How are geopolitics shaping the semiconductor industry?
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The semiconductor industry has come increasingly under the spotlight in recent years. From supply shortages to growing geopolitical tensions, the sector has struggled to adjust to fluctuating demand. As a result, industrial players are stepping up production capacity and tightening policies in a bid to shore up supply.
In some sectors, momentum has slowed amidst difficult economic conditions. PC shipments, for instance, fell 16% in 2022 and are expected to further contract by 6.8% this year, while mobile phone shipments are expected to drop by 4% in 2023. Yet automotive semiconductors – which currently represent 8-10% of the global market – are experiencing rising demand as trends such as electrification and connected driving continue to gather pace. And while this momentum is unlikely to slow down, where and how it will unfold is yet to be determined.
Chip bans dent Chinese purchasing power
The US has been imposing sanctions on Chinese tech companies since 2019. And in recent years, this has expanded to an increasing number of firms – not only in terms of exports, but also regarding US companies’ ability to invest in them. Notably, the 2022 ban on sales of semiconductor chips to China, followed by similar measures introduced by the Netherlands and Japan, demonstrate a marked escalation in efforts to curtail the advancement of China’s tech sector.
China’s imports of semiconductors have exceeded those of oil since 2015, and in 2022, 86% of its chip making equipment was imported from foreign firms. With regards to domestic production, China’s share is elementary compared to the US, Japan and Europe, which make up the majority of the market.
As such, China is heavily dependent on foreign equipment. And sanctions have had an impact: in 2022, China saw its first decline in equipment purchasing within the last decade, with imports falling by 3% following its 2021 peak. While the US-led multi-country chip ban is taking shape, it is also likely that Washington seeks to freeze Beijing’s tech capability and keep the gap rather than a complete halt of all semiconductor production in China.
However, despite short-term setbacks, China still has a number of possible options to boost production via its own supply chain. It is clear that China will step up its research and development (R&D) more than ever, and it all depends on whether the West can match the investment and keep its tech advantage.
Automotive semiconductors: a beacon in the dark
While consumer electronics continue to experience a drop in demand, the automotive sector – which currently represents only 8-10% of the semiconductor market – is growing rapidly. Naturally, the main force behind this growth is electrification, as electric vehicle (EV) production intensifies. Alongside this, the push for digital mobility is driving a greater need for semiconductor chips, as are increasing bandwidth requirements with more data being transferred between vehicles and their external environment.
In line with these developments, light vehicle production is expected to increase at a rate of 2.2% annually by the end of this decade, and within the same period, 20% of the value of the materials used to make modern vehicles is expected to correspond to microchips. Both the EU and US are strongly positioned across the entire automotive semiconductor range, from integrated device manufacturers specialising in power electronics to advanced fabless designers focusing on cutting edge chips. Tech giants such as Google or Apple are also working to create their own products, while major car manufacturers, including Tesla and Stellantis, are investing in the development of their own “silicon”.
Still, China has its own strengths in this space. Automotive semiconductors require mature process node technology, a large percentage of which relies on older, 200mm wafer equipment – a technology expected to only grow in the low single digits through 2026. Demand will therefore likely continue to outpace supply, and China is one of the few countries to have expanded its 200mm capacity in recent years. This, in turn, could strengthen the country’s positioning in global automotive semiconductor supply chains.
Another element central to the EV ecosystem are wide bandgap materials (WBGs), which manufacturers require to produce more efficient semiconductors capable of operating at a higher voltage. The move to higher voltage batteries will be essential for the future of the industry, as they will help to reduce charging times and allow the use of smaller, lighter motors to reduce chassis weight and make vehicles more efficient. Most of these new components are designed to be printed on 150mm and 200mm wafers. China is heavily investing in the sector, which could give it an additional competitive advantage.
Taking into account China’s roughly 70% share of global rare earth metals, its dominance when it comes to cobalt mining and its control of large parts of the semiconductor assembly and testing market, it is apparent that it is slowly tightening its grip on the EV ecosystem.
Future of industry uncertain
Vehicle architectures are constantly evolving and by 2030, experts estimate that we will have fully transitioned to a software-defined model. This will mean cars will require fewer logic microchips, but that those they do have will be more sophisticated in order to make intelligent mobility more of a possibility.
As such, in the longer term, advanced chip manufacturers in the US may have the upper hand. However, China certainly isn’t out of options. Whether or not it succeeds in advancing its own domestic microchip production will greatly determine the future of the semiconductor industry – and could ultimately see the chasm with the rest of the developed world deepen when it comes to tech development.
Watch the replay of the webinar "Semiconductors transformed by geopolitics"