Key Takeaways:
The US is strategically strengthening its domestic semiconductor industry by offering significant incentives to foreign firms like SK Hynix through the CHIPS and Science Act, aiming to build a robust supply chain and create new job opportunities.
China’s access to advanced semiconductors is being curtailed by US export controls, which could impede its military modernization and disrupt its technological support to Russia in the ongoing conflict.
The global semiconductor market is increasingly shifting towards a US-centric model, with a potential decline of China's semiconductor industry.
As China faces these restrictions, it may intensify efforts to develop a self-sufficient semiconductor supply chain and attempt to drive wedges between US allies, such as South Korea and Japan.
On August 6th, the US Department of Commerce (DOC) announced $450 million in funding for SK Hynix through a non-binding Preliminary Memorandum of Terms (PMT), accompanied by a $500 million government loan. These funds are part of the CHIPS and Science Act, designed to enhance incentives for foreign chip manufacturers to invest in the US semiconductor industry. The DOC’s proposed funding would supplement SK Hynix’s $3.87 billion foreign direct investment in Indiana, aimed at establishing high-efficiency packaging facilities for AI products and advancing packaging R&D. Domestically, this foreign investment in building a novel supply chain in the US is projected to create approximately 1,000 new career opportunities for American talent.
The decision to provide significant incentives to foreign chip firms in the Indo-Pacific region may serve as a mechanism to alleviate investor concerns regarding the CHIPS and Science Act’s restrictions on the Chinese market, which aim to limit foreign chip supplies to China. According to the Act, recipients of CHIPS incentives are restricted from producing, investing in, or supplying advanced technologies to foreign countries deemed as “concerns,” including China, Russia, Iran, and North Korea. These restrictions have sparked apprehension among companies worried about the impact on their investments. For instance, SK Hynix, which has invested $20 billion in producing advanced chips in Dalian, China, has faced challenges due to the US’s restrictions. As a result, SK Hynix may consider relinquishing its factories in the region in the long-term.
In light of these setbacks in China, it is anticipated that affected foreign firms will redirect their investments. The US is offering substantial support to encourage these companies to expand their semiconductor supply chains domestically, securing R&D capabilities, expanding the domestic chip industry, and creating career opportunities, while preventing advanced technologies from leaking into countries of concern. From a geopolitical perspective, China’s acquisition of advanced chips is seen as detrimental to Western interests, as China supplies significant technological equipment to Russia for military use in the ongoing conflict in Ukraine.
Looking Forward:
Global semiconductor manufacturers, particularly those based in the Indo-Pacific region, will increasingly direct their supply, research, and development efforts toward the US. Consequently, the chip market is likely to become more US-centric, while the Chinese semiconductor industry may experience a decline under the combined influence of the CHIPS and Science Act, and expanded sanctions on Chinese semiconductor development and exports.
Facing the start of a redirection of HBM chip supply chains, it is anticipated that Chinese-based firms such as Huawei would begin to increase their purchase of HBM semiconductors from other foreign companies like Samsung before it gets affected by the US restrictions. According to South Korea’s Ministry of Trade, Industry and Energy, the Information & Communications Technology exports (which include semiconductors) to China have increased up to 29.9% in the first half of 2024, signaling Chinese firms intention to stockpile advanced chips manufactured by foreign suppliers for the improvement of their own R&D.
Considering that China is now increasing imports of advanced microchips to counter the chips supply blockade, it is suggested that China would also attempt to improve and domesticize the supply chain of HBMs as part of the programme under the “Roadmap of Major Technical Domains for Made in China 2025”, in which China aspired to reduce and eventually replace imports with Chinese-based products in key industries. For example, China seeks to reach a 1.5 million manufacturing capacity for semiconductor wafers per month by 2030. However, despite the aim to self-produce AI chips, the setbacks posed by the US export controls prevent Chinese firms like Biren, YMTC, SMIC and SMEE from developing more advanced AI semiconductors. This would help the US maintain its superiority over AI technology in defence over China.
This reduction in Chinese access to HBMs could also affect the quality of Chinese technological supply to Russia, as Chinese tech companies are responsible for 88% of the chip exports to Russia which has gone to supporting Russian military development, including drones, missiles, communications and intelligence equipment. KSG assesses that this situation is likely to have a significant effect on Russian access to key military equipment, and thus its war effort in Ukraine. This effect is likely to take effect over the next 12 months, with an enduring effect of 2+ years.
KSG assesses that the consequential reduction of HBMs in China will slow the modernisation and expansion of the Chinese military capability across all domains. This will allow the US to maintain its military dominance over the next five years at least.
KSG assesses that the US strategy will lead to an increase in global supply over the next 5 years. According to a report from the Yole Group, the HBM global market has the potential to grow up to $37.7 billion in 2029. Given this assessed global increase, KSG analysis concluded that the HBM redirection strategy of the US would stand to benefit the EU, as well as lithium mining organizations across the globe.
By Benjamin Wu, Indo-Pacific Analyst