Self-help and Paradox of American Semiconductor

There is no doubt that the technological competition between China and the United States will be the main axis of the global technology industry for a long time from the past to the future. And the chip occupies a unique position among them.

All along, the Chinese media have been analyzing the impact of the US’s implementation of chip supply and chip sniping on China, and China’s possible response measures. In other words, we have been looking at what China should do. However, as a long-term competition mechanism, the impact of chip competition is by no means unilaterally released to China. The United States, standing at the other end of the field, is also desperate for a small chip.

Overall, the semiconductor policy of the United States in the past ten years has been quite consistent. It can be summed up as follows: build factories in-house and engage in sniping outside to reconcile the contradiction between large companies and local employment. The motivation for these behaviors lies in the United States, the biggest beneficiary of semiconductor globalization, and has drawn itself into a paradoxical knot.

Self-help

The information revolution has brought mankind to the Internet age, and it has also brought several major US semiconductor giants to the pinnacle of human business history.

However, the globalization pattern has also brought a series of almost irreversible effects to the chip industry, which is the fifth-largest export product of the United States. For example, after large companies continue to complete industrial annexation, they have reached a similar monopoly in their respective fields. And these multinational companies will chase benefits and continue to globalize R&D, production and markets. As a result, the large companies that the United States has worked hard to cultivate have gradually become "independent kingdoms". The stronger their monopoly effect, the harder it is for American SMEs to survive, and there will be fewer and fewer local jobs.

At the same time, the multinational giants that can logically grab the global interest chain have their own innovation rate slower than the competition period, which has led to the gradual shrinking of the US's core technology leadership. It can be seen from the rise of Asian semiconductor companies to the backwardness of 5G in the United States.

In order to alleviate the business conflicts between multinational companies and the local economy, and at the same time deal with the challenges of the rise of technology from Asia, especially China, the United States has long recognized that semiconductors must "help themselves." Since the Obama administration, the United States has begun a series of policy adjustments and industry guidance program changes in the semiconductor field.

For example, today’s familiar semiconductor export control was promoted during the Obama era. From the initial raising of the threshold for semiconductor technology transfer to the passage of the Export Control Reform Act (ECRA) in the Trump era, it has evolved into a series of "blackout" plans for Chinese companies. It took the United States several years to bring the semiconductor export policy back to the level of the 1980s during the US-Japan semiconductor competition.

In ECRA, semiconductors are listed as the first item of export control of "emerging and basic technologies". The transfer, export, and mergers and acquisitions of semiconductor technology by US companies, especially when it comes to China, will face extremely stringent controls.

On the other hand, the Obama administration also initiated a series of layouts to enhance the long-term competitiveness of American semiconductors. For example, in 2017, the then Presidential Council of Science and Technology Advisory Committee (PCAST) wrote a report "Ensuring the United States' Long-term Leadership in the Semiconductor Field", which put forward the core direction of the development of American semiconductors:

• The government provides more R&D investment and policies to attract talents and reforms the tax laws and licensing policies of semiconductor companies.

• Targeted attacks on technological innovation and commercial progress in other countries.

• Promote and fund core technology innovation in the semiconductor industry.

Although this report was criticized at the time as over-talking about strategy and lacking specific implementation plans. But looking at it today, these directions do indeed lead the step-by-step development of the US semiconductor policy. In fact, it was inherited by the Trump administration, and it is more likely to carry forward in the Biden administration. Therefore, when we analyze the future of the global semiconductor industry and the Sino-US chip game, it is still necessary to frequently return to the 2017 report to think about US motives.

Paradox

To some extent, semiconductors are "monsters" cultivated by mankind in the era of globalization. The most advanced semiconductor technology and manufacturing process can no longer be independently developed, manufactured and consumed by any country, or even cut off any major market from the global map.

As a result, "America First" may be welcomed by many industries and people in the United States; but excessive "Priority" will be firmly opposed by the core industry of the United States, the semiconductor. Existence priority means competition and fragmentation, while the essence of semiconductors is free trade and coordinated production.

