0x01 Semiconductor Alliances (Beta)
On the rumoured US-Taiwan-South Korea-Japan semiconductor alliance. And the Quad alternative.
I have long argued that for building a resilient semiconductor supply chain, plurilateral cooperation is a necessity, not a choice. After a few rounds of industrial policy measures by several states, it is dawning upon many nation-states that indigenising the whole industry is not possible. Partnering with others that have complementary capabilities has to happen concomitantly.
In a subsequent edition, I'll look at the status of all promised semiconductor alliances after the COVID-19 shock—what they promised, what they delivered etc. For now, let's focus on one such attempt: the US-Japan-Taiwan-South Korea grouping.
At the end of March, there were several reports suggesting that the US was attempting such an alliance. Che Pan wrote in SCMP:
The US government proposed setting up a semiconductor industry alliance with its Asian allies, including South Korea, Japan and Taiwan, to keep mainland China’s fledgling semiconductor industry at bay, a Korean news portal reported this week.
The proposal was not “fully acceptable” to Seoul because South Korean chip giants Samsung Electronics and SK Hynix have invested billions of dollars in key manufacturing facilities in China, and feared retaliation from Beijing if such an alliance went ahead, _BusinessKorea_ reported, citing an anonymous industry source.
Why is the US pushing for an alliance with these countries, you ask? This single chart has the answer.
Although a bit outdated, the shares in this chart haven't changed much. US-headquartered firms dominate the market of fabless firms and IDMs (companies having their own wafer fabs). Taiwan-headquartered companies' dominance in contract foundries and Assembly, Test, Packaging (ATP) complements US strengths quite well. Combine that with South Korea's IDM behemoth Samsung, and Japan-headquartered companies making high-grade materials and equipment, this tech alliance would collectively span the entire semiconductor supply chain.
And so, it is logical that the US is attempting this partnership. However, the most optimal policy pathway is often made unavailable due to external constraints. In this case, South Korean major companies—Samsung and SK Hynix—both have major investments in China. Being a part of a US-led tech alliance would require them to wean themselves off the Chinese market and manufacturing facilities, a trade-off they are not willing to confront.
The other less-optimal but politically more feasible tech alliance option is the Quad. Last year, the leaders of the four states announced a Quad Semiconductor Supply Chain Initiative in their September summit meeting. Since then, there's been little news on the progress of this initiative. I have previously written about substantive steps that this Initiative could take, ahead of the next Quad summit meeting in Japan in a couple of months.
There's another bilateral opportunity that could feed into this initiative. As many people have argued, resilience is built by diversification, not by further concentration. Substituting semiconductor manufacturing in East Asia with another geographically concentrated cluster in the US will not only be costly, but it will also be subject to the same vulnerabilities that COVID-19 exposed. Instead, resilience would require spreading manufacturing facilities amongst tech allies and partners. It’s in this regard that Intel CEO's recent visit to India should be seen. Pat Gelsinger met the Indian PM on April 6th, notably with other company leaders from the new Intel Foundry Services arm. It is in the Quad's interest for the US government to nudge Intel to start a trailing-edge fab in India. While the US focuses on leading-edge fabs, Intel Foundry Services could make India its hub for 45nm+ nodes.
Given that the idea of alliances in semiconductors has now become mainstream, it is important for India to seize the initiative through the Quad platform.