TRUE OPINION: Are Semiconductor Chips the New Oil?

TRUE OPINION: The worth of semiconductor chips in the world economic supply chain was perhaps truly felt by the average person for the first time in the wake of the COVID-19 pandemic that spread across the world from late 2019. Industries like the motoring sector were hit hard, with consumers still waiting for new cars they purchased and ordered up to 12 or 18 months ago. Jemma Nott takes a look at the commodity becoming scarcer and more valuable.

Much of the conversation around the sparks of tension ignited in the South China Sea and Taiwan have focused on border disputes, but what lurks in the background are the supply chain fears revealed by the pandemic. While China holds firm ground on their position on China’s relationship with Taiwan, US manufacturing is in a dire scurry to reduce reliance on China for some of their most pivotal industries. The dimension to this potential looming war not receiving as much attention is the US’ response to a global semi-conductor chip shortage – an industry that Taiwan has been climbing the ranks in for decades.

While Silicon Valley achieved its name for the early stages of a flourishing computer chip production industry, the US’ control over one of the most pivotal industries in the globe has petered out over the space of a few decades. Largely, the blame is much the same as any of its other manufacturing industries dying – neoliberalism was allowed to take hold during and post the Carter era and key industries were allowed to go to China and what many mainstream economists call the Asian Tiger economies – Japan, South Korea, Hong Kong and Singapore. In fact, recently companies like Intel recognise this more than ever and there have been strong calls for the return of semi-conductor manufacturing from China back to Michigan with at least one facility opening in the region recently.

As of 2021, the stark reality brought on by world crisis events not just including the pandemic but also the ice storm in Texas, the fire in the Ukraine and the cargo ship that got stuck in the Suez Canal, has meant a halting of smooth production. However, a far more important element of the underlying fears in Silicon Valley also relate to the production of sub 10nm geometry process node fabs which are necessary for the production of semi-conductor chips, the production of which has been dominated by Taiwan’s TSMC.

A Biden initiative to challenge these supply chain fears came to fruition in the form of the 2022 CHIPS and Science Act involving a whopping $50 billion investment in semi-conductor manufacturing. However, Washington would be blind not to recognise that this is a longer-term strategy for addressing what is, in the short term, something that leaves Taiwan at the centre of a very important geopolitical tug-and-pull. Taiwan’s TSMC holds 55% of the world’s market currently in semiconductor manufacturing and Taiwan’s market produces all of the world’s most advanced processors.

In many, ways Australia may find ourselves in a similar position where Jim Chalmers refers to the necessity for the “creation of new industry,” in his recent essay in The Monthly ahead of the national budget, this is likely the kind of new industry — driven by supply chain fears — he is in fact referring to. Chalmers is not simply overwhelmed by the compelling argument of Keynes, he recognises the prospect of militarism and trade wars on the horizon and that a lack of response to it could cause real and serious internal collapse in Australian supply chains.

Where some of the world’s most famous wars since America became a global hegemon, like the Iraq war, are now widely accepted as being essentially oil wars (or wars for the control of the petrodollar), in the “information age,” the question then becomes: is semiconductor manufacturing the global resource domain for wars of the future?

In many ways America’s attempts to control the industry mirror OPEC and its successfully established financial control of the oil market. However, when OPEC was established, China was a far-less economically advantaged state still in fledgling stages of secondary production. Today, China has moved into both complex manufacturing, and towards moving the yuan into a reserve currency for many global south states. In other words, America’s attempts at cross-country collaboration to control would could be the “tech chip dollar” has a genuine financial competitor this time in the form of China.

The most important element to the US’ CHIPS and Science Act was to restrict export to China of processor production IP. More important than this in the immediate term though, is the US’ ability to control trade-sharing ability between China and Taiwan. And both countries must be acutely aware that in much the same way access to crude oil is an absolutely short-term dire necessity for daily life, so is access to the semiconductor manufacturing sector where these chips are necessary for every product associated with the computer age, which fundamentally rules and is a necessity of modern life. Consequently, a threat to the supply lines for either country is not just brilliant leverage in war but the absolute worst nightmare for either country, let alone the entire world, to be significantly impacted by.

The US’ ability attempts to control Chinese export controls on the industry could provide them with a significant upper-hand and only late last year TSMC affirmed that it would adhere to US rules to cut China off from computer chips made anywhere in the world with US equipment. However, this assumes that the US can actually meaningfully cut off Chinese access to intellectual property and while the US seeks to put export controls on the entire lifecycle of the semiconductor manufacturing sector there are already reports that states like Japan, Malaysia and Singapore are seeking key ways to avoid US export controls. Japanese firms have begun marketing their products as “American-Export- Administration-Regulation-free firms.” Similarly, some of America’s biggest firms in the space like Applied Materials, which make machines to minute circuits, count China as one of their biggest markets.

China has spent $150 billion since 2015 on upgrading its investment in semiconductor manufacturing and have more recently progressed to using quantum computing technology as a part of the production process. China is well aware of the imperative of participation in this particular arms race of sorts and is even providing a 20% subsidy on the cost of purchases for companies engaged in relevant manufacturing. However, China is still about on par with the US in terms of ability to keep each step of the supply chain fully domesticised. Yet, even though the US and China are starting out on equal footing on this front – China may be able to move ahead in leaps and bounds in decades to come.

Another blow to the US’ attempts to stop Chinese investment in outcompeting the US on this front, revealed in a CSIS report, Reshoring Semiconductor Manufacturing: Addressing the Workforce Challenge, are major domestic skills shortages in the US for rolling out certain key elements of production. Australia laments similar problems where looking at increased investment in this form of manufacturing.

For both countries, the standard solution of importing large hoards of skilled labour from mostly Asia have become much harder since the pandemic as both countries see skilled labour vacancies in most industries rise. Much like AI production, this could be another area where China finds an upper-hand, where it has the people power and foundational technological workforce to not just roll-out large-scale infrastructure to begin integrating AI products into the economy but also for the workforces to roll-out each stage of chip production.

In many ways, the US is trying to band-aid a solution to an innate problem that the more socialised elements of China’s economy solves – that being that active investment in poverty reduction as well as technological production in areas like Shenzen. In cities like China’s Shenzen, the workforce have gone from the peasant classes to AI production in the space of sometimes 3 generations as under central direction, China has shifted from being lead by investment and manufacturing to consumption and technological innovation. While, California’s Silicon Valley also underwent the same changes in a much earlier period, the combinations of the US’ external reliance on being able to incentivise the importation of skilled labour combined with demand being directed privately elsewhere has meant that wherever large-scale economic and infrastructural changes are required quickly in the US, the country sits at a disadvantage behind China.

In the meantime, however, the political classes of the US and China will be looking to Taiwan as one of the most, surprisingly quietly, important focal points in the world to determine the direction of global hegemony.

Feature Image: Marco Verch Professional Photographer (Flickr)