Rakesh Kumar is a professor in the Department of Electrical and Computer Engineering at the University of Illinois and author of Reluctant Technophiles: India’s Complicated Relationship with Technology.
In a stunning example of how geopolitical powers limit chip access to their rivals while maneuvering to boost chip production at home: TSMC and ASML now have the ability to remotely disable chip manufacturing tools if China invades Taiwan. With all the recent furious action surrounding chips, questions are being raised about what the new status quo will look like. Will some countries outpace spending and leave others out? Or will multiple power centers emerge, perhaps focusing on separate niches?
There are three different motivations behind the clamor we’re seeing around chip manufacturing. For some, it is about economic and national security. Semiconductors are critical to both, so securing access to chips through local manufacturing provides certainty. For others, it’s about geopolitical influence. Control over chips enables control over rival economies and defense mechanisms. And for many, it’s about ownership in a large and growing industry; the chip market is expected to double and exceed a trillion dollars by 2033.
However, political and economic realities must be taken into account. Advanced chip factories require tens of billions of dollars in annual investments to start and maintain, in addition to access to the required tools and technologies. Not many countries can make such a commitment. Others may not have access to the tools and technologies. The costs of producing older chips are lower, but the low profit margins on these chips require cheap labor and resources.
Once both factors are taken into consideration, a likely equilibrium begins to come into focus. For advanced chip manufacturing, only the US, China, Japan and the European Union can afford the necessary patient capital. For Japan and the European Union, however, access to chips has not been an issue, and the motivation for geopolitical influence is weak, especially with their currently struggling economies.
China has a strong investment motivation because access to advanced chips and chip-making tools and technologies is limited. They will also likely succeed, either by developing homegrown versions of the limited tools and technologies, or by developing alternative techniques such as advanced packaging to build equally powerful chips.
The US also has strong economic and national security motivations. It will likely gain access to advanced chip manufacturing soon, either because an American chip company like Intel catches up, or because a foreign company like TSMC or Samsung is forced to set up advanced chip manufacturing plants locally. Overall, advanced chip manufacturing will reach a steady state similar to that of oil: there will be a small number of producers – Taiwan, South Korea, the US and China – for something that everyone needs.
The story will probably be different for older chips. It is much cheaper and less risky to produce older chips. Relatively low-cost countries such as India will move into traditional chip production, mainly to become players in this growing, low-margin industry and use their large local markets to support the industry. Countries like Turkey, Malaysia, Indonesia and Vietnam could follow suit, as they have large enough local markets or existing ecosystems to make a smooth transition to large-scale production of older chips. The UK, Japan, US and European Union could also improve their production of existing chips, mainly to secure access to these chips. However, due to the high costs of production in these countries, they can use tariffs to support local production. Overall, traditional chip production can be like the automotive industry: dynamic and with many players.
What would this new chip world order mean for producers and non-producers? Because a small number of countries will own advanced chip manufacturing, they will use it as leverage and can control access. It will exacerbate geopolitical tensions and accelerate geopolitical realignments as geopolitical allies become advanced chip allies and vice versa. Second, since access to older chips is likely to be easier, only a small proportion of non-producing countries will have to take sides. In fact, we’re likely to see older chips from multiple manufacturers in the same geographic market, some more dominant than others. For the manufacturers of both chip types, there will be attempts to outpace and outcompete rivals. However, given the motives involved, the key players will survive, some by taking protectionist measures.
The countries on the sidelines will have to be particularly careful. They will be tempted, but it will often not make sense to get into chip production because of the low margins and high costs. In this new chip world, chip nationalism will have to be avoided at all costs.
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