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April, 2018

Semiconductors at crux of Sino-U.S. trade tensions

Original article: United Daily News

The Trump administration is taking its "America First" strategy to the semiconductor sector, reportedly urging Taiwanese semiconductor manufacturer TSMC to set up production facilities in the U.S. TSMC is the world's largest contract chipmaker, with clients including Apple and Qualcomm. TSMC currently manufactures its most advanced chips in Taiwan and other, less advanced chips in mainland China. TSMC's Nanjing US$3 billion fab is one of the largest ever overseas investments by a Taiwanese firm. 

Analysis:

Perhaps more so than any other industry, semiconductors lie at the heart of Sino-U.S. trade tensions. Semiconductors are integral parts of our everyday lives. They're involved in almost all electronic technology, and are the computing brains that power our smartphones, tablets and laptops. A January 2017 report by then President Barack Obama's Council of Advisors on Science and Technology noted that advanced IC technology is essential to defense systems and American military might, while "the pervasiveness of semiconductor devices makes their integrity important to mitigating cybersecurity risk."


It may seem hard to fathom in Donald Trump's "America First" reign, but it was the Obama administration which initially questioned Beijing's IC ambitions. Indeed, six years ago, a report published by the Department of Defense said that China exported counterfeit semiconductors to the United States that could cause military equipment - such as fighter jets - to malfunction. During the Obama years, Washington complained consistently to Beijing about alleged semiconductor-related IP theft by Chinese actors. 


In December 2016, the Obama administration blocked the Chinese takeover of the German semiconductor maker Aixtron - it could do so because Aixtron has a large US division - citing national-security concerns. The aforementioned report urged protection of the domestic semiconductor industry from Chinese encroachment. Among its key recommendations: expand CFIUS's oversight of Chinese investment in U.S. semiconductor makers. If that sounds familiar, it's because the recommendation mirrors efforts by the Trump administration. 


Given rising IC-sector competition between the US and China, it makes sense for Washington to boost manufacturing at home. That would provide some security in the advent of a major supply chain disruption. Further, Taiwan chipmaker TSMC's largest clients are American tech giants like Apple and Qualcomm. Having a large production facility close to their headquarters isn't a bad idea. 


For their part, Taiwanese manufacturers are concerned about the fallout from a U.S.-China trade conflict, which could shave up to two percentage points off of the island's annual GDP, according to a March report in Japan's Nikkei Asian Review. They need to be prepared to shift some production capacity if tensions escalate. At the same time, Shen Jong-chin, Taiwan's Minister of Economic Affairs, was quoted by Nikkei as saying that "a growing number of [Taiwanese] companies are avoiding China for fear of leaks of technology." 


Still, the allure of the China market remains strong for many IC makers, says Jian-Hong Lin, a researcher at the market-intelligence firm TrendForce. Many semiconductor companies cannot afford to give up on the massive China market, even if IP protection is still inadequate, he says. "The companies need to ensure they have sufficient capital and growth momentum [which China can provide] to sustain their global business until the day when the IP protection issues are solved."


He points out the dilemma global IC makers face in the China market. On the one hand, leading IC makers try to protect their IP as much as possible by methods like keeping the core R&D team in their headquarters. On the other hand, they aim to expand in China rapidly to gain more profits and stay ahead of their competitors. They then use those earnings to invest and develop next-generation technology. 


With regards to Sino-U.S. trade tensions, Hong suggests that Washington and Beijing decouple trade and IP negotiations. "We suggest separating trade and IP protection because IP protection requires cross-national rather than simply bilateral cooperation," he says. Further, "working on changing the 'export/import statistics numbers' and trade situation cannot help companies protect IP in a better way." 

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