US-China Battle for Chip Dominance Pushed Further by Russia-Ukraine Conflict

The US-China battle for semiconductor dominance has grown even more complicated, as the Russia-Ukraine conflict interrupts supply chains further. The US and China have been attempting to increase semiconductor self-sufficiency after decades of globalization joined countries in complex production processes. The Russian invasion of Ukraine will push the process even further, particularly as Russia increases its chip demand from China.

Russia-Ukraine chip disruption

Russia’s invasion of Ukraine has resulted in disruptions along the semiconductor supply chain. This is in large part because the US has asserted its disapproval of Russia’s invasion using economic sanctions. President Biden’s embargo on selling semiconductors to Russia will prohibit any chip developed using American technology from being sold to Russia. However, it seems unlikely that China will ban the sales of semiconductor chips to Russia, as it has criticized such sanctions as ineffective. Purchases from China may provide a partial solution to Russia’s chip shortage. Chinese chips are less advanced, but can be used in some military applications.

The embargo is likely to have significant ramifications, not only for Russia but for China. As a precedent, the US ban of semiconductor sales to Chinese firm Huawei dramatically affected its smartphone business. Such geopolitical tensions, along with China’s own tech ambitions, induced China to increase investment in its semiconductor industry. US sanctions on Russia are likely to increase Russia’s demand of chips from China, which will place even more pressure on China to expand and advance chip production. This will remain a struggle, since Chinese semiconductor manufacturing continues to require imported equipment.

Further complicating matters is the fact that both Russia and Ukraine supply much of the world’s neon gas and palladium, which are essential to producing semiconductor chips. The conflict and its global response are likely to shrink supply of these inputs from the region. Ukraine produces over 90% of US semiconductor-grade neon. Over one-third of the world’s palladium is sourced from Russia. This will have a significant impact on the industry.

Semiconductor investment in the US and China

The US and China have been attempting improve domestic production capacity in recent years. Part of this is because of geopolitical tensions, while another reason to build local manufacturing capabilities is because of COVID-19 disruptions. Due to increased demand for home electronics during COVID-19 and pinched supplies as factories shut down to contain the pandemic, semiconductor shortages have persisted for months. The problem is ongoing in the automotive industry.

Building domestic capacity presents a challenge to both the US and China. The US owns only 12% of global chip manufacturing capacity, down from 37% in 1990. To combat this, the US semiconductor industry has announced close to $80 billion in new investments since 2021, including construction of a $17 billion Samsung factory in Texas and a new Global Foundries factory in New York. The US government is also in the midst of passing laws to secure funding for expansion of chip manufacturing in the US. The CHIPS Act, which has been approved by both the US House and Senate and awaits agreement on joint competitiveness legislation, includes $52 billion in government investment in semiconductor research and manufacturing.

China supplies 5% of the world’s semiconductor supply, and these chips are less advanced than those produced by other nations. However, the country is the largest consumer of semiconductors and provides most of the world’s raw materials for semiconductors. In order to boost self-sufficiency, China has increased investment in the industry. The Chinese government subsidizes its chip industry by about $15 billion per year.

For both countries and especially China, it will take years before domestic production of semiconductors can become a reality. The US is ahead due to its advanced research and development in the field, while China lags behind in many areas of semiconductor design and production. As a result, domestic semiconductor production is unlikely to be an immediate reality for either nation.

Chip production is global

Semiconductor production has been institutionalized as a global process, and appointing all aspects of production as domestic operations will require substantial investment. Chip production requires up to 300 different inputs, and, notably, China produces most of these raw materials. Despite China’s dominance of the semiconductor raw materials industry, its ownership of global intermediate goods and equipment for the chip industry falls behind. China lags in the production of some fab materials, such as photomasks and photoresists, while the US is a key producer of these materials. China also lags in the production of wet chemicals as well as in the production of testing and process control tools.

The US carries out much of the research and development for advanced semiconductors. American firms Intel and Nvidia own much of the integrated circuit market share. Despite this capability, there are no major US-based wafer producers. The US lacks an extensive store of raw materials as well as lithography scanners.

The lack of certain capacities has typically been compensated for by global trade. After research and development is carried out in the US, wafers and other inputs are sourced from Europe and Asia, cut into dies and packaged in another Asian or European country, and assembled into consumer goods in China. Goods then travel to the end-consumer market anywhere in the world. The typical semiconductor production process is carried out in at least four countries. As a result, it will not be easy to restrict the process to a single country.

Conclusion

The semiconductor industry looks set to experience supply disruptions in the near future because of geopolitical tensions, both between the US and China and now between Russia and Ukraine. These heightened risks have underscored to American and Chinese policymakers the need to secure production of vital industries, but undoing years of globalization will require significant amounts of time and money. As the drive to become self-sufficient rises, supply chain complexities are rising as well.