US attempts to coerce China's semiconductor supply chain will backfire

Tom Fowdy
America's saturation over the chain is deep, but piece by piece Chinese firms are localizing and pushing hard to establish their own replacements in every domain.
Tom Fowdy

As the United States imposed sanctions against Russia over the Ukraine crisis, US Secretary of Commerce Gina Raimondo made an explicit threat on Tuesday against Chinese companies who are perceived to "violate" the sanctions by doing business with Moscow, threatening to "cut off" any implicated companies and even to "shut down" Semiconductor Manufacturing International Corp (SMIC).

Such moves are long in line with Washington's attitude to weaponize the entire semiconductor supply chain for its own geopolitical gain as a means to trying to coerce and control China. Never has, in lieu of such a reality, developing independent capabilities been more important.

A foreign policy based on semiconductors

How is the United States able to dictate who Chinese companies, based in China, are able to supply to? At first glance this seems bizarre, yet the US has in the past few years developed a foreign policy which seeks to weaponize ownership of key foundational technology in the semiconductor supply chain to exert control over manufacturing in other countries, with the specific goal of gaining geopolitical leverage over China, or as recent actions show: Russia.

By blocking access to certain patents, the US can shut down the supply chain and dictate the flow of exports at will. Most famously, this strategy was applied to isolate the Chinese firm Huawei from the global semiconductor supply chain. Besides the exceptionally harsh treatment of Huawei, upward to 400 Chinese firms have also been added to the commerce department's "entity list."

But depriving individual companies is not the only means whereby this strategy is applied to. The US has utilized it first to try and block China's semiconductor development by forcibly depriving firms such as SMIC from acquiring high-level lithographic technology, as it has done with the Dutch firm ASML.

It has in turn blocked Chinese takeovers of chip companies in third-party countries, such as MagnaChip in South Korea and has also strongarmed firms such as TSMC and Samsung into building new capacity in the United States as part of gaining even greater leverage over the entire supply chain.

In a nutshell: American foreign policy has established sovereign control and politicized the global semiconductor industry to its own political gain, and is using it to bully and coerce China.

The push for independence

The fact that one country has been able to singlehandedly weaponize a critical technology such as semiconductors is a strategic bind for China, especially given that it is the world's largest consumer of chips. With America attempting to use this to contain China, Beijing has been locked in a race now for some time in order to develop its own capabilities and break out of this box.

It is one of the country's biggest geopolitical imperatives. It is no surprise on this premise that in the year of 2021 China spent a record US$441 billion on research and development, an annual increase of 14 percent, and is firing all guns blazing at developing new foundational technologies to create semiconductors of which the United States cannot exert unilateral control over.

Despite American sanctions which also includes a ban on investment, SMIC is nevertheless booming. The firm reported on Monday that in the first two months of 2022 alone, it made US$1.22 billion in revenue with a profit of US$309 million, a 94 percent increase from the previous year as reported by the Global Times. The firm has likewise injected billions into the establishment of new capacity, with three new projects in the wings including plants in Shanghai and Shenzhen.

Meanwhile, Huawei, although not a semiconductor manufacturer, has established its own precision manufacturing wing which will aim to make its supply chain more independent and will also produce laser technology believed to contribute to the manufacturing of semiconductors.

China won't fail

America's weaponization of the entire semiconductor supply chain against China is both arrogant and abrasive, but it is a strategy which already is posing to have tremendous geopolitical consequences. The bid to exert monopoly across an entire industry for geopolitical gain is forcing a gradual yet clear alignment of global tectonics, forcing China to go all out for independence.

America's saturation over the chain is deep, but piece by piece Chinese firms are localizing and pushing hard to establish their own replacements, from lithography to chip packaging, to architecture, in every domain. In the long run, this decision to try and put China down and to attack Chinese companies, as well as to ostracize entire countries, will ultimately backfire, isolating the US from what is and will continue to be the largest semiconductor market in the world.

(The author is a South Korea-based English freelancer. The views are his own.)

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