Asia Report #60 | April 18, 2023
Introduction
The resiliency of supply chains in the Indo-Pacific now poses a central challenge for the United States and its partners in the Indo-Pacific. The U.S. has entered a new era of industrial policy, backed by the CHIPS Act and the latest round of export controls on China. The story of the chips race will unfold in Asia given that Taiwan, together with South Korea and Japan, account for over 90 percent of the world’s semiconductor production. How well are Taiwan, South Korea and Japan positioned to deal with the ongoing supply chain stresses and what are the economic and security implications to watch for?
To explore this question, the Sigur Center for Asian Studies recently hosted a Roundtable on Semiconductor Supply Chains in the Indo-Pacific: The Role of Taiwan, South Korea, and Japan as part of its Taiwan Roundtable Series. This Asia Report covers the deliberations of the Roundtable comprised of Lotta Danielsson, Vice President of the US-Taiwan Business Council, Daniel Aum, Associate at the Institute for Corean-American Studies, and Jeffrey D. Bean, Program Manager for Technology Policy and Editor at Observer Research Foundation America (ORF America). The panel was moderated by Deepa Ollapally, Associate Director of the Sigur Center for Asian Studies at George Washington University. Watch the full video of the conference here.
Taiwan’s Central Role in the Semiconductor Industry and its Spinoffs
Lotta Danielsson opened with a brief on how Taiwan evolved to become the epicenter for the global semiconductor supply chain. It was a concerted effort over 40 years, starting with initial government investments and encouragement of private enterprise. Taiwan’s innovations in the sector really hit its stride with the pioneering of the “foundry model” of semiconductor manufacturing. Simply put, it separates the design aspect from the production one, and Taiwan doubled down on semiconductor production. This was only bolstered by the clustering effect around Hsingchu, where thousands of suppliers across the value chain create an ecosystem that turbocharges research and development.
Taiwan’s centrality to the world’s supply chain is remarkably high. Taiwan enjoys around 60-70% of cutting-edge semiconductor manufacturing. It is fully cognizant of the geopolitical significance of its industry and has worked hard to cultivate it. It is recognized as a major factor in boosting its global ties, especially with the United States. Danielsson noted that there are many pressures on the semiconductor industry including talent shortages, intellectual property issues, supply risks, demand shocks, and most notably the Chinese security threat. These pressures incentivize Taiwanese companies to look abroad to diversify, however this is tempered by Taiwan’s own desire to remain central to the semiconductor industry, especially at the cutting edge.
Danielsson also considered the impact of the passage of the Chips and Sciences Act (CHIPS) by the U.S. Congress. The United States is having success in drawing investment from foreign companies such as TSMC and Samsung, but Danielsson argues that the $50 billion allocated for semiconductor investment under CHIPS is insufficient. Nearly $400 billion is needed to just replicate the capacity of TSMC alone. Taiwan built its semiconductor industry over several decades and the United States cannot replicate it easily. Danielsson also explored the Chip 4 Alliance with Taiwan, Japan and South Korea. Politically it is a big opportunity for Taiwan but South Korea and Japan are major competitors as well so this initiative would need to balance political cooperation with private competition.
South Korea in the Semiconductor Supply Chain: Challenges and Opportunities
Daniel Aum began by clarifying what South Korea’s semiconductor portfolio looks like. Although not as dominant as Taiwan in high end chip manufacturing, South Korea’s niche is found in memory chip manufacturing where it dominates nearly two-thirds of global market share. The South Korean economic boom is inexorably linked to the development of its semiconductor industry.
Aum provided historical context for South Korean chip manufacturing. Starting in the 1980s, a combination of government subsidies and conglomerate investment incentivized the hiring of talented engineers who pioneered South Korea’s initial forays into memory and DRAM chips. South Korea took advantage of the U.S.-Japan chip rivalry that restricted the ability of Japanese manufacturers to export to the United States. This allowed South Korean companies to leapfrog their competitors. Additionally, Aum put forth the South Korean “model” of chip manufacturing as a possible reason for success. Samsung, SK Hynix, and other South Korean Chip manufacturers are “end-to-end” service providers, from design to packaging. This allows them to build everything in-house while also servicing foreign clients.
