2022, “Chips And Science Act” was passed by US Congress in which $280Bn of total Funding was announced for the research and development of semiconductors in United States along with other fields like artificial intelligence, advanced communication, quantum computing etc. Out of which $52Bn were provided for research and development of Semiconductors and in subsidies for the American Companies. The act also prohibits funding recipients from expanding manufacturing of semiconductors in China for next ten years.[4]

On 7th October 2022, Bureau of Industry and Security (BIS) announced comprehensive export restrictions of semiconductors to Chinese companies and prohibits US citizens to work in Chinese Companies without license.[5] At first around 30 companies were added in the entity list including YMTC (China top chipmaker company) then after couple of months three dozens of more Chinese companies were added in the list. United States imposed these restrictions under “foreign direct product rule” which means if a specified amount or specific component of US technology is used in a product then non-American countries will also have to abide by US regulations and since almost every high end chips uses American component or technology so they have to stop exporting modern semiconductors (less than 16nm) to china to avoid sanctions from US. US main goal is to slow down China’s rapid advances in Artificial Intelligence and in military technology. US main argument is that China is using high end semiconductors in enhancing its security capabilities which is a direct threat to US national Security so these sanctions are essentially to contain China so US can beat China in technological and military capabilities.

China’s response to US sanctions is also very aggressive, China is calling US export restrictions as “technological terrorism”. China has also filed a complaint against United States in World Trade Organization (WTO) which is a first case in Biden Administration. China’s main argument is that these US restrictions stability of global industrial supply chain is threatened. China has also announced $143Bn of support package which will be used for research and development of semiconductors in China.[6]

Initially it will have negative impact on economies of both countries and globally as well as main export market for US chipmakers is China and China uses these chips in economic products as well like electric cars, smart phones etc. but in a long run it is yet to decide which country can win this race US will be reliant mainly from the support of its allies i-e Taiwan, South Korea and western world also trying to achieve its dominance in modern technology. On the other hand these export restrictions on China will be indirectly contributing towards technological innovations in China. Although SMIC is mastering 7nm and 5nm chips while TSMC is ready to launch 3nm chips commercially if China can catch Taiwan in next 3 to 4 years then competitions will become more interesting in this region. China is also using its bilateral ties with US allies by offering them more money to overcome US restrictions by using non-American technology but it would also take some time. All in all we can say this is a true definition of stiff competition in Indo Pacific where US is trying its best to keep its influence while China is trying to break it. It is too early to predict the future but one must say it would be very difficult for US to keep influence in long term.