US President Joe Biden holds a semiconductor before signing an executive order in the State Dining Room of the White House in Washington, DC, the United States, February 24, 2021. / Getty

US President Joe Biden holds a semiconductor before signing an executive order in the State Dining Room of the White House in Washington, DC, the United States, February 24, 2021. / Getty

Editor’s Note: Andy Mok is a researcher at the Center for China and Globalization. The article reflects the views of the author, and not necessarily those of CGTN.

The US semiconductor sanctions were aimed at ensuring continued US leadership in an industry that has played a pivotal role in fueling the global economy and will make even greater contributions as the world continues on its path to safety. digitization.

However, not only have these sanctions caused unexpected and widespread collateral damage to many industries around the world, but they are undermining the position of the US semiconductor industry rather than strengthening it.

As expected, the US sanctions have served their purpose of halting the development and rise of Chinese technology companies. But these measures have also disrupted economic activity around the world in ways that China’s American hawks might not have anticipated.

In fact and remarkably, nearly 170 industries, from consumer electronics to automobiles and air conditioners, have been negatively affected by the semiconductor shortage which was precipitated in part by storage and panic buying before these sanctions along with unexpected increases in consumer demand for consumer electronics, automobiles and other products during the COVID-19 pandemic, according to a study conducted by Goldman Sachs.

Every sound policy decision requires choosing a course of action that delivers the most benefits to achieve the desired strategic outcome at the lowest possible cost. The costs, including collateral economic damage, of these sanctions have been high and continue to rise.

For example, in the auto industry, factories in Germany, the United States and elsewhere have suspended production, costing the industry billions and endangering tens of thousands of jobs and fragile economic recoveries. . But if the goal of slowing China’s rise to power and securing US supremacy in the vitally important semiconductor industry is achieved, then it can perhaps be seen as a political victory.

However, China’s response to US sanctions seems to suggest that this policy is in fact weakening the overall position of the US semiconductor industry. And if these sanctions continue, it could lead to the permanent loss of US technological leadership.

To understand why, one must understand that the semiconductor industry is unique in that it requires exceptional levels of investment in both research and development and capital expenditure. For example, according to the Semiconductor Industry of America, the industry invested $ 90 billion in R&D and $ 110 billion in capital spending in 2019, which represented about 50% of the $ 419 billion in global sales.

The semiconductor value chain has three main segments: design, upstream manufacturing or wafer manufacturing, and downstream manufacturing or assembly, packaging and testing. China has traditionally been strongest in back-end manufacturing, while the United States leads in front-end design and manufacturing areas such as electronic design automation (EDA), equipment and tools and materials. Where Americans are not the market leaders, the United States has the ability to dictate the business decisions of companies in places like Taiwan, Japan, or the Netherlands in China.

The head office of Semiconductor Manufacturing International Corp. (SMIC) in Shanghai, China on March 23, 2021. / Getty

The head office of Semiconductor Manufacturing International Corp. (SMIC) in Shanghai, China on March 23, 2021. / Getty

By arming access to key elements of the semiconductor value chain, the United States has forced China to prioritize the development of alternatives to preferred American suppliers such as Applied Materials, Cadence, Lam Research and Synopsys as well as to Dutch companies like Advanced Semiconductor Material Lithography (ASML) and Japanese companies like Canon and Tokyo Electron.

Given China’s track record of delivering large-scale, well-integrated, and technologically challenging projects, it appears likely to make significant strides in developing competitive alternatives to established players.

Due to the exceptional levels of R&D investment and capital spending, scale is vital to remain technologically and commercially viable. In addition, due to the sheer magnitude of sunk costs, barriers to exit are high.

If new entrants manage to overcome daunting hurdles, the impact on incumbents in the market can be devastating and US companies will be the first to suffer the losses in profitability, market capitalization and technology leadership.

In a recent speech at the Huawei Global Analyst Summit, Turning President Eric Xu noted that the semiconductor industry has benefited from a highly specialized and globally distributed supply chain where each region contributes according to with its own strength. While American companies have pioneered and dominated the industry, recent American policy decisions put that leadership, and perhaps even American prosperity and security, at risk by arming this supply chain.

Specifically, the Chinese government plans to invest $ 1.4 trillion over the next 6 years to expand chip manufacturing. In addition, these sanctions have prompted Chinese chipmakers to step up production of 28-nanometer chips which are crucial for developing skills in advanced chip-making technologies.

Additionally, Chinese companies have started placing orders for 14-nanometer chipsets from market leader Taiwan Semiconductor Manufacturing Company Limited (TSMC) to Semiconductor Manufacturing International Corporation (SMIC), China’s leading semiconductor company.

SMIC will also begin trial production of 7-nanometer chips with mass production slated to start in October, but relying on deep ultraviolet light (DUV) technology instead of extreme ultraviolet (EUV) plus advanced due to US sanctions.

These sanctions have met with some short-term success, at a cost not only to American companies, but to many others as well. But the real cost can be a permanent loss of leadership in key parts of the semiconductor supply chain by US companies. As the Biden administration formulates a comprehensive approach to China, these longer-term implications must be taken into account.

(If you would like to contribute and have specific expertise, please contact us at [email protected])

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