- Biden is following Trump’s footsteps continuing the “new space race” against Xi.
- Both Biden and Xi share interests to develop a semiconductor industry internally and avoid foreign dependency.
- With Taiwan in the middle, the industry is too entangled for the conflict to end well.
Why is Biden (still) at war with Xi?
Answer: Chips are evermore so important.
Many agree that data is the new oil, and semiconductors or chips are the refineries turning data into profit. Silicon-based and with over 40 million components, this American invention is said to be the most complex technology developed by mankind and more influential to human history than the industrial revolution. From cars to medical equipment, to your new Airpods, chips are the brains of the ever-growing and ever necessary digital world. However, the geopolitics of this tech is complex and ruthless. Now worth $412 billion, this industry is front and center of the Sino-American new “space-race” with commercial and security interests colliding.
The battle for supremacy in the semiconductor industry is neither new nor bound to end soon. Last year, RAIA Group analyzed this conflict between Donald Trump and Xi Jinping. While Trump did hit the Chinese semiconductor industry with sanctions to Huawei and a ban on American tech, the battlefield has changed as has American leadership. Biden, following Trump’s footsteps, is determined to continue fighting. While main interests have not changed much, a few aspects have, namely challenges and main players.
During the pandemic, the industry faced a new challenge: a global shortage of chips. From the automobile industry to pharmaceuticals, the entire supply chain of semiconductors had a deficit paralyzing production in many industries. The main reasons were decreased orders for chips and the unexpected demand for all sorts of gadgets following the global lockdowns. In sectors like the automobile industry, which was hit the hardest, Ford and General Motors alone warned of a loss of $4.5 billion due to the halt in production. From Washington to Berlin to Brussels, the shortage was highly alarming. Hence, securing the supply of these tiny yet essential devices is rightfully on everyone’s agenda.
However, while the interests are shared, production is quite concentrated. When this technology began to develop, there were around 25 designers and manufacturers. However, as chips become more complex, the economics of the industry are too brutal for most competitors. Building a chip-making factory takes years and billions of dollars, and these must run 24/7 to be profitable. A single new factory is estimated to cost $28 billion and is likely to become obsolete in less than 5 years.
Currently, three companies carry out most of the heavy lifting: Intel (American), Taiwan Semiconductor Manufacturing Co. or TSCM (Taiwanese), and Samsung Electronics Co. (South Korean). While Intel has historically taken the lead, from 2015 to 2020 a shift made TSCM the leader of the industry, with more than 70% of logic (high tech) chips coming from Taiwan.
What does Biden want?
Answer: Internal development and strategic autonomy
Continuity of interests is key when it comes to the “new space race”. Ever since the early 2010s, US Presidents have consistently blocked technology from and to China in efforts to squeeze them out of the global industry. Obama blocked Intel from selling tech to China in 2015. Trump blocked Huawei from acquiring and using American tech in 2020. And Biden has maintained the bans and included new ones such as banning American investment in 59 Chinese companies with alleged ties with the defense or surveillance technology sector.
Biden’s interests are twofold: bolstering the internal development of semiconductors and becoming the dominating power in the field. (Spoiler: Xi wants the same things). However, his approach to semiconductors is quite novel: he is calling it “infrastructure”. Within his new $2 trillion infrastructure proposal, Biden announced $50 billion would go to the Chips for America Act, initially proposed by Trump. Additionally, and as part of this Act, Biden has pledged 40% investment tax credits to companies in the industry, as well as a $10 billion fund to match any chip manufacturing incentive at a state level over the next 5-10 years.
While this sounds promising, recall that a single plant with an operating 5-year lifespan is estimated to cost around $28 billion, which begs the question of whether Biden’s pledges are enough. While throwing money at the issue might achieve the first objective of developing the industry internally, the second objective, autonomy, is far more unattainable.
What does Xi want?
Answer: *Insert Biden’s interests here*
China has a critical dependency on foreign technology that makes Xi worrisome. On one side, Taiwan dominates manufacturing; while on the other, design, software, and tools are dominated by America. In total, China demands over 60% of the global share of microchips. Dependency, especially in times of shortage like at the beginning of this year, is terrifying for Xi for two main reasons. First, it’s very costly. Some estimate that China spent around $300 billion importing semiconductors every year for the last 3 years. Second, tech is key for national security. Therefore, depending on foreign tech inevitably weakens Chinese security.
However, as per usual, Xi has a plan. This plan is referred to as a matter of national security, not economic development; it is given as much money and importance as nuclear weapons development. Xi’s goal is to create a “closed-loop semiconductor manufacturing ecosystem” from raw material and equipment products to the final product.
What is Xi doing?
Answer: Investing, heavily,…and abroad?
Xi´s main action plan for semiconductors involves a great deal of investment ($150 billion) and, unlike the US, it has not changed much with the new American Administration. However, Xi has adapted to the changes in the industry. As mentioned earlier, TSMC supplies most of the world’s logic chips, therefore, Taiwan plays a big role in Chinese ambitions to catch up with its counterparts. From its human talent to its AI chips, Taiwanese tech is generations ahead of Chinese tech.
However, as usual, the plot thickens: Xi has invested heavily in Taiwan’s economy and TSMC has invested heavily in China as well. In April 2021, TSMC announced it would spend $2.8 billion in the automotive chip industry in China. As Dr. Pippa Malmgren, a former advisor to President George W. Bush states, you can’t extricate Chinese money from Taiwan or vice-versa.
Who is winning and what about you?
Answer: Winners might be up for grabs, but the entire industry is losing.
Many believe neither Xi nor Biden will be able to fulfill their ambitions of self-reliance in chips. The industry’s supply chain is far too globalized. Chip components can travel more than 25,000 miles and cross borders more than 70 times before the final product is delivered to the end customer. Untangling the global supply chains in this interconnected industry is simply not feasible since they all depend on each other. Just as Xi needs American designs and tech, Biden needs Chinese markets, and everyone needs Taiwan. As Jan-Peter Kleinhans, director of the Technology and Geopolitics project at Stiftung Neue Verantwortung put it, “Take out any of these players and the value chain falls.”
Therefore, as Xi and Biden battle through bans and sanctions, the real loser is the industry in general. With stronger punches, the industry loses efficiency as players are more restricted in terms of who they can trade with. This increases costs, restricts access to new players, and halts development. Just as trade wars are not great for trade, this chip war is not great for the chips.
More importantly, why should you care? Well, if you’re reading this from an iPhone or a Macbook, the chip it’s using came from TSMC, as it is Apple’s main supplier. Your memory cards probably come from Samsung Electronics Co., as well as your PlayStation’s chip. Therefore, the price you pay for your gadgets is directly impacted by this ever-growing conflict between Biden and Xi, proving geopolitics is, in fact, all around us.