The downward trend in the semiconductor market over the past year has reflected the pandemic-induced over-ordering of computers and smartphones, which led to an abnormal increase in sales, but also the restrictions imposed on China by the US government on free trade in advanced chips, first by former President Donald Trump and now by current President Joe Biden, especially with his chip law (the US Chips Act) enacted last November.
The main aim of the US Chips Act and the European Chip Act, the latter of which is still in the process of being approved by the European Union, is to encourage more chips to be manufactured in the United States and the European Union by granting subsidies and soft loans, and thus achieve greater autonomy in this strategic market. The US has also banned its companies, and those that use all or part of US-patented production equipment, from selling their products to China, especially those with high added value, such as those used for military purposes or high-performance servers and artificial intelligence tasks. It also succeeded in stopping TSMC from supplying chips to Huawei, even though the Chinese company had designed them.
The US also imposed that companies that manufacture advanced chips in China with US patents, such as the American Intel or Micron but also Samsung and SK Hynix, all of them with huge production centres for processors and memories, could not renew their equipment subject to US patents after a one-year extension, which is expected (although not confirmed) to expire next September. According to the Financial Times, the US will continue to ban Samsung and SK Hynix from selling sophisticated chips to China, although the decision has not yet been approved by President Biden.
China happens to be the largest purchaser of chips and production equipment, both for domestic consumption and for export in the form of finished electronics products. Virtually all of HP and Dell’s computers and laptops, for example, are assembled in China and exported to the rest of the world. A large part of the wafers manufactured by TSMC in Taiwan are shipped to mainland China to be cut and encapsulated into chips from Apple, Qualcomm, MediaTek or NVidia and assembled into smartphones from Chinese manufacturers.
TSMC has stated that manufacturing chips in the US is 30% more expensive than in Taiwan, which is unsustainable without generous public subsidies from the US. From a strategic point of view, it is in TSMC’s interest to relocate some of its production outside Taiwan, either to the US or to Europe. That is why it has built a plant in the US and will probably agree to do so in Europe as well, even if it is not particularly profitable. But the plants will certainly not be the most advanced when the pace of mass production is finally reached, nor will TSMC share production secrets, as the United States aspires to.
The problem is that the amount of subsidies to manufacture chips in the United States or Europe, just over $50 billion in each case and over several years, is an amount that does not even represent half of the annual investment that TSMC or Samsung allocate to semiconductor production plants, which are essential to continue the technological race and lead the market in highly sophisticated chips.
Intel’s current financial situation is a symptom of the chip industry’s problems. To remain competitive in the infinitesimal chip race, the company must build production plants costing tens of billions of dollars and taking up to five years to build. At the moment, Intel is well advanced with the renovation of its factory in Ireland and the construction of the macro-complex in Ohio is well underway.
But Intel’s subsidies only cover a small part of the necessary investment, however high they may be, while its market capitalisation has plummeted to 34 dollars a share when it was twice as much two years ago, partly because of the first quarter losses of 2.8 billion dollars and the 34% drop in turnover compared to a year earlier that it announced a few days ago. Against this backdrop, experts are sceptical that Intel can match its manufacturing ambitions, even if it manages to catch up technologically within a year with TSMC and Samsung, as it has repeatedly claimed.
The market back-and-forth is also affecting Qualcomm, the US manufacturer that specialises in designing processors for smartphones, which are made by TSMC. Qualcomm has just announced that its sales in the last quarter were down 17% and profits 42% from twelve months earlier, due to lower smartphone sales in the last nine months.
Results from MediaTek, Qualcomm’s big competitor in smartphone processors, which is also made by compatriot TSMC, are expected to show a similar decline in sales. Smartphones are not only crucial to Apple’s profits, but the evolution of global sales, irretrievably downward, has broad repercussions for the entire technology sector.
The second half of the year and especially next year will be decisive for the future development of the global semiconductor market and the competitive position of Europe, the United States, South Korea, Taiwan, Japan and China in the industry in the second half of this decade. Not to be forgotten either is India, which wants to become a major global technology player and the size of its domestic market allows it to do so. And all this against the backdrop of a conflict between Russia and Ukraine that has no end in sight.
Albert Cuesta, specialized journalist