This paradox may only be cleared by a radical technological change. However, the Trump administration’s actions accelerated the direct outbreak of the paradox. For example, the American Semiconductor Industry Association (SIA), which once served as the vanguard in the US-Japan semiconductor competition, has stood on the "other side" in the Sino-US semiconductor confrontation.

After the outbreak of the Sino-US trade war, SIA has repeatedly stated publicly that it does not understand why semiconductors have become a tax target. Because China is a major exporter of US semiconductors, the US has almost completely banned semiconductor products from mainland China from entering the US market. As a result, the large increase in tariffs in the semiconductor field has to some extent turned into a "one-way sanction" on the US semiconductor industry.

In March 2020, SIA announced an independent study commissioned by the Boston Consulting Group (BCG). This report shows that before and after the U.S. trade war in 2018, the median revenue growth of the top 25 semiconductor companies in the United States decreased from 10% to 1%. After Huawei was included in the "Entity List" in May 2019, the revenue of major US semiconductor companies all experienced a 4%-9% decline.

This report predicts that if the United States continues the Trump-era policies in the semiconductor field in the next three to five years, US semiconductor companies will lose 8% of the global share and 16% of revenue. And these losses will eventually cause semiconductor companies to drastically cut R&D investment, thereby destroying the virtuous circle of the semiconductor industry. Eventually, it may not only threaten the leading position of the US semiconductor industry but also may eventually lead to the loss of a large number of jobs.

The biggest difference between the Sino-US semiconductor game today and the US-Japan semiconductor conflict in the 1980s is that at that time, Japanese companies approached one after another, causing American companies to struggle; today, Chinese companies are customers and even major customers of American semiconductors. The US government is launching closures and crackdowns based on employment rates, overall trade volume, and even abstract national competition. The paradox of interests between the two will only lead to a series of contradictions escalation.

The "chip war" promoted by the Trump administration and the accompanying "America First" values, another contradiction caused by the United States and its traditional "semiconductor ally". After the U.S.-Japan "Plaza Agreement", the U.S., Japan, and the European Union reached a basic balance of interests and guaranteed innovation and coordination, laying an important foundation for the information revolution that followed. At the current stage, both semiconductor iteration and new application space expansion will generate extremely high comprehensive costs. If the US government and the industrial chain want to dilute this cost, they can only choose to innovate and collaborate with the industrial chains of countries such as the European Union, the United Kingdom, Japan, and South Korea.

But the basis of innovation collaboration is the unification of interests. And the semiconductor strategy of "America First" has abandoned the consistency of semiconductor interests with allies. In fact, a large number of semiconductor manufacturing jobs returned by the United States are "stripped" from Europe and South Korea. In the semiconductor barriers to China, the Trump administration has repeatedly chosen to "backstab" allies. For example, based on the Wassenaar Agreement, the United States will dynamically supervise the exports of many EU semiconductor companies to China. However, the U.S. government is willing to issue a permit for its own enterprises based on the principle of "America First".

This has led to many cases in which the United States suppressed Chinese technology companies through chips, but the final outcome was that the United States, Japan and South Korea continued to supply chips, while European companies fell out. This bizarre situation further divides the semiconductor industry chain, which is already full of imbalanced interests. The European Union first clarified the strategic interests of semiconductors in 2019 and emphasized that the European Union's presence in the global semiconductor industry chain is closely related to a series of operations in the United States.

In the paradox of American semiconductor interests, we will find that if the "Trump Policy" continues, American companies, American allies, and the American market will deviate from the United States. This situation also makes it impossible for the United States to directly launch a large-scale, long-term "chip war".

It is more likely that the United States will follow the example of the past on Japanese and European companies and launch "semiconductor sniper" and long-arm jurisdiction against particularly representative companies in an attempt to stifle the rise of China's core technology. At the same time, it establishes a closer alliance of interests with traditional allies to prevent the continued expansion of the division that has occurred.

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