Aum then described the strengths and shortfalls of the current government’s semiconductor initiatives. While South Korea today possesses only 1% of market share of non-memory chips, President Yoon Suk Yeol is targeting 10% by 2030. South Korea’s National Assembly has increased tax cuts by up to 15% for conglomerates, however these efforts fall short of Chinese, Taiwanese, Japanese, and U.S initiatives. The South Korean government has also attracted over $260 billion in private investment, mainly from Samsung, to create a cluster of over 150 firms that cover the entire semiconductor supply chain. To fuel this, the South Korean government has set the goal to train over 150,000 workers over 10 years. However, Aum points out several hurdles this initiative would need to overcome. The South Korean birth rate hampers talent supply, the tax incentives are not competitive, and the U.S.-China rivalry threatens South Korea’s economic ties to China.
Taking up the political implications of semiconductor policy, Aum suggested that to South Korean firms, the CHIPS Act initially seemed like a double-edged sword as subsidies would restrict production expansion in China. However, recent clarifications from the U.S government has allowed South Korean companies some limited expansion rights. South Korea will have to leverage its position as the premier memory provider while balancing the United States and China. Regarding Taiwan, Aum sees South Korean and Taiwanese cooperation as quite healthy. Both governments have a history of cooperation and on a corporate level, even though they compete for each other’s contracts, companies have voluntarily agreed to set up common global standards for chip stacking to increase mutual profits. Aum closed by mentioning that South Korea also faces great opportunity with Japan. President Yoon and PM Kishida have resumed bilateral visits, while Japan has agreed to lift restrictions on semiconductor material exports to South Korea. For its part, South Korea has dropped a World Trade Organization case against Japan. All in all, South Korea stands to gain substantially from cooperation with both Taiwan and Japan.
Getting Back to the Future: Japan’s Chip Challenge
Jeffrey Bean began by describing the downfall of Japanese semiconductor dominance. Decades of government and private investment had led Japan to emerge as a leader in DRAM and memory in the 1980s, but concerns from U.S firms put a stop to that. The United States compelled Japan to sign an agreement that put a price floor on Japanese DRAM in the U.S. and forced Japan to open its market up to foreign suppliers. Japanese firms entered a period of intense adjustment as other nations like South Korea quickly flooded the market. Japanese companies had a tough time adapting to the Taiwanese “fabless foundry model,” but eventually found a niche in specialized supply chain components. Despite Japan’s low market share in the global semiconductor industry, it is not reflective of how integral Japanese specialty products are to the manufacturing of chips.
According to Bean, several characteristics make the Japanese semiconductor industry special. Japanese firms are leaders in design and Japan is a hub for the creation of semiconductor manufacturing equipment and precursor materials. Additionally, Japan’s experience with electronic components, legacy chips, and consumer electronics makes it the premier place for semiconductor expertise. Japan is now actively seeking to grow its position in the supply chain. The Japanese government has subsidized the creation of a 5-nanometer facility in Kumamoto with TSMC and Sony, a 2-nanometer facility in Hokkaido with IBM, and manufacturing equipment plants in Oshu. Japan is seeking to reestablish itself in the industry.
Bean argues that this is largely as a result of Japan pioneering the effort to consider “economic security.” In 2020, the Liberal Democratic Party of Japan had conducted research on Japan’s role in a global economy with regards to national security and critical technology. The fruits of this changing focus have been new strategic documents listing China as a strategic competitor, the Economic Security Promotion Act which made national security a factor for investment for firms, and the establishment of a cabinet level position on economic security. Japan has been concerned about this issue longer than most other countries.
Bean summed up by contrasting Japan’s political position with South Korea and Taiwan. Unlike the other two, Japan plays an important role in leading multilateral institutions. Japan is the main driver for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and has looked favorably on Taiwan’s accension, while negatively on China’s. Bean argues that Japan is eager to cooperate in the semiconductor industry, as Japan is part of the Indo-Pacific Economic Framework (IPEF) and the Quad. In 2021, Japan and Taiwan also came to an agreement regarding semiconductor supply chain security. Japan has taken a leading role in the conversation on economic security and critical role the semiconductor industry plays in it.
Overall, the prospects for greater cooperation on the critically important global semiconductor supply chain resilience between Taiwan, South Korea and Japan appear bright, in spite of underlying competitive elements. By extension, this is good news for U.S. economic security interests in the