The Pacific--Dealing with the Sino-US Chip Tech Competition: Why Taiwan and South Korea Respond Differently

Editor’s Notes

Semiconductor chips, often compared to the oil of the 21st century, are increasingly strategic and crucial to economic competitiveness and national security. The US considers them a key weapon in its technological competition with China.

Amidst these changing circumstances, the governments of Taiwan and South Korea, along with their semiconductor giants, are paying close attention to the US "Chips Act" and the ongoing decoupling of technology between the US and China. This article will first introduce the division of labor within the semiconductor supply chain, and discuss the leading roles of South Korea and Taiwan in global chip manufacturing. Then, it will summarize the measures the US takes to draw in its East Asian allies. Finally, it clarifies the government and corporate logic to understand the varying responses of Taiwan and South Korea to the US-China technological decoupling.

On August 9, 2022, US President Biden officially signed the "Chips and Science Act" (referred to as the "Chips Act"). In March of the same year, the US proposed the so-called "Chip Quad" alliance, consisting of the US, Japan, South Korea, and Taiwan, and continued to promote it. Although the White House describes the purpose of the act as reducing costs, creating jobs, strengthening supply chains, and promoting the return of semiconductor manufacturing, the US's intentions to hinder the chip development of the Chinese mainland (abbreviated as China) are clear, especially with the inclusion of the "China Fence" clause, forcing semiconductor giants to take sides in the US-China industrial policy. The US is now using both incentives and pressure to attract or compel Taiwanese and South Korean semiconductor giants to set up operations in the country, aiming to increase domestic chip manufacturing capabilities and build a "resilient" supply chain based in the US. The world's bipolar structure of technology competition and ideology between the US and China will profoundly affect the global layout of semiconductor companies. In the future, the global semiconductor industry is likely to be divided into regional supply chains.

East Asia Holds Three-Quarters of Global Chip Manufacturing Capacity

Semiconductors are highly integrated, precision products of modern technology. Their design and manufacturing processes require technical support from various scientific fields, including materials and mechanical processing. According to data from Capital IQ, Boston Consulting estimates that in 2019, the semiconductor industry had the highest R&D spending as a percentage of sales revenue, reaching 22%, one percentage point higher than the biopharmaceutical industry and eight percentage points higher than software and computer services, which ranked third. In terms of capital expenditure, the semiconductor industry also tops the list, with capital spending accounting for 26% of sales revenue.

Due to its high-tech nature, high capital expenditure, and large-scale industrial production, the semiconductor supply chain is highly globalized, integrated, and specialized. As shown in the left half of Figure 1, the semiconductor supply chain specifically includes the following stages: fundamental research, EDA (Electronic Design Automation)/core IP (Intellectual Property), chip design (subdivided into logic devices, DAO, and memory), semiconductor manufacturing equipment and materials, and manufacturing (subdivided into front-end wafer fabrication, back-end packaging, and testing).

Figure 1: Highly Globalized and Integrated Semiconductor Supply Chain

(Source: Boston Consulting)

As shown in the right half of Figure 1, different economiesor regions play different roles according to their comparative advantages: The United States, with its world-class universities, technological talent, and market-driven innovation ecosystem, leads in R&D-intensive segments—EDA, IP, chip design, and advanced manufacturing equipment. East Asia (Japan, South Korea, and Taiwan) is at the forefront of advanced materials and wafer manufacturing, which requires significant capital investment, government incentives, robust infrastructure, and skilled labor. Chinese manufacturers still lack critical technological capabilities in advanced materials, equipment, and wafer manufacturing processes but have gained a particular market share in the assembly, packaging, and testing stages.

Taiwan Dominates Advanced Logic Chip Manufacturing, While South Korea Leads in Memory Chips

Taking a closer look at the regional distribution of global chip manufacturing capacity in 2019 (see Figure 2), the total capacity of the four major East Asian economies is very close: Taiwan (20%), South Korea (19%), Japan (17%), and the Chinese mainland (16%). However, there are apparent differences in terms of technology levels. South Korea has an apparent comparative advantage in memory chips, accounting for 44% of global capacity, followed by Japan (20%), the Chinese mainland (14%), and Taiwan (11%). Taiwan leads logic chip manufacturing, particularly in advanced processes below 10 nanometers, with an unrivaled and absolute leading position, capturing 92% of capacity. South Korea takes the remaining 8%, with Taiwan monopolizing this manufacturing segment and maintaining an oligopoly. The Chinese mainland has secured a foothold in mature process chip manufacturing: 28-45 nanometers (19%) and above 45 nanometers (23%) but is weak in advanced processes: below 10 nanometers (0%) and 10-22 nanometers (3%).

