This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every Monday to Thursday
Hello from Singapore, which is feeling very quiet as many expats and residents take advantage of new travel lanes and flee the island city-state ahead of the holidays, before the Omicron variant spreads too widely. The country’s pandemic social distancing rules remain strict by global standards — dining out is still limited to groups of five people — and many long for a change of scenery.
Today’s note explores how Asian countries, which like their western counterparts have long been critical of China’s state-subsidised push to be self-sufficient in semiconductor technology, are now taking a leaf out of Beijing’s playbook.
Charted waters looks again at the disparity in vaccination rates between richer and poorer nations.
How Tokyo and Seoul followed China’s chip lead
Self-sufficient, self-reliant, indispensable. You have probably heard these words regularly in connection with the semiconductor chip industry over the past 18 months.
The governments of major economies — including the US, the EU, Japan and China — and their top technology companies have accelerated efforts to develop in-house core technology in the essential components that run everything from smartphones and fridges to missiles.
Up until recently, Asian countries have, like the US and EU, been critical of China’s heavily state-subsidised push to onshore the production of chips. The big change brought about by the pandemic is that now they are beginning to copy it.
National security concerns and worsening US-China tensions — alongside the much discussed global chip supply shortage linked to the pandemic — have shifted the tone.
For those of you who have not followed what China has done in recent years, here’s a quick debrief.
China kicked its efforts to internalise semiconductor production into high gear — as Beijing-Washington friction intensified under the Trump administration — as part of its Made in China 2025 policy. The continuance of those tensions under Joe Biden, particularly where they relate to the flow of technology to China, has galvanised those existing plans to be more self-sufficient.
Generous subsidies and an increase in investment by state-backed funds focused on the industry has led private companies to heed Chinese president Xi Jinping’s call.
The FT’s sister newsletter #techAsia last month revealed Oppo, the world’s fourth-largest smartphone maker, is aiming to use its own chips in its high-end phones as soon as 2024. Semiconductor Manufacturing International Corporation (SMIC), a company at the heart of Beijing’s drive to become more self-sufficient in chipmaking, has boosted investment and tried to make the leap into ever-smaller chips. Other tech giants are also trying to design their own chips including TikTok owner ByteDance, ecommerce titan Alibaba and search and artificial intelligence company Baidu. Huawei has started investing in emerging Chinese chip companies as the telecoms group accelerates efforts to become self-reliant in semiconductor technologies in the face of US sanctions.
Though, in spite of this, the Chinese government’s goal of meeting 70 per cent of its semiconductor needs through domestic supply remains a long way off, with an estimated self-sufficiency rate of 16 per cent last year, according to data from market research company IC Insights.
So how are other Asian countries, many of which initially joined the EU and US in criticising China’s state aid for the industry before the pandemic struck, changing tack?
Let’s start with Japan, which has launched a full-scale response to reverse the offshoring of the complex technology. The country turned to foreign companies to build domestic chip plants, providing generous subsidies and other support for such private-sector investments. Participating companies have to prioritise Japanese shipments. TSMC, the world’s biggest contract chipmaker based in Taiwan, will take advantage of the push, last month disclosing a plan to build its first-ever Japanese factory.
South Korea’s self-sufficiency push, meanwhile, started more than two years ago when the country realised how excessively dependent it was on Japanese imports of semiconductor materials during a trade spat. Now the Korean government, whose industrial pillar of auto production has been hit by the supply shortage, is investing in research and development projects for self-sufficiency in automotive semiconductors. This year Seoul said Won510tn ($42bn) would be invested in chips by 2030, with the bulk of that coming from private companies in the country.
Critics liken such onshoring to turning back the clock and argue it inhibits innovation in chip technology. TSMC founder Morris Chang, now retired but a statesman of Taiwan’s chip industry, has lambasted the efforts, saying they will raise costs and potentially slow advances in technology.
The expensive government intervention could also eventually result in an overcapacity of certain chips, especially less sophisticated (and, thus, less profitable) products, some analysts have warned.
It could also be ineffective, creating a plethora of new semiconductor companies that are still not self-sufficient. In China, the number of firms in the industry has tripled this year as even former seafood makers buy into lossmaking semiconductor groups.
The approach also risks the World Trade Organization being hit with many complaints of unfair trade practices and competition. As Chang warned: “What may happen is that after hundreds of billions and many years have been spent, the result will still be a not-quite-self-sufficient and a high-cost supply chain.”
For now, it seems that — as far as governments in Asia, Europe and the US are concerned — those warnings will fall on deaf ears.
Yesterday we touched on how poorer nations were struggling to vaccinate their populations. Expect more in the days to come on whether this reflects a failure of global government, of supply chains, of vaccine hesitancy, or a mixture of the three.
For now, we’d like to show you a chart that updates the data from September to right now. It shows that rich countries have provided more booster shots than the most poor countries have given total doses. Claire Jones
The chips crisis may be over. Nikkei reports ($) that inventories were up at Renesas of Japan, Infineon, STMicroelectronics and Texas Instruments at the end of September, indicating that the global shortage of those chips used by the auto industry is improving.
A case for a South Korean application to CPTPP: It would be one of the pact’s biggest beneficiaries, standing to gain $86bn annually, according to this Nikkei piece ($).
The New York Times delves into how supply chain problems are affecting a ski supplier.
Federal Reserve chair Jay Powell, meanwhile, has warned US lawmakers to expect more supply chain pain ahead owing to the Omicron variant. Francesca Regalado and Claire Jones