As neophyte newspaper reporters about 30 years ago, BusinessWorld editors Raul and Letty Locsin would often remind us about the difference between “Dog bites man” and “Man bites dog” stories. The former was nothing to write home about, they said, but the latter was what made newspaper headlines. The extraordinary, after all, always piques people’s interest.
And this is precisely what happened when I chanced upon the headline of a Hong Kong newspaper, The Standard, a couple of weeks back that read, “Woman caught smuggling semiconductor chips into China in fake ‘baby bump’.” That someone actually attempted to smuggle something into China is unusual, as the norm is usually the other way around.
Quoting the Bloomberg news service, The Standard reported that Chinese Customs officials caught a woman “smuggling semiconductors inside a pregnancy prosthetic,” particularly 202 processors and nine smartphones. Customs said she was stopped while crossing into Zhuhai, China from Macau on Nov. 25.
Apparently, semiconductor chip smuggling into China has been going on for some time. The report noted that “an underground market for semiconductors has sprung up in China since 2020, when a global shortage of chips started disrupting supplies of everything from smartphones to vehicles.” Smuggling cases are also the result of the “move by the US to impose sweeping curbs on exports of high-end semiconductors and chip-making equipment to China, partly to stop them being used for military purposes.”
A report in the South China Morning Post in July 2021 noted that “Hong Kong drivers [have been caught] trying to smuggle computer chips into mainland China via the Hong Kong-Zhuhai-Macau Bridge.” One driver was arrested with 256 Intel central processing units (CPUs) taped his chest and calves, while another 52 chips were confiscated in a separate smuggling attempt 10 days later.
Being the manufacturing hub of the world, where many global companies have chosen to locate large-scale production facilities, I was always under the impression that China was practically self-sufficient in all production inputs, including semiconductor chips. Apparently, this is not the case. When it comes to electronics, one report notes that China accounts for only about a quarter of world production of semiconductor chips.
However, as it accounts for a big bulk of the electronics assembly worldwide, China requires a significant volume of chips annually and imports additional requirements from Taiwan, Korea, and the US. Demand currently outstrips supply, and China’s access to better technology for chip production has likewise been limited by geopolitics, thus impacting its drive for self-sufficiency.
The chip shortage started after the COVID-19 pandemic hit in 2020 because of production shortfalls and supply chain issues. However, things seem to be looking up. As JP Morgan Research noted in a paper, “More chips will become available in the second half of 2022 and the shortage is nearing the end… However, available chips may not be the right type to satisfy all demand.”
And this is where problems may continue. Almost all industries make use of semiconductor chips now, and not just makers of computers or smartphones. Consumer durables like electric appliances mostly have some form of electronic circuitry, while most cars have electronic boxes or control units that contain computer chips.
Volkswagen, for one, says JP Morgan Research, believes that semiconductor supply is unlikely to meet auto industry demand until 2024. And with global car makers like Toyota and Lexus already limiting the production for lack of semiconductor chips, probably several other industries will just have to wait a little longer for supply to catch up with demand.
“Currently, capacity is being freed up due to weakness in some end markets, particularly PCs, smartphones, and consumer electronics, where sales have been falling since March 2022. Foundries in Taiwan are beginning to reallocate some of this capacity to the automobile and industrial end markets, which lost out to other sectors during the COVID-19 pandemic. However, autos generally require older chips, which are fundamentally different to those used in PCs and smartphones,” read the Aug. 11 report by JP Morgan Research.
In this regard, one cannot help but wonder if the next world war will result from a fight not for fossil fuel but for raw materials and technology for the production of semiconductor chips and batteries. The global need for oil is slowly but surely being mitigated by developments in renewable energy and battery technology, and the drive towards electric mobility.
A recent paper by the Center for Strategic and International Studies (CSIS) can probably shed some light on emerging developments in the chips front. Written by Gregory Allen, CSIS Director for its AI Governance Project and Senior Fellow of its Strategic Technologies Program, the paper looked into the recent actions by the US government with respect to its relations with China in connection with the production and sales of computer chips and artificial intelligence (AI) technology.
While high-end chips used in AI technology are not exactly the same type of chips used in commercial applications, any US move to deny China access to high-end technology for chip production may impact China’s ability to produce its own chips. That is, if China cannot scale technology and production fast enough on its own to produce what it needs. Moreover, the US can have some sway over chip producers like Korea and Taiwan, both US allies, in supplying chips to China.
CSIS’ Allen wrote, “The United States does not want China to have advanced AI computing and supercomputing facilities, so it has blocked them from purchasing the best AI chips, which are all American. It does not want China designing its own AI chips, so it has blocked China from using the best chip design software (which is all American) to design high-end chips, and it has blocked chip manufacturing facilities worldwide from accepting entity-listed Chinese chip design firms (as well as any Chinese chip company building high-end chips) as customers. Finally, the United States does not want China to have its own advanced chip manufacturing facilities, so it has blocked them from purchasing the necessary equipment, much of which is irreplaceably American.”
He added, “In weaponizing its dominant chokepoint positions in the global semiconductor value chain, the United States is exercising technological and geopolitical power on an incredible scale.”
However, Allen also pointed out challenges in pursuing the US policy, including the fact that “export restrictions apply to US-owned entities operating in China,” but do not prevent “international subsidiaries of Chinese corporations from smuggling chips into China in violation of US export controls.”
Moreover, he noted that while US export controls pose challenges to “China’s production of an indigenous supply chain” for chips, such controls “focus on advanced chips at high technology nodes.” Moving forward, he said, “China may now focus on gaining market leverage over older semiconductor technologies. Legacy semiconductor designs made with older technology nodes (>28 nm) still play an important role in the global economy.”
Semiconductor chip diplomacy by the US will play a significant role in this regard, Allen noted. China is now the 3rd biggest producer of chips after Korea and Taiwan. Can the US convince Korea and Taiwan, as well as producers in Japan and Europe, to support its export controls? South Korea, for one, while a US ally, has “invested significantly in Chinese semiconductor manufacturing operations.”
He added, “The United States needs to ensure that all of its allies are rowing in the same direction when it comes to keeping China’s semiconductor industry down… Turning these unilateral export controls into multilateral ones will be a major challenge. Expect this to be a key White House diplomatic priority for discussions with Europe, Japan, Taiwan, and South Korea going forward.”
One can only imagine how China is going to react to all these developments.
Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council