US-China Microchips War And Its Meaning For Markets

The US and China are in a heated contest for control of microchip production. The US emphasizes domestic technical advancement and supply chain stability, while China seeks autonomy from the US and its allies. This conflict could cause extreme repercussions in the global financial markets. To understand the effects this US-China microchips war could have, it is essential to research its history.

1. US Companies Pledge $200 Billion for Chip Manufacturing Projects to Counter Chinese Dominance

Since early 2020, US companies have pledged nearly $200 billion for chip manufacturing projects to reduce reliance on imports and counter the US-China microchips war. However, implementing the Biden administration’s plan to ramp up domestic microchip production presents significant challenges.

The global supply chain for semiconductors is complex. It involves millions of workers across multiple continents and facing heightened disruption due to the pandemic. Furthermore, chips are essential for modern military operations. They are needed to coordinate weapons systems’ production, use, and maintenance. Therefore, the US government must take decisive action to ensure the security of its chip supply chain and maintain its military advantage.

For a long time, Chinese semiconductor companies have relied on foreign expertise to keep up with Western competitors like Qualcomm. Now the company has limited access to the market.

2. What Are Microchips/Semiconductors? What Are Microchips Made Of?

Microchips are materials, typically silicon, that have electrical conductivity. They are critical components in electronic devices, including transistors, diodes, and integrated circuits (ICs). Tech manufacturers use them to control and amplify electronic signals and make electronic devices such as computers, smartphones, and televisions.

They also have a usage in the renewable energy sector, such as solar cells. Due to their unique properties, they are the backbone of modern electronics and are critical to the economy and technological advancement.

3. How Do Chips/Semiconductors Work?

Semiconductors work by controlling the flow of electrical current through a material. In microchips, electrons exist in energy levels known as “bands.” The band closest to the nucleus of an atom is called the “valence band,” and the band farthest away is called the “conduction band.”

The valence band is filled with electrons in a microchip, while the conduction band is empty. When a small number of impurities, called dopants, are added to the semiconductor, the material’s conductivity can be controlled.

4. What Are Chips Used for?

Microchips, called integrated circuits (ICs), are compact electronic components that control and manipulate electrical signals. An integrated circuit is a microchip chip containing several transistors, diodes, and other electronic components.

Manufacturers use microchips/semiconductors in various electronic devices and appliances. They are the backbone of modern electronics and technology. Producers use them in virtually every electronic device, from computers and smartphones to cars, appliances, and medical equipment. Some of the applications for microchips include:

Computer processors and memory chips.

Automotive applications include engine control units (ECUs), navigation systems, and safety features.

Home appliances such as washing machines, microwaves, etc.

Consumer electronics include smartphones, televisions, gaming devices, and MP3 players.

Industrial and medical equipment

Communication devices such as routers, modems, and cellphones.

Renewable energy systems like solar cells and wind turbines.

Defense and aerospace systems.

Transportation systems like GPS, tickets system for trains or buses, and many more.

5. US-China Microchips War: The Role of Taiwan in Global Chip Manufacturing

Taiwan plays a significant role in the global semiconductor manufacturing industry. The island is home to several major chipmakers, including the Taiwan Microchip Manufacturing Company (TSMC), the world’s largest contract chip manufacturer, and United Microelectronics Corporation (UMC).

These and several other smaller firms produce a wide range of semiconductors and microchips for various electronic devices, including smartphones, computers, and automotive systems.

6. Why Are Microchips Made in Taiwan?

Taiwan’s chipmaking industry has several advantages that have helped it to become a significant player in the global market. These include:

High levels of investment in research and development to keep up with the latest manufacturing technologies.

A large pool of skilled and experienced labor in the microchip industry.

Strong partnerships with major global technology companies, including Apple, Qualcomm, and Samsung.

Proximity to China, a primary electronics and semiconductor market, makes it easy for Taiwanese chipmakers to supply Chinese customers.

So, why are microchips made in Taiwan? The island plays an essential role in the global supply chain of microchips, with companies based in Taiwan supplying the chips to many electronics manufacturers worldwide. Also, this has put Taiwan in a sensitive position in the global political context, with the US-China microchips war for Taiwan’s alliance in the semiconductors industry.

