Wednesday, November 27, 2024

Western countries need a plan for when China storms the chip market

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The author is the author of “The Chip War,” a professor at the Fletcher School, and a nonresident senior fellow at the American Enterprise Institute. green mantle partner

The CEO of Semiconductor Manufacturing International Corporation, a major Chinese chipmaker, predicted a “global oversupply” of the types of semiconductors the company makes during a recent quarterly earnings call. did. At the same time, the company announced that it would increase capital investment by $7.5 billion.

It may seem counterintuitive to business logic, but Chinese chipmakers are ramping up production capacity, supported by generous subsidies, despite concerns about oversupply. The country’s chip production capacity could increase by 60% over the next three years and double in the next five years, according to one consultancy. Western restrictions on exports of chip manufacturing equipment to China have prevented China from producing cutting-edge processor chips, so much of this production will focus on basic chips widely used in cars, household goods and consumer devices. Becomes a processor chip.

No wonder trade policy makers are nervous that China might flood the market with certain types of chips. The CEO of TSMC, the world’s leading Taiwanese chipmaker, recently raised concerns about overcapacity in the basic segment. Other chip CEOs have said the same thing privately. The most pessimistic analysts see a parallel in China’s investment in solar panels and worry that the country’s chip manufacturing investment will drive down prices and the profits of Western companies.

Until recently, the risk of overcapacity was a topic of discussion only among economic bureaucrats and trade lawyers. It has now reached the highest level of G7 policy discussion. On January 8, Republican Rep. Mike Gallagher called on the Biden administration to impose tariffs if necessary to prevent China from gaining “undue influence” on the global economy.

However, it is not clear which segments may experience excess production capacity. There are many different types of basic chips, produced by different manufacturing plants, different materials, and different companies. There is no guarantee that Chinese companies will be able to capture market share in every field. For example, due to painful shortages during the pandemic, some Western automakers already have long-term supply contracts and are unlikely to buy more from Chinese suppliers even if prices are lower.

Nevertheless, the US, European and Japanese governments are all discussing potential responses to China’s chip overcapacity. They face complex trade-offs. Tariffs are the usual means of combating dumping, but Western countries do not directly import large quantities of Chinese chips. It is integrated inside the finished device. The underlying chip often accounts for a small portion of the product cost. Some companies don’t even know the origin of the chips in their components. Given the complexity of customs administration, authorities are exploring alternatives. One approach is to subsidize the use of non-Chinese chips, but this would require governments to find new funding.

The second option is to restrict market access for certain Chinese companies. SMIC manufactured Huawei’s controversial sanctioned 7nm smartphone processor in 2023, and the Commerce Department is formally investigating whether it violated U.S. law. If so, China hawks in Congress will demand harsh penalties (although Western companies still working with SMIC will lobby for leniency).

Finally, Chinese chips could simply be banned from “critical” use cases. Intelligence agencies are already concerned about malicious insertions and chip compromise. Anything from medical equipment to electric vehicles could be considered critical infrastructure.

European countries view the issue of excess capacity primarily through the lens of trade damage rather than security, and will likely reject any response they deem non-compliant with World Trade Organization rules. China hawks in the United States and Japan are more concerned with the security implications. They had little concern about effectively banning Huawei from telecoms infrastructure, and would follow suit by banning “untrusted” Chinese chips from critical areas.

But a total ban may not be necessary if Western companies are deterred from buying Chinese chips. Mr. Gallagher went public with his concerns about Chinese subsidies, in part to urge the Biden administration to take action. But CEOs will also be parsing Gallagher’s comments carefully. A House committee has already summoned executives from several major U.S. semiconductor companies to testify about their relationships with China. As the Chinese government ramps up scrutiny of potential overcapacity, companies in other regions also find themselves potentially being held to account for the security implications of their reliance on low-cost Chinese chips. right.



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