Figure 2: Regional Distribution of Global Chip Manufacturing Capacity in 2019

(Source: Boston Consulting)

As the inventor of integrated circuits, the United States chip manufacturing capacity is increasingly lagging behind East Asia, accounting for only 13% of the global share, lower than Taiwan (20%), South Korea (19%), Japan (17%), and the Chinese mainland (16%). Economic globalization, driven by US capital, has caused the modern semiconductor industry, with chips at its core, to continuously shift from the US for decades, resulting in a steady decline in the US share of global capacity, from 37% in 1990 to 13% in 2019. Most alarming for the US is Taiwan and South Korea's monopoly on advanced process chips below 10 nanometers. According to Bloomberg, US Commerce Secretary Gina Raimondo said at the 2022 Aspen Security Forum held in Colorado, "Our reliance on Taiwan for chips is unsustainable and insecure." Former US Treasury Secretary Lawrence Summers, who also attended the Aspen Security Forum, compared the US dependence on Taiwan to Europe's reliance on Russian natural gas imports. Summers stated that people look at Germany and ask, "How can they be so dependent on Russian natural gas?", "Now they will look at us and say, 'How can we be so dependent on Taiwan's semiconductors?'"

The US aims to win over East Asian allies to comprehensively suppress China's chip industry

The US government is trying to reverse the situation. In pursuit of a so-called "secure and resilient" supply chain, the US has introduced measures to maintain its economic dominance in the chip industry, as shown in Table 1. These measures can be roughly divided into two categories: the first is "exclusionary," limiting the entry of US chip technology and talent into Chinese companies. In recent years, the US has repeatedly imposed sanctions on China's high-techenterprises under the pretext of "national security," gradually expanding its means and scope and constantly generalizing its sanction criteria. In 2019, President Trump began to sanction Chinese telecom giant Huawei and chip foundry leader SMIC on the grounds of national security. After Biden took office, he further increased sanctions on China's semiconductor industry, from single-point sanctions on specific companies to a targeted "chokehold" on military-grade high-end chips. Now, a full-scale restriction on US chip technology entering Chinese companies. President Biden signed the Chips Act passed by Congress on August 9, 2022, pushing the decoupling of the US and Chinese economies to an irreversible tipping point. The 1054-page Chips Act lists several support measures for the US semiconductor industry. Among the most eye-catching are the $52.7 billion in federal subsidies for the industry between 2022 and 2026, with $39 billion for building, expanding, or upgrading US-based wafer fabs, $11 billion for funding semiconductor research and development, and a 25% tax credit for related semiconductor investments. The Chips Act explicitly lists a "China fence" provision: prohibiting companies receiving federal funds from significantly increasing advanced chip production in China for ten years. Companies that violate the ban or fail to correct violations may have to repay the federal subsidies in full.

Table 1: US Policies and Measures in the Semiconductor Field Targeting East Asian Economies

May 2019 Trade restrictions against Huawei The U.S. Department of Commerce added Huawei and its 68 non-U.S. affiliates to the Entity List, prohibiting U.S. companies and their suppliers from selling products to Huawei without a license.

Dec 2020 Trade restrictions against Huawei The U.S. Department of Commerce added SMIC and some of its subsidiaries and affiliates to the Entity List, restricting U.S. companies from selling 10-nanometer and below process technology to SMIC.

Sep 2021 Forced acquisition of semiconductor data The U.S. Department of Commerce demanded TSMC, Samsung, and other chip foundries to disclose their inventory, order, sales records, and other data deemed as trade secrets, citing the need for "supply chain transparency."

Jul 2022 Four-party alliance in the chip industry The U.S. proposed a “Chip Quad” alliance with Japan, South Korea, and Taiwan to build a new semiconductor chain.

Aug 2022 Chips Act U.S. President Biden signed a $280 billion chips act passed by Congress, encouraging chip manufacturers to set up factories in the U.S. and including "China safeguards" to force semiconductor giants to choose sides in the U.S.-China industrial policy.

Aug 2022 Four emerging and foundational technology restrictions against China The U.S. Department of Commerce included four "emerging and foundational technologies" in the new export control, involving fourth-generation semiconductor materials and ECAD software specifically designed for 3 nanometers or below chip designs.

Oct 2022 Ban on chip equipment exports to China The U.S. Department of Commerce issued new export restrictions, banning U.S. companies from exporting equipment needed by Chinese chip manufacturers to produce chips.

Oct 2022 Talent restriction order Prohibiting U.S. technical personnel (including U.S. citizens, permanent residents holding green cards, or legal entities established under U.S. law) from assisting China in "developing" or "producing" high-end chips without U.S. permission.

The second is "wooing" with financial subsidies and potential political risks, pushing semiconductor companies in Japan, Taiwan, and South Korea (including TSMC and Samsung) to pivot away from China. In addition to the aforementioned federal subsidies, the US has proposed a “Chip Quad” alliance, seeking to join forces with Japan, South Korea, and Taiwan to restructure the global chip supply chain and exclude the Chinese mainland, reflecting the US's strategic intentions. If the strategy succeeds and this "integration" occurs, the US would hold a significant advantage across almost the entire chip industry chain. At that time, research, development, and design would be the responsibility of US companies. At the same time, foundry production, packaging, and testing would be handled in the US by Taiwanese and South Korean companies. This would cover the US's shortcomings, creating an end-to-end service from R&D to production and packaging, leading to a US-dominated, "unified" market landscape.

Impact of the Chips Act on China's Semiconductor Industry

From an experiential perspective, although the short-term impact of the Chips Act on China's chip industry is relatively manageable, the long-term risks are severe, bringing challenges such as supply chain exclusion, widening gaps in advanced technology, and talent drain.

In the short term, the act may distort the chip supply chain and disrupt international trade. Due to export restrictions on core components, the development of China's advanced process chips (14nm and below) may slow down. On the other hand, China's mature process chips (28nm and above) industry chain is relatively complete, with advantages in packaging and testing, and has the world's largest chip consumption market, accounting for about 60% of the global market share. Therefore, the short-term impact of the act on China is relatively controllable.

However, in the long term, China's approach to catching up with advanced international levels using international resources faces blockades, and the difficulties and challenges should not be underestimated. First, the containment and suppression of the chip industry escalate further. For example, precise suppression of leading Chinese companies, semiconductor-related companies, and affiliated companies being included in the US export control "Entity List" may affect their production and operations; the blockade and control of the supply chain continue to escalate, and so on. Second, supply chain exclusion and widening gaps in advanced technology are risks. Third, the trouble of talent and technology concentrating in the US. The Chips Act particularly emphasizes talent development, including providing more STEM (Science, Technology, Engineering, and Mathematics) opportunities for Americans, increasing their participation in high-tech fields and industries, etc., and we need to be alert to the potential talent drain effect that may result.

TSMC Becomes a "Battleground for Superpowers"

TSMC (Taiwan Semiconductor Manufacturing Company) is the world leader in semiconductor foundry services. In 2019, its founder, Morris Chang, predicted that TSMC would become a "battleground in geopolitical conflicts." Since the second half of 2020, amid the global chip shortage caused by the pandemic, TSMC's advanced process technology and production capacity (as shown in Figure 3) quickly became critical strategic assets worldwide.

TSMC has become a coveted target for major powers, with continuous demands to establish foundries in their countries or prioritize shipments to them. The increasing concern among US corporate clients and officials is particularly noteworthy as tensions rise across the Taiwan Strait. They worry that producing all chips in Taiwan could undermine US national security and the global chip supply chain. Building factories in the US could mitigate these risks, despite significantly higher costs than anticipated. In June 2020, TSMC announced a $12 billion investment to make a 12-inch wafer fab in Arizona, with plans to mass-produce 5nm chips by 2024, reaching a monthly capacity of 20,000 wafers. TSMC Chairman Mark Liu admits that building factories in the US results from "political drivers" rather than purely technical or commercial reasons and that costs far exceed expectations. According to estimates by the Semiconductor Industry Association and Boston Consulting Group, a similar semiconductor factory built and operated in the US for ten years would cost about one-third more than one in Taiwan, South Korea, or Singapore.

In November 2022, Morris Chang, representing Taiwan's economic leaders at the APEC summit, expressed concerns and considerations about the semiconductor supply chain. He stated that the dramatic decline in chip prices and their widespread application over the past few decades can be attributed to the "innovation and efficiency of the supply chain." Sacrificing this innovation and efficiency would slow down the contributions chips provide for national security and economic growth, making it difficult to achieve the goal of "supply chain security and resilience." He urged APEC members to face their differences and seek balanced solutions together.

Taiwan Authorities Use TSMC as a Political Bargaining Chip

Taiwan's authorities use TSMC as a political bargaining chip, actively cooperating with the United States to "integrate" the semiconductor supply chain. Since Tsai Ing-wen's administration came to power, they have pursued a gradual path towards Taiwan's independence, adhering to an ideological approach in the economic domain and implementing a foreign strategy of distancing from the Chinese mainland and leaning towards the United States and Japan. On the one hand, they have adopted a passive attitude towards the stagnation of cross-strait economic cooperation; on the other hand, they have sought support from the US and Japan, promoting the "New Southbound Policy" in hopes of achieving industrial upgrading and replacing the Chinese mainland market by tapping into Southeast Asian markets, thus realizing "economic decoupling" and consolidating the economic foundation for Taiwan's independence.

Tsai's administration has been swept up by ideology in the semiconductor supply chain, endorsing the US policy of a "secure and resilient" chip industry chain and actively participating in and assisting US-led chip cooperation. According to Taiwanese media, TSMC's overseas investments must be approved by Taiwan's economic affairs authorities. When the economic department dares not to make decisions independently, it requires Tsai Ing-wen's approval. Therefore, when TSMC invested in a factory in the United States, Tsai's administration played a facilitating role. In response to doubts from the island's public opinion about the "draining of Taiwan's semiconductor talent" and "de-Taiwanization of the semiconductor supply chain," the Democratic Progressive Party (DPP) administration has continuously denied such allegations while introducing amendments to the "Industrial Innovation Regulations" in an attempt to encourage key high-tech industries to continue R&D investment in Taiwan and dispel social concerns. However, this regulation, known as the "Taiwanese version of the Chips Act," has not stabilized the local sentiment.

Samsung and SK Hynix of South Korea is trying to find a common denominator Between China and the US

Both China and the United States are significant countries for South Korea's semiconductor industry. The US holds most of the original semiconductor manufacturing technology, and South Korea's semiconductor industry is highly dependent on American chip designers and equipment manufacturers for advanced chip production technology. Meanwhile, China is South Korea's largest semiconductor market. According to the Korea Trade Association, South Korea exported $50 billion worth of chips to China in 2021, a 26% increase year-on-year, accounting for about 40% of its total chip exports. According to Korea Industrial Research Institute data, South Korean companies have invested over KRW 200 trillion (1 CNY ≈ 195 KRW) in China. Among them, Samsung has a NAND flash memory factory in Xi'an, China, since 2014 and a semiconductor back-end process (testing, packaging) factory in Suzhou, accounting for about 15% of the global NAND flash production (about 40% of Samsung's production). Since 2006, SK Hynix has operated a DRAM factory in Wuxi, accounting for 15% of global DRAM production (about 50% of SK Hynix's production). More recently in 2021, it acquired Intel's NAND factory in Dalian and has a back-end process factory in Chongqing. Samsung Electronics and SK Hynix factories are closely intertwined in semiconductor raw materials, production, and back-end processes. They have recently continued to invest in adding and replacing outdated equipment.

Therefore, compared to TSMC, South Korean semiconductor companies, which rely heavily on the Chinese mainland’s market and have made huge investments, are walking on thin ice in dealing with the Sino-US tech competition. According to Reuters, Samsung's CEO is trying to find a common denominator amid the China-US chip battle. For example, Kim Ki-nam, the co-CEO responsible for Samsung's semiconductor business, has expressed concern about the Chip 4 initiative, stating that "our position on the Chip 4 alliance is that they should seek understanding from the Chinese mainland first and then negotiate with the United States. We are not trying to take advantage of the US-China conflict but trying to find a win-win solution." At the end of 2021, Samsung announced a $17 billion investment in a second wafer fab in Texas, while its Xi'an NAND Flash facility accounted for 42.3% of its total production capacity.

South Korean Government Prioritizes National Interest and Pragmatism, Avoids Taking Sides

As for joining the Chip Quad alliance, South Korea acknowledges the necessity of cooperating with the United States but is also cautious about the possible opposition from China. As a result, South Korea maintains a cautious attitude. The South Korean Ministry of Foreign Affairs has refrained from using the term "Chip 4" alliance, opting for more ambiguous phrases such as "chip-related cooperation with the United States and the international community," demonstrating extreme caution. To show no hostility towards China, Park Jin, a special envoy from the Ministry of Foreign Affairs, visited China in August 2022 to exchange views on issues related to security and economic areas, such as the denuclearization of North Korea and supply chain stability. Before his departure, Park Jin stated that the purpose of the visit was to enhance mutual understanding, reduce unnecessary misunderstandings, and expand common interests. South Korea exports about 60% of its chips to China, so it is highly concerned about the negative impact of the chip alliance. South Korean policymakers are well aware that the country's economic future is deeply intertwined with China. They will strive to strengthen economic security while further developing economic and trade relations, ensuring the stability of industrial and supply chains.

The South Korean government is also concerned that the chip alliance may "disrupt the competitive balance among major semiconductor companies," requiring competitors like Samsung and TSMC to share technology. Additionally, some South Koreans worry that the United States is trying to use this initiative to give American companies like Intel and Micron a competitive advantage. South Korean media analysis suggests that the US is organizing a chip alliance to ostensibly counter China's emerging technological development while secretly aiming to prevent excessive competition between TSMC and Samsung Electronics, buying time for Intel to grow stronger. These factors make South Korea the least willing ally to join the Chip 4 alliance. The South Korean government's stance will somewhat determine the alliance’s effectiveness. Still, it may be difficult to curb the US's strategic intention to isolate China in the semiconductor industry and the escalating trend of Sino-US competition.