US seeks to bolster tech prowess with return to state-led industrial policy

Washington is taking a leaf out of Beijing’s book by pouring state funds into technology development, with a focus on semiconductors
Yet, while both the US and mainland China are striving for greater self-reliance, catching up with Taiwan in advanced chip-making remains a challenge

David Chao

Published: 3:30am, 4 Aug 2022

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The US Senate recently passed a US$280 billion industrial policy bill to bolster American technological prowess in the tech race with China. Long critical of Chinese government subsidies to key industries, US policymakers, in an about-face, are now embracing government intervention in industry to “win the 21st century”.

The new policy calls for diverting federal money into developing innovative technologies. Crucially, this will include US$52 billion in subsidies and tax credits for US semiconductor manufacturers.

During the pandemic, the global chip shortage severely disrupted the modern industrial sector, most areas of which depend on a steady supply of chips. The situation made more apparent than ever the US’ near-total reliance on Chinese-controlled supply chains and foreign-made semiconductor chips.

The shortage has also highlighted the risks of relying on a few large offshore foundries for global chip manufacturing. After all, semiconductors are used in most of today’s advanced technology, including military equipment ranging from radars to fighter jets. That means access to them is both an economic and national security concern. They are the key technological commodity of the 21st century.

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Since the end of the Cold War, though, the imperative for government-led industrial policy in the US has waned, leading to underinvestment in domestic manufacturing and leaving other nations with lower labour costs room to build massive economies of scale. As such, while the semiconductor industry was born in the US, 80 per cent of foundries (or “fabs” in industry parlance) are now located in Asia.

China made its own policy pivot towards progress in innovation and technology in 2017, when President Xi Jinping called for China to “become a global leader in innovation”. Last year, he emphasised in China’s five-year plan and at its sixth plenum that “self-reliance in science and technology is a strategic pillar of national development”.

Sanctions placed on some of China’s top technology companies highlight the country’s reliance on US technology and policymakers’ urgency to reduce vulnerabilities.

Still, Beijing is putting its money where its mouth is: in 2020, the State Council announced that corporate taxes for advanced fabs would be waived for 10 years, and that the government would offer insurance to fabs for their suppliers.

Mainland Chinese semiconductor companies have also raised billions in capital over the past few years and now trade at steep premium valuations relative to their long-established Taiwanese peers.

The headquarters of Taiwan Semiconductor Manufacturing Co (TSMC), the world’s leading chip producer, in Hsinchu, Taiwan. Photo: Reuters

While it’s hard to see mainland Chinese semiconductor companies leapfrogging to become industry leaders in the immediate future, there’s a good chance that they will become recognisable global players in certain areas over the next decade.

It is important to point out that there are essentially two types of semiconductor chips: “leading edge” digital chips used for more sophisticated applications such as computers and mobile phones, and “trailing edge” or “mature” analog chips used for less-demanding applications such as cars and washing machines.

Currently, around 90 per cent of the most advanced “leading edge” chips, known as 5nm chips, are produced by a single Taiwanese manufacturer. Meanwhile, US and mainland Chinese foundries make none.

Moreover, Taiwan continues to pioneer the latest technology in chip-making, with plans to put an even more advanced chip, the 3nm, into volume production this year, with a ramp-up in capital expenditure further supporting industry development.

Wrestling away Taiwan’s chip manufacturing dominance will not be easy. It takes over two years to start a fabrication plant. Building up the intellectual capital and industrial capacity will take significantly more investment and time.

When a leading Taiwan manufacturer set up its first US plant over 25 years ago, it quickly became clear how much US manufacturing expertise had eroded after decades of offshoring. Even with the latest injection of US government support, reversing this trend will be challenging.

On the other hand, taking on Taiwan in the “leading edge” chips race may not be necessary for the mainland. Expanding demand for mature analog chips could allow mainland fabs to focus their efforts on building massive scale in this market segment.

Indeed, while the mainland’s largest chip manufacturer has apparently succeeded in building its own 7nm chip, record-high revenues for 2021 were nonetheless driven by demand for mature nodes. Continued high demand should be expected for mature technologies – in chip-heavy electric vehicle production, for example.

As the US returns to an era of government support for industrial advancement, healthy global competition is likely to create winners across market segments, diversifying production and leaving the industry much less concentrated than it is today.

US happy to shoot itself in the foot in tech war with China

With more fabs able to produce a wider range of both leading and mature chips, consumers can look forward to increasingly powerful and efficient phones and PCs, while no longer having to wait months for a new car.

Modern industrial strategies are complex, requiring extensive state involvement in the form of research and development subsidies and infrastructure programmes, as part of a carefully structured long-term plan. The geopolitical chip war is shaping up to be one worth watching closely.

David Chao is Invesco’s global market strategist for Asia-Pacific