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After a puzzling on-again, off-again trade action against China’s information and communications technology (ICT) giant ZTE in 2018, the Trump Administration began sanctioning China’s number #1 ICT player Huawei in May 2019.  The sanctioning action involved putting Huawei on a Commerce Department “entity list” and thereby restricting U.S. suppliers from selling their goods and technology to Huawei.

As with all of Trump’s trade actions against China, impulse outweighed well thought-out execution in the Huawei crackdown.  Initially, some sales were allowed and others denied without clear criteria being communicated to U.S. industry.  Later, without preparatory signaling, the Huawei campaign was intensified by expanding U.S. government authority to require licenses for sales of semiconductors made abroad with American technology.

The fitfulness of this policy can be measured by (1) the number of licenses (and dollar value of affected goods and technology) pending but held up in the inter-agency process and (2) the number of licenses (and dollar value of affected goods and technology) which had been applied for by U.S. companies but not processed towards the end of the Trump Administration.  (As things stood at the time of the November 3rd election, the expectation was that products in both categories which had clear 5G application would likely be rejected while non-5G products would likely be processed on case-by-case basis.)

Meanwhile, in the international sphere, the Trump Administration pursued a parallel campaign to try to persuade traditional allies to disallow Huawei technology from 5G infrastructural build-out in their respective markets on the grounds that – despite price and performance competitiveness — Huawei’s products represent a national security threat.  The results of this international campaign were mixed at best, not least because many of these traditional allies had themselves been targets of different tariff sanctions under Trump’s America First trade policy.  Without delving into the changing fortunes of this campaign at different times in different parts of the world, a summary headline on November 3rd might have read “Trump’s 5G Campaign Against Huawei: Embraced in India, Accommodated in the UK, Begrudged in Germany and Repudiated in Thailand and Elsewhere.”

The Biden Administration, while making a quick and clean break from Trump Administration trade policy in the area of climate change mitigation and clean energy technology, has largely kept the Trump Administration domestic policy of restrictive licensing for sales of advanced ICT goods in place.  At least, it has made clear that no substantive change should be expected until after the completion of a whole-of-government review of China trade policy and a parallel review of strategic global supply chains which includes semiconductors. In the international arena, it has relaxed the narrowly-focused pressure campaign against Huawei adoption in favor of a more broadly-conceived alliance strategy to rally traditional allies and other democracies to rise to the 21st century challenge posed by China’s autocratic model.

So where do things stand today?  The restriction of supplies of U.S. advanced semiconductors to Huawei under both the Trump and Biden Administrations has taken the biggest toll on Huawei.  Less impactful but still a headwind for Huawei has been the doubt sown internationally as the U.S. and China edge closer towards global confrontation and supply chain de-coupling.  The result?  Huawei reported last Friday its third straight quarterly decline in revenues, falling a significant 38% against 2021Q1 results.

Huawei is likely to remain at the center of a highly-fraught tug-of-war between the U.S. and China over 5G.  On one side, China has ability to leverage the world’s largest installed base of advanced mobile phone users in the world.  On the other, the U.S. dominates the global market for the advanced microchip designs on which advanced telecom markets depend. And the U.S. maintains close partnerships with the world’s leading microchip fabricators in Taiwan and the makers of the world’s leading fabrication equipment in the Netherlands and elsewhere.

Expect more tremors and seismic activity on this fault-line for the foreseeable future.  Just last week, the PRC government issued retaliatory actions against Huawei’s main Western rivals – Sweden’s Ericsson AB and Finland’s Nokia, among others.  And, as fall-out from the recent spread of the SARS-COV-2 Delta-variant in China, it was announced over the weekend that the World 5G Conference – scheduled for August 6-8 in Beijing – would be postponed indefinitely.  Pressure continues to mount while chances to release that pent-up pressure close off.

On June 8th, the Biden Administration announced immediate actions it was taking to address near-term vulnerabilities in four critical supply chains as identified by a 100-day America’s Supply Chains assessment initiated in late February.  The four critical supply chains included in this announcement are: semiconductor manufacturing and advanced packaging; large capacity batteries, like those for electric vehicles; critical minerals and materials (so-called “rare earths”) used in smart phones, electric vehicles, wind turbines and other advanced technologies; and pharmaceuticals and active pharmaceutical ingredients (APIs) used in vaccines and other applications.

