Tech War: China Could Face U.S., EU Curbs Over Legacy Chips Dominance
Over the next three years, China’s legacy chip capacity is set to grow to 39 percent of the overall market, thanks to Beijing’s subsidies, according to data by Trendforce. A separate forecast by Gavekal Dragonomics sees China adding more chip-making capacity this year than the rest of the world combined — a million more legacy chips per month than last year.
India also wants a piece of the action, which could further spur overcapacity in the chip supply chain. Indian conglomerate Tata Group is pouring $11 billion into the construction of its own chip foundry, in Dholera, Gujarat.
Taiwanese chipmakers, which currently hold nearly half of global chip production capacity, have switched focus to meet the demand for advanced chips, along with the United States, South Korea and Japan. Taiwanese foundries will likely see their overall market share decline as a result of China’s investment spurt, TrendForce forecast in December.
Overreliance on China a Security Risk
Critical dependencies are another concern. If Western chipmakers are unable to compete with their Chinese counterparts and downscale, the United States and EU could become too reliant on China for the semiconductors needed in everyday consumer electronics, but also military hardware and critical infrastructure.
If it were to dominate the market, China could use economic coercion to stymie Western access to legacy chips. The effect could be worse than the COVID-era chip shortage that led to delays in deliveries of vehicles and gadgets, including the latest iPhones, blamed on the lack of legacy chips not advanced ones.
“For consumers, the importance of legacy technologies outweighs that of advanced chips like AI,” Trendforce’s Chiao told DW, adding that despite hogging the headlines, AI chips account for less than 1 percent of global semiconductor consumption.
Any loss of access to Chinese legacy chips could wreak havoc for Germany’s auto producers, for example, who are already struggling with intense competition in the transition to electric vehicles.
Sanctions, Subsidies and Sourcing from Allies
While there’s agreement that Washington and Brussels must do something, there are concerns that sanctions and other curbs could also harm Western chipmakers.
“It’s the wrong solution to the right problem,” Penn, the CEO of the UK-based chip consultancy Future Horizons, told DW. “Sanctions will only delay China’s dominance, they won’t stop it.”
Penn noted how despite sanctions on Western exports to Russia following Moscow’s full-scale invasion of Ukraine, exporters and Russian buyers have found workarounds through third countries.
Western countries won’t be able to ramp up chip production fast enough to offset any shortage of chips from China in the event of tit-for-tat retaliation, he warned.
“If you decided to do it today [invest in more domestic production], you wouldn’t see the first chips for at least three years, probably longer — even if there were no delays in building the factories and you found the people with the skills to run them,” Penn explained.
While U.S. and EU officials may consider further sanctions on China, industry insiders believe export controls are more likely on tools that aid legacy chip production. Washington and Brussels could rely on so-called friendshoring — manufacturing and sourcing from geopolitical allies, including India, to cut their reliance on China.
They may also offer further subsidies to encourage domestic foundries to build more legacy chips and survive a price war. Through the passing of two recent Chip acts, the EU and the US have already committed some $86 billion in subsidies to the semiconductor sector over the next decade.
Nik Martin is editor and content producer at DW. This article was edited by Rob Mudge, and it is published courtesy of Deutsche Welle (DW).
