Nations Deploy War-Like Efforts to Win the Chip Race

Integrated circuits on a circuit board.

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Tiny pieces of silicon with intricate circuitry are the lifeblood of today’s economy.

These clever semiconductors make our Internet-connected world go round. In addition to iPhones and PlayStations, they support key national infrastructure and sophisticated weaponry.

But recently there have not been enough to meet the demand.

The reasons for the current global chip shortage, which will last until 2022 and possibly 2023, are complex and multifaceted. Yet nations plan to inject billions of dollars into semiconductors in the coming years as part of an effort to secure supply chains and become more self-sufficient, with money earmarked for new chip plants as well as research and development.

South Korea became the latest country to announce a colossal investment in the industry last week. The nation’s government said Thursday that 510 trillion South Korean won ($ 452 billion) will be invested in chips by 2030, with most of it coming from private companies in the country.

Abishur Prakash, a geopolitics specialist at the Center for Innovating the Future, a Toronto-based consulting firm, told CNBC via email that it is a “war-like effort in South Korea to build future security and independence.” .

“By developing massive chip capabilities, South Korea will have the power to decide its own trajectory, rather than being forced in a specific direction,” added Prakash. “This is also about not depending on China or Taiwan. By investing hundreds of billions of dollars, South Korea ensures that it is not tied to other nations for its critical technology needs. “

Through the so-called “K-Semiconductor Strategy,” the South Korean government said it will support the industry by offering tax breaks, finance and infrastructure.

In a speech on May 10, South Korean President Moon Jae-in said: “In the midst of the great transformation of the global economy, semiconductors are becoming a kind of key infrastructure in all industrial areas. ”.

He added: “While we solidly maintain the status of our semiconductor industry as the best in the world, we will safeguard our national interests by using the current semiconductor boom as an opportunity for a new leap forward.”

But South Korea is not leading on all fronts. “In pure manufacturing capacity, Taiwan ranks first and South Korea second, with the United States in third place and China quickly gaining,” Glenn O’Donnell, vice president and chief research officer at analyst firm Forrester, told CNBC. .

South Korea has a dominant memory chip advantage with a 65% share, thanks in large part to Samsung, he said. He added that Asia as a whole dominates in manufacturing, with 79% of all the world’s chips produced on the continent in 2019.

O’Donnell said it is “hard to say” whether the investment will help South Korea seize the world chip-making crown the way it wants. “This is a monumental investment, but the United States, Taiwan’s TSMC and China are also investing heavily,” he said.

Deep pockets

South Korea’s investment is being led by two of its largest chip firms: Samsung Electronics and SK Hynix.

Samsung Electronics, the country’s largest chipmaker and rival to Taiwan’s TSMC, plans to invest 171 trillion won in memoryless chips through 2030, raising its previous investment goal of 133 trillion won, which was announced in 2019.

On the other hand, SK Hynix, a semiconductor provider of dynamic random access memory (DRAM) chips and flash memory chips, plans to spend 230 trillion won in the next decade. A SK Hynix spokesperson told CNBC that the company will spend 110 billion won on its existing production sites in Icheon and Cheongju between now and 2030. It is also investing 120 billion won in four new factories in Yongin as part of an effort. broader to double the number of chips it produces.

Prakash said the world should be shocked by the size of South Korea’s general war chest. “With almost half a trillion dollars and the participation of more than 150 companies, South Korea is moving mountains to secure its place in the future,” he said.

The US, China and the EU also invest

South Korea’s pledge comes after US President Joe Biden proposed a $ 50 billion plan for chip making and research, while China’s Xi Jinping pledged to spend on industries from high technology, with a great emphasis on semiconductors. The EU said in March that it wants 20% of the world’s semiconductors to be made in Europe by 2030, up from just 10% in 2010.

“In the ongoing battle for dominance in the field of technology, all nations are vying for such an important designation as the world’s key supplier,” said Forrester’s O’Donnell. “South Korea, Japan, the United States, Taiwan, the EU and China yearn for that gold medal on the podium of the Tech Olympics.”

O’Donnell noted that it takes about two years to build a chip manufacturing plant, or factory. “Each factory will cost more than $ 10 billion, but all the money in the world will not quickly solve the chip shortage or guarantee that gold medal.”

He added: “Geopolitical tensions also influence dynamics. South Korea always lives under threat from North Korea who will destabilize its technological position if things get too hot in the DMZ. Taiwan, arguably today’s largest semiconductor supplier, faces a similar threat. ” as tensions with mainland China rise. “

Outside of South Korea, all the major chipmakers have announced large investments of their own.

TSMC has committed to spending $ 100 billion over three years to increase its production capacity, while Intel plans to build two new factories in Arizona with $ 20 billion. The two companies have also been in discussions about a new European factory, according to reports.

Meanwhile, Chinese chipmaker SMIC said on Friday it is working quickly to expand capacity with some plans ahead of schedule. Haijun Zhao, the chief executive, said in an earnings call that semiconductor demand in each customer segment continues to outstrip supply.

SMIC posted a 22% increase in first quarter sales to $ 1.1 billion and raised its sales outlook for the first half of the year.

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