7. What Percentage of Microchips Are Made in Taiwan?

Taiwan produces 66% of the world’s semiconductors and nearly 90% of advanced integrated circuits. By comparison, China produces just over 5%, while the US produces around 10%, according to market analysts.

8. Taiwanese Microchip Companies

Several major Taiwanese companies play a significant role in the global semiconductor industry:

Taiwan microchip Manufacturing Company (TSMC): TSMC is the world’s largest contract chip manufacturer and one of the largest chip companies in the world. They offer a broad range of foundry services, including the production of advanced process technology nodes, as well as manufacturing a wide range of integrated circuits (ICs), such as Application Specific Integrated Circuit (ASICs) and high-performance mixed-signal ICs, which are used in a wide range of electronic devices and applications.

United Microelectronics Corporation (UMC): UMC is a leading global semiconductor foundry that provides advanced technology wafer manufacturing for applications spanning every primary sector of the IC industry, including digital, analog, mixed-signal, RF, and CMOS image sensors.

MediaTek is a fabless semiconductor manufacturer. It provides system-on-chip (SoC) solutions for wireless communications, HDTV, DVD and Blu-ray, and DVD recorders.

HTC Corporation is a Taiwanese consumer electronics company that manufactures smartphones and VR types of equipment

Quanta Computer: a Taiwan-based company, the world’s largest manufacturer of notebook computers.

Asus: ASUS is a multinational computer hardware and electronics company that designs and manufactures laptops, motherboards, graphics cards, and other computer components and peripherals

Realtek: is a fabless semiconductor company providing solutions in the network and computer peripheral ICs.

Nvidia: while not a Taiwanese company, Nvidia has a strong presence in Taiwan. It is a US-based technology company that designs and manufactures graphics processing units (GPUs) and system-on-a-chip units (SoCs) for the gaming, professional visualization, data center, and automotive markets.

Innolux Corporation is a Taiwanese display manufacturer that provides solutions on TFT-LCD, OLED, AMOLED displays

These are some of the well-known Taiwanese companies in the semiconductor industry, but many other smaller companies also play essential roles in the industry.

9. What is the Cause of the US-China Microchips War Over Taiwan?

In 2022, China held a large-scale military exercise in the air and seas around Taiwan. The drill included firing ballistic missiles in a show of force. This action came in response to an earlier visit to the island by the Speaker of the US House of Representatives, Nancy Pelosi. It was a significant step in the whole US-China microchips war.

China sees Taiwan as a breakaway province that will ultimately come under its control. President Xi Jinping has stated that “reunification” with Taiwan “must be fulfilled” and has not ruled out using force to achieve this.

However, Taiwan regards itself as separate from mainland China, with its constitution and democratically-elected leaders. Taiwan has been self-governing since 1949 when the Nationalists lost the Chinese Civil War to the Communists and moved their government to Taiwan, which Beijing has never controlled. As a result, Beijing considers Taiwan a province of China and has insisted for decades that Taiwan must eventually come under its control, by peaceful means if possible but by force if necessary. But Taiwan has made clear its self-rule, considers itself a sovereign state, and has no intention of becoming part of China.

Read also: Chinese Banks Get Rid Of Dollars On Swap Markets

10. A Brief History of Taiwan-China relationships

The history of Taiwan’s relationship with China is complex and contested. Sources suggest the island came under complete Chinese control in the 17th century. At this time Qing dynasty began administering it as a province. However, in 1895, China ceded to Japan following a defeat in the First Sino-Japanese War. After Japan’s defeat in World War II, China retook control of the island in 1945.

However, a civil war broke out in mainland China between the nationalist government forces led by Chiang Kai-shek and Mao Zedong’s Communist Party. In 1949, the Communists emerged victorious, taking control of Beijing and establishing the People’s Republic of China. Chiang Kai-shek and the remainder of the nationalist party, known as the Kuomintang, fled to Taiwan, where they ruled for several decades.

China claims that Taiwan was historically a Chinese province, citing this history as evidence. However, Taiwan argues that it was never part of the modern Chinese state first established in 1911, nor the People’s Republic of China that was created in 1949. They see themselves as an independent sovereign state and have been running their government, economy, and self-rule since 1949.

11. US-China Microchips War: The Storyline

The US-China microchips war is a disagreement between the two countries about how they do business with each other. The US government, led by President Trump, has implemented tariffs on Chinese imports, making it more difficult for Chinese businesses to sell products in the US. The US has pressured China to reform its alleged unfair business practices and prevent the country from stealing US technology. In response, China put taxes on things made in the US, making it harder for US companies to sell things in China.

During 2019 and 2020, both countries tried to negotiate a trade deal, and they reached a preliminary agreement in 2020. Still, it didn’t bring the results that the US sought. The Joe Biden Administration keeps the tariffs and trade barriers put in place by the previous Administration. The US-China microchips war took off in the second half of 2022.

12. The US-China Microchips War Timeline:

On October 7th, 2022, the Department of Commerce issued new export control regulations on AI and semiconductor technology exports to China, effectively banning exports of advanced computer chips that power AI algorithms.

This action impacts China’s ability to be an AI superpower as US semiconductor companies design most chips in China. AI was listed as a top priority in China’s five-year economic plan for 2021-2026.

On October 18th, 2022, Secretary of State Antony Blinken stated that the world is at an inflection point, with intense competition to shape the future, with technology at its core.

The United States and China view leadership in AI as necessary for future military power.

December 2022: The US is blocking China’s alternate paths by exploiting its dominance in critical chokepoints of the global semiconductor supply chain, such as chip design software, manufacturing equipment, and equipment components.

13. What is the strategy of China, Taiwan, and the USA?

Each state has its approach to this highly complex and sophisticated conflict.

13.1. China’s strategy

China aims to be technologically independent. “Made in China 2025” is a strategic plan developed by the Chinese government to make China a dominant player in high-technology industries, such as artificial intelligence, semiconductors, and other advanced technologies. The plan calls for reducing China’s dependence on imported chips and increasing the domestic production of microchips, which are small computer chips used in many technology products.

The goal is to reduce China’s imported share of chip production from 85% in 2015 to 30% by 2025. This goal is being pursued through a combination of subsidies and government-led investments in the chip industry. The Chinese government is also using a “Big Fund” to back this new leap forward in chip making with state-owned organizations like China Development Bank and semiconductors, among others. The plan is seen as ambitious and revolutionary, seeking to reshape global trade flows and the global economy.

13.2. The US strategy

Recently, the US strategy in the microchip war with China has shifted from defensive to offensive. The US previously focused on changing China’s attitudes, strengthening its economy, and protecting its security interests through investment screenings and regulatory restrictions. But now, the US is shifting its focus to R&D policies in leading industries, specifically the semiconductor industry, to challenge the Chinese system and contain China to retain its hegemony.

Due to its complete reliance on TSMC for the manufacturing of its A-series and M-series processors, among other things, Apple is more vulnerable than anybody.

The shift in strategy may result from the US realizing that the microchip industry may side with China and cause the US to lose its dominant position (as we might see during the recent tech companies sale: https://www.benzinga.com/markets/22/11/29572396/the-big-sale-of-tech-companies-is-the-specter-of-the-global-crisis).

The US strategy also seeks to prevent any adverse impact on the US economy that could result from cutting key supply sources and causing disruptions to the US industry. The US is taking a more offensive stance to counteract the potential destabilization of the industry.

13.3. Taiwan’s strategy

As for Taiwan, the country aims at protecting its independence from PRC and protecting its hi-tech companies. At the same time, the country keeps investing in the military sector.

Taiwan’s strategy in geopolitics is to strengthen its military capabilities to defend against a potential invasion from China. The government is pursuing this strategy by extending the duration of compulsory military service for Taiwanese men to increase the number of reserve forces available. However, the move has been criticized by defense analysts who believe it may not effectively address the problem of military power, which is a key aspect of deterrence.

