[Lee Jong-woo's Economic Reading] US Aiming to Cut Off China's Semiconductor Growth... Korea Plans to Develop Technology

Amid COVID-19, US Realizes Risks of High Overseas Dependence on Semiconductor Production
Expanding Domestic Production and Strengthening Anti-China Bloc
Strategy to Suppress China Before It Gains Competitiveness Without Top 10 Semiconductor Firms
Korean Companies Must Focus on Technology Development While US Buys Time with Sanctions

U.S. restrictions on Chinese semiconductors have intensified.

There are two main objectives, one of which is a strategy to nip the competition in the bud before Chinese companies gain competitiveness. Although China’s economy ranks second in the world, it does not have a single semiconductor company within the top 10. On the other hand, digital companies like Alibaba and Baidu are not far behind the U.S. Artificial intelligence (AI), autonomous driving, and facial recognition systems are also at a level similar to that of the U.S. Applying this situation to semiconductors means that although there is currently a large technological gap with the U.S., if the Chinese government increases investment under its leadership, the gap could be rapidly closed. From the U.S. perspective, a strategy to suppress competitors early on is necessary.

The COVID-19 pandemic also highlighted how risky it is to rely entirely on overseas production, which has become another cause of the semiconductor dispute. When a situation arose where cars could not be produced due to automotive semiconductors costing only one dollar, the U.S. decided to produce part of the semiconductors domestically.

Until last year, U.S. restrictions on China mainly focused on direct sanctions. A representative example is requiring U.S. government approval for sales of products containing U.S. semiconductor technology to the Chinese company Huawei. As a result, Taiwan’s TSMC, the world’s largest semiconductor foundry, stopped doing business with Huawei.

This year, the pressure tactics shifted toward expanding domestic semiconductor production and strengthening the anti-China bloc. Currently, the U.S. accounts for 34% of global semiconductor demand and 12% of production. The difference between these two figures is mainly supplied from Asia, as Asia accounts for 80% of global semiconductor production. China and the U.S. are increasing their semiconductor investments annually by 6.8% and 3%, respectively. If these rates continue, by 2030, the U.S. share of global semiconductor production will decrease to 10%, while China’s will increase to 24%. In this scenario, there is a risk that the U.S. will no longer control the global semiconductor market but instead be absorbed into China’s supply chain. This is why advanced countries, including the U.S., have no choice but to consider domestic semiconductor production.

Taiwan is leading the anti-China bloc. TSMC has decided to build semiconductor factories in the U.S. and post-processing research facilities in Japan. Semiconductor equipment exports to China have also been blocked. Dutch company ASML has stopped supplying extreme ultraviolet (EUV) lithography equipment, a key tool for advanced semiconductor processes, cutting off China’s path to producing high-end products. Apple is pushing to establish a mobile semiconductor R&D center in Germany, and Intel plans to build a new factory in Europe. A semiconductor alliance excluding China is rapidly forming.

China has also responded. Regardless of U.S. sanctions, it reaffirmed its plan to raise semiconductor self-sufficiency to 70% by 2025, when the Made in China 2025 plan concludes. If securing silicon semiconductor technology becomes difficult due to U.S. interference, China has devised a strategy to respond by developing compound semiconductors, the next-generation semiconductors, or high-power transistors widely used in electric vehicles.

Semiconductors have undergone extreme fluctuations over a long period. The chicken game centered on DRAM semiconductors in the mid-1980s is a representative example. Under Japanese company leadership, a competition ensued to sell 54K DRAMs, which cost $1.70 to produce, at 30 cents, causing many companies to disappear from the market. During this time, the industry structure also changed. Previously, one company managed the entire process from semiconductor design to production, but after the chicken game, design and production became separated. The global supply chain was reorganized when the U.S. pressured Japan into signing two semiconductor agreements in 1983 and 1986.

Although U.S.-China semiconductor conflicts are intensifying, this time it is unlikely to change the industry structure. Even if domestic semiconductor production increases and bloc formation strengthens, the separation of design and production and reliance on overseas demand are likely to continue. The reason is simple: the current structure helps generate profits. To have the U.S. and Europe account for 20% of global semiconductor production by 2030, an initial investment of $1 trillion is required. Maintenance costs are also substantial. Even if products come out of such investments, it is questionable whether adequate profits can be secured, as increased semiconductor supply may cause prices to fall. Realistically, due to many constraints, the alternative many countries will choose is to produce only part of the semiconductors domestically and secure the rest through strengthened blocs for stable supply. Of course, China will be excluded from that bloc.

The U.S.-China semiconductor dispute poses challenges for our companies. There is “Moore’s Law,” which theorizes that the density of semiconductor chips doubles every 24 months. When this law reaches its limit, technological development slows, and the semiconductor industry stagnates. Semiconductor technology is now approaching that limit. The process has become so fine that further improvements are difficult. While developing better technology takes a lot of time and money and progresses slowly, companies below the limit can catch up quickly, narrowing the technological gap. The generalization of once cutting-edge industries occurred through a similar process. U.S. sanctions help delay the time for Chinese semiconductors to catch up. Meanwhile, our companies must focus on technology development. When technology hits a limit, the next competition is about who can produce products more cheaply, and China has an advantage in that area.

Semiconductors are an industry sensitive to supply and demand. Even a slight shortage in supply causes product prices to soar, while the opposite causes prices to plummet. Corporate profits are therefore unstable. There have been several past cases. In 1995, during a semiconductor boom, 4M DRAM prices rose to $48 but dropped more than 90% a year later. In the previous boom in 2018, SK Hynix’s operating profit, which exceeded 20 trillion won, fell to 2.7 trillion won within a year due to semiconductor price declines. In both cases, increased investment during a boom led to oversupply. I believe this U.S.-China semiconductor competition will not cause an unexpected oversupply.

This content was produced with the assistance of AI translation services.