The rebalancing of high-tech power must involve the entire supply chain – and will increase prices for everyone.
Advanced technology is an important instrument of power on the world stage. Arguably more than at any previous time in history, it's closely linked to economic influence, energy generation and management, healthcare delivery, international diplomacy, and military strength including cyber capabilities. Access to advanced technology is the issue at the heart of the current maneuvering between western nations and China, in particular.
Concerned about the potential for Chinese control over its communication networks, the West has restricted involvement in 5G infrastructure projects. It's currently limiting shipments of advanced industrial technology. Of course, China has responded, announcing export controls on raw materials like gallium and germanium, which are basic ingredients for producing compound semiconductors: a critical enabling technology for future generations of equipment such as optical networking, 5G infrastructure, and high-efficiency power conversion needed to ensure affordable renewable energy and e-mobility.
China can flex its muscles over the supply of these raw materials to hold back progress in the West, since it sits on huge natural deposits: some estimates say as much as 98% of the world's gallium and about 60% of all germanium. Although compound semiconductors account for only about 20% of world semiconductor device production right now, they represent a sizable and growing proportion of the market as applications using this technology are increasingly becoming mainstream.
Prices for gallium and germanium are now about 20% higher than at the beginning of the year. The supply situation can potentially slow development, drive up the cost of compound-semiconductor components, and make next-generation products such as communication and energy-conversion systems less affordable for businesses and governments. Ultimately, it puts a brake on modernization.
The semiconductor industry is, of course, a large jewel in the West's crown. California is essentially the birthplace of chipmaking, following the inventions of the transistor and large-scale integration beginning in the 1950s/60s. Its power in this sector has diluted partly through inevitability, as the expertise has spread worldwide, but also as companies have pursued bigger returns by moving activities to locations with lower labor costs. In the 1990s, the US held about 37% of world semiconductor manufacturing and China had less than 15%. Today, the US has about 12% share and is only the fifth-largest chipmaking destination in the world, after Japan, South Korea, Taiwan and China. About 10% of manufacturing is based in Europe.
Now the West wants to reacquire its power in semiconductors, for political reasons and simply to restore resilience. The US government is committing $280 billion toward achieving this over the next 10 years, as it enacts the CHIPS and Science Act. About $200 billion is intended for scientific R&D, while $50 billion will go toward building wafer fabs. These fabs are expected to be in locations such as Arizona and Tijuana, Mexico, typically not in California. The European Chips Act proposes a rather more modest spend of 40 billion euros, although both are aiming to roughly double their global share of the market.
The intentions here are clear, although there will be a cost to everyone around the world.
The US plans are expected to drive demand for more than 250,000 extra engineers. It will take time to fill these opportunities and there is a shortage of the necessary skills, so wage inflation is anticipated. Generally, costs will be higher. TSMC's new US fab, currently being built in Arizona, represents an investment of $40 billion. That's about four to five times the cost of a comparable plant in the company's native Taiwan. Overall, chip prices could rise by as much as 50% in the future.
Rebalancing the power in high-tech will depend on more factors than simply increasing semiconductor manufacturing in the West. It's critical to build up the complete electronics supply chain and establish independent access to other important components, including PCBs. The US currently produces about 4-5% of the world's printed circuit boards, while less than 2.5% is made in Europe. Significantly increasing the western share of chip production would drive an even greater mismatch between this and other aspects of the supply chain. A rebalancing would strongly affect China, where a large portion of the world's PCB production currently happens. Already, driven by geopolitical factors as well as economic changes, fabricators and material suppliers are in the process of moving away to areas in Southeast Asia like Thailand and Vietnam.
The PCB-focused organizations, the Printed Circuit Board Association of America (PCBAA) and the European Institute for the PCB Community (EIPC), are making the case for broader support of the electronics supply chain. The message, that regaining high-tech power depends on more than simply bolstering the chip industry, makes perfect sense and may be winning acceptance.
There is a fine line between powering up the indigenous industry to increase its influence and competitiveness on the one hand, and plain old protectionism on the other. Whatever your position on the wisdom, or otherwise, of trade warfare, the West needs to invest in its high-tech industries. This has fallen short over the past two decades or more as companies have focused on driving down costs. Although prices are expected to rise, some of the skills learned in pursuit of keeping costs down could help to mitigate price increases.
However this situation evolves, we should all expect big changes to start happening in the technology available, and the prices we will pay, well within the next decade.