The Taiwan military follows a conventional war strategy in dealing with modern and sophisticated threats, but the country may lack strategic thinking. The president, Tsai Ing-wen, acknowledges this as an “unavoidable responsibility” for her as the leader of Taiwan to improve the country’s self-defense and strengthen its deterrence against the perceived threat of China. The president has also acknowledged that the move is a “tough decision” but necessary to defend Taiwan and maintain peace and stability.

Read also: Chinese Anti-Lockdown Protests And Their Impact On the Global Economy

14. How Does The US-China Microchips War Influence the financial markets?

The US-China semiconductor conflict could have far-reaching implications for the global microchip market. In the short term, US microchip companies may experience a decline in sales due to restrictions on exports to China.

In contrast, Chinese companies may need help to procure the necessary technology from the US. In the longer term, the conflict could affect the balance of power in the global semiconductor market as China invests in its domestic industry.

Moreover, the pricing of semiconductors may also increase due to the restricted access to the Chinese market, a significant consumer of microchips. This conflict could also knock on various industries that rely on microchips. And here, I mean manufacturing, technology, automotive, and communication. It could also inhibit innovation in these areas.

14.1. Nvidia Stock Price Amidst The US-China Microchips War

Nvidia, a Taiwanese semiconductor design giant, has introduced a new chip called the A800 graphic processing unit as an alternative to its previously restricted high-end microchip, the A100 GPU. The new chip has a reduced processing speed compared to the A100. It is designed to meet the US government’s export control guidelines for reducing the risk that the chip may be used for military purposes in China.

Nvidia created this new chip in response to the US government’s decision to place the A100 and Nvidia’s enterprise AI chip H100 under an export control list. It could potentially affect Nvidia’s sales to China by $400 million in the third quarter. Chinese chip distributors are marketing the A800 to circumvent the US export rules. They also still retain some of the core computing capabilities of the A100.

Nvidia is one of the leading Taiwanese chip manufacturers. Their stock price was hurt by the export to China ban.

14.2. AMD’s Involvement

The export restriction of specific advanced chips to China could cause severe financial losses for companies such as Nvidia and AMD as it impedes their ability to supply one of their most lucrative markets. This could put them at a competitive disadvantage compared to their rivals in the Chinese market.

Moreover, this ban adversely affects Chinese tech companies that rely on these advanced chips for their technology growth and development, particularly in facial recognition and data centers.

Furthermore, this ban goes beyond current trade sanctions that target specific companies and sales restrictions on advanced chipmaking equipment. It may even affect downstream users and applications such as metaverse, artificial intelligence, cloud computing, and facial recognition.

The pandemic-related scarcity of chips and semiconductors has impacted global supply chains and production procedures. This could create an excellent opportunity for companies like AMD.

15. US-China Microchips War: A Conclusion

In conclusion, the US-China microchips war is heating up. The government continues to impose export controls on advanced computer chips that power AI algorithms. The goal is to prevent China from achieving its goal of becoming an AI superpower. Still, they threaten to disrupt the global semiconductor industry and harm US companies such as Nvidia (NVDA.US) and AMD (AMD.US). The new ban is a significant escalation from current trade sanctions. It could significantly impact downstream users of chips in the metaverse, artificial intelligence, cloud computing, and facial recognition.

However, these developments also present opportunities for traders. SimpleFX trading app users can closely monitor the market reaction to the restrictions. With it, they can potentially benefit from the volatility of the companies such as Nvidia and AMD. Users can also diversify their portfolio by trading other technology companies in the microchip industry, such as TSMC, Samsung, and Intel.

Keep Up with the US-China Microchips War and Reap the Benefits with SimpleFX Trading App

Staying informed on the US-China semiconductor war is essential to understand how it may affect the markets. With the help of the SimpleFX trading app, users can make informed decisions and capitalize on ongoing conflicts. They should keep track of the performance of companies such as Nvidia, AMD, Qualcomm (QCOM.US), and Apple (AAPL.US), as they are all likely to be impacted by the war. Additionally, users should remain up-to-date on the news and upcoming events related to the war. So that they can make the most of the situation.