Today’s post takes an initial high-level view of the critical supply chain for semiconductor manufacturing and examines the shifting fault-line of vulnerability.  Subsequent posts in the Global TECHtonics series will take a much closer look at these and related issues.


Photo: barks/Adobe Stock

What is the Fault-line?

The semiconductor supply chain fault-line runs directly under Taiwan, whose chip foundries produce 92% of the world’s most advanced microchips (which have transistors less than one-thousandth the width of a human hair).  The small island is caught between the tectonic forces of the China market (which accounts for 53% of global semiconductor consumption and the U.S. market (which accounts for the vast majority of the advanced designs on which Taiwan chip production is based).  In addition to these market forces, political dynamics add to the stresses along this fault-line.  While China claims Taiwan as an inalienable part of its territory, the U.S. has been serving as the guarantor of Taiwan’s de facto independence since 1949. In more recent years, the Trump Administration’s “Tariff War” against China has given impetus to a process of technology “de-coupling” which is forcing Taiwan companies – especially its preeminent foundry manufacturer Taiwan Semiconductor Manufacturing Company (TSMC) – to choose between the fast-growing China market (34% revenue growth since 2014) and its slower growing (4% growth) but highly strategic U.S. customers, including the U.S. military. The fact, for instance, that 14 of TSMC’s 17 foundries worldwide (and all of its foundries capable of higher-end production above the 16 nanometer level) are located in Taiwan at a distance of just 90 miles from the PRC mainland adds to the tectonic friction.

What is the Trend-line?

Subsequent posts in the Global TECHtonic series (approximately two per month) will examine a broad range of dynamics in detail to include the impact of the COVID-19 pandemic on global microchip supply chains, specific dynamics within microchip subproduct categories (logic chips, analog chips, memory chips, etc), TSMC’s strategic response to the increasing global pressure and detailed analysis of trends within the U.S. semiconductor industry.  Today’s post will limit itself to two broad brush-strokes to suggest the general trend-line: (1) the twenty-year trend-line since 2001 and (2) the one-year trend-line since 2020.

  • The accession of China and Taiwan to the World Trade Organization (WTO) in 2001 led to hopes that Information and Communications Technologies (ICT) supply chain tensions might start easing but, from 2008 at least, the opposite has proved true.  Following the Global Financial Crisis, market forces and competitive tensions increased pressures on ICT supply chains markedly and these pressures further accelerated starting in 2012 following the 18th Chinese Communist Party Congress in 2012.  (Readers interested in a deeper understanding of the ICT supply chain dynamics covering the period 2001-2008 can refer to Congressional Commission testimony I provided during the 107th, 108th and 109th Sessions of Congress as well as to my article in the edited volume Economic Integration, Democratization and National Security in East Asia (Peter Chow, Elgar Publishing) and my article in The Journal of Contemporary China (Volume 13, Number 40, 2006).
  • The past year has shown some notable shifts along this fault-line. In Taiwan, policies instituted by President Tsai Ing-wen have led to a small shift in Taiwan’s trading dependence on China and to larger shifts in the pattern of outbound and inbound investment involving China.  Specifically, the Tsai Administration’s New Southbound Policy has shifted a small portion of Taiwan’s trade in consumer electronics away from China in favor of Southeast Asian markets.  More notably, the “Invest Taiwan” program has exceeded its targets and much of the reinvestment in Taiwan comes as a result of production being repatriated from the mainland. As for outbound investment from Taiwan in ICT sectors, recent trends favor the U.S. as a destination rather than China.  In March 2020, TSMC announced that it would be building a $12 billion microchip production plant in Arizona.  Meanwhile, tighter regulations by Taiwan’s Investment Commission has led to a 60% drop in outbound investment to the mainland since 2018.

It is for these and other reasons that the New York Times recently proclaimed “pound for pound, Taiwan is the most important place in the world.”  The Strait of Hormuz may have been the world’s most dangerous fault-line in the 20th century oil economy.  In the 21st century, the tectonic pressures of the global economy now converge on the Strait of Taiwan.

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