By: Dhavall Gandhy, SVKM’s Pravin Gandhi College of Law

The pandemic has been a death knell to the global manufacturing community. Global supply chains have collapsed on account of incessant lockdowns. [1] There has, however, been an outlier. The sale of digital products has witnessed an unprecedented surge. This seems logical, for there are a few things more engrossing than a web series when you’re isolating, encapsulated between four walls, a video call seems to be the most viable option to exchange pleasantries with your near and dear ones and video conferencing platforms like Teams and Webex have become synonymous with professional life.

The “heart” of any digital device- mobile, laptop or computer is it’s processor. This processor chip is made up of semiconductors. Today a Trillion such chips are manufactured annually. Unfortunately, the manufacturers of these semiconductors failed to account for this lockdown induced pent up demand, and consequently did not accentuate the pace of production, per contra, the pace actually depreciated on account of the manufacturing units being under lockdowns themselves.

This is exacerbated by the fact that a few companies in the world enjoy a virtual monopoly over the manufacturing of chips. Concerningly, this number has been steadily declining. At the turn of the century, in 2000, there were more than 25 such companies. The number is now down to merely three. The American and Korean giants- Intel and Samsung design and manufacture such chips. However, even these tech giants are eclipsed by the expertise of the Taiwan Semiconductor Manufacturing Company (TSMC). TSMC undertakes contractual manufacturing of chips. For example, chips for iPhones are designed by Apple’s engineers in San Francisco and subsequently transmitted to TSMC for manufacturing.

This is fiscally prudent even for opulent corporations of Apple’s nature. Chip manufacturing is an extremely esoteric process requiring talented brains working round the clock, meticulously catering to the intricacies during the entire procedure. This necessitates specialised machinery, which is expensive to maintain and becomes obsolete in merely four to five years of functioning.

It thus makes financial sense for corporations to outsource this entire process to corporations like TSMC.
In this backdrop the factum of TSMC controlling 84% of the semiconductor market comes as no surprise. Taiwan adroitly utilises this market dominance to navigate its geopolitics. In order to appreciate how Taiwan does this, we have to appreciate the Sino-American tensions and how Taiwan fits into it.

Taiwan’s Geopolitical Conundrums.

In pursuance of the expansionist Chinese ideology of irredentism. The government of People’s Republic of China (‘PRC’) sees Taiwan (Republic of China) as a breakaway province that it believes will, eventually, be a part of the country again [3]. With the rise of Wolf Warrior diplomacy, PRC’s stance on the Taiwan issue has become increasingly aggressive. This has been disconcerting the Global North, given the heavy reliance on Taiwan for semiconductors. Picture this, if PRC could inhibit Taiwan from exporting these chips, it would pose a grave impediment to sustaining the present levels of technology, let alone any technological advancements. This is no exaggeration, semiconductors are the lifeblood of any digital equipment today. We adverted to their importance in digital devices earlier, but these semiconductors are indispensable even in sophisticated military equipment. With the advent of “Internet of things” this dependency on semiconductor chips is only going to rise.

Taiwan, on its part has adroitly plays to these anxieties of the global North spearheaded by the United States of America. It has counterpoised the geopolitical divide by making itself indispensable to the technological ambitions of both superpowers, warding off PRC’s plans of territorial aggrandizement. Mr. Craig Addison described this Taiwanese counterpoise as “silicon shield” in his book “Silicon Shield: Taiwan’s Protection Against Chinese Attack”

Simply put, there is no replacement for TSMC in the current supply chain, consequently, TSMC enjoys a lot of power at its disposal. Taiwan fully exploits this power whilst formulating its foreign policy to balance the power asymmetry vis-a-vis a much stronger PRC. The United States of America liberally funds the Taiwanese semiconductor industry whilst also promising military support.

Per contra, PRC seeks to systematically reduce its reliance on Taiwan and has undertaken steps to ameliorate its domestic semiconductor manufacturing facilities. The Chinese Communist Party is leading the industry with the same strategic importance that it gave to its atomic bomb program. Obviously, this has alarmed the rest of the world given the ever increasing belligerence of China.

The country has been able to make some progress, especially in low-end processes of the multi-step chipmaking procedure. China is the largest purchaser of chips by volume in the world as well as a manufacturer of less sophisticated chips for companies like ‘Qualcomm’ and other American companies. Bear in mind that a lot of American businesses rely on China for growth so there is a very strong pushback from the private sector to allow the free flow of American technology to China to resume.

But PRC is still decades away from more complex operations like lithography [3]. Lithography is the process of using light to transfer circuit patterns to a film, which is then used to make individual microprocessors. These patterns consequently shuttle the electrons. Thus, lithography is the most crucial part of the entire procedure. It can take more than ten years to develop the extreme ultraviolet tools for lithography; and the machinery has become increasingly expensive. It is thus a capital- and knowledge-intensive process. The only company that makes the machinery in PRC: Shanghai Micro Electronics Equipment Ltd uses outdated lithography technology.

There are only a select few companies globally that have the capabilities of manufacturing top of the line machinery. One such company is the Advanced Semiconductor Materials Lithography (‘ASML Holdings’). The Trump administration successfully lobbied the Dutch government to block shipments of such a machine to China in 2019. This prompted the Chinese semiconductor makers to purchase used second hand chip making machines from Japan since they were exempted from the embargo. The American sanctions have adversely affected the Chinese domestic chip manufacturing foundries, starving them of much needed capital. The Biden administration has shown no signs of reversing that stance.

But U.S sanctions have limited efficacy in the long run. Cutting out China completely isn’t an option since China retains its importance as a manufacturing hub for most of the world. Furthermore, Beijing is determined to become self-sufficient and is shifting to its highest gear to do so. During its annual NPC meeting in 2021, President Xi Jinping pledged $1.4 trillion to accelerate their tech industry and become totally independent from foreign technology.

SMIC signed an agreement to build a $2.5 billion semiconductor manufacturing plant with Shenzhen’s Government. Going forward such private-public partnerships look probable. China has time and again showcased its ability to throw money and human resources at the development of massive mega projects.

As a denouement, it can be averred that albeit, China is generations behind the rest of the world in the field of semiconductor manufacturing, any laxity would be ill conceived given the monochromaticity with which China is pursuing its aims for dominance in the field. The pandemic has highlighted the perils of being overly dependent on a single source point for such an important commodity. It is thus in the better interest of a more stable and equitable global supply chain that alternate sources are developed to reduce this over dependability avoiding bottlenecks.

Notes and References

[1]For further reading on disruptions to global supply chains, read:
Guan, D., Wang, D. and Gong, P., 2020. Global supply-chain effects of COVID-19 control measures. [online] Nature Human Behavior. Available at: <https://www.nature.com/articles/s41562-020-0896-8&gt; [Accessed 12 July 2021].

[2] To understand the historical connotations of the divide between the People’s Republic of China and the Republic of China, read: BBC News. 2021. What’s behind the China-Taiwan divide?. [online] Available at: <https://www.google.com/amp/s/www.bbc.com/news/world-asia-34729538.amp&gt;.

[3] To understand the scientific and Procedural intricacies of lithography, succinctly explained in this article, in greater detail, read: Mojarad, N., Gobrecht, J. and Ekinci, Y., 2015. Beyond EUV lithography: a comparative study of efficient photoresists’ performance.