The symphony of technology: Bifurcation is not yet possible in the semiconductor industry
One note does not make a symphony, and it takes an orchestra to weave the music. This is also the essence of the semiconductor industry. From integrated circuit (IC) design to high-end equipment and materials, every detail matters in the race to the smallest nano scale. In this second note of our semiconductor series, we focus on the chip supply with a specific question, i.e. how easy it is for a country to achieve vertical integration. This is more important than ever as the US is pushing for a bifurcation of supply chain for cutting-edge technology and strategically important products, where chips play a centric role.
While Mainland China is the biggest market for chips with 35% of global consumption in 2020, it only constitutes 8% of the supply by revenue. In contrast, the US accounts for 42% of the supply, followed by Korea (20%) and Taiwan (16%). In terms of global relevance, the US and Taiwan are the only two producers with higher market share recently.
Although all steps go hand in hand in the semiconductor supply chain, the barriers to entry may vary. Chip production can be classified into three parts, i.e. IC design, foundry and outsourced assembly and testing (OSAT). The first and the last step have the lowest barrier of entry. Fabrication is challenging due to its interrelation with materials and equipment to minimize cost and fatal rate. Still, there are still integrated device manufacturers (IDMs) aiming to achieve vertical integration.
Within Asia, Taiwan is the expert in OSAT while Mainland China has also gained a footing. For the fabrication process in foundries and IDMs, the barrier to entry is high due to the intensive investment and the advanced technologies with Taiwan and Korea as the winners. Behind the scene, though, material and equipment are critical for foundries to produce chips. In this regard, Japan is the leader in material, but challenges are seen from Korea and Mainland China. And the equipment market continues to be led by the US, Japan and Europe.
Hence, the production of semiconductors is too complex for a single economy to build a fully integrated and self-reliant supply chain. Even with the well-developed technologies of the US, it only manages to dominate the high end of the value chain and still relies on other markets for production, especially Taiwan. For Mainland China and Europe, this raises doubts on whether stronger industrial policies with money can really meet the expectation. Taiwan and Korea have clear comparative advantages, but the move in expanding capacity with massive investment may end up creating an oversupply of certain types of chips.
That said, a bifurcation in the semiconductor industry is not yet possible although the interest in reaching that stage is increasing, especially in Mainland China and Europe. Taiwan and Korea are enjoying the tailwinds as the middleman, but the question remains how long it can last, which depends on the success of self-reliance policies.
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President, TriOrient Investments. Co-Chair, Private Equity Committee at AmCham Taiwan.
3 年Excellent commentary and research, Alicia Garcia-Herrero, thanks. And agreed that bifurcation is a ways off. As you note, there are many factors which go into whether or not a nation can become a global semiconductor industry powerhouse. Such views were recently shared by TSMC founder Morris Chang, as you and many others heard recently when he addressed the issue of Intel's plans to invest big in the chip manufacturing segment. Intel’s move to step up chip manufacturing ‘ironic’: TSMC founder https://www.taiwannews.com.tw/en/news/4182983 And for now at least, centralization of the industry into one or two markets may be challenging given the demand. The amount of smart and other applications being developed across many industries should make it difficult for one powerhouse to provide most of the supply. And as long as the US and China are keen on developing their industries separately rather than in cooperation, other nations such as Taiwan and South Korea will continue to have orders. The question may be which of the two - the US or China - will be attract the larger amount of long-term investment by firms all along the semiconductor supply chain. Thanks.
Senior Data Scientist at Tamara
3 年Hi Alicia. Thank you for your article. Why it should be too complex for the US to achieve capability in the 3 steps you describe in producing IC's? Too expensive I can understand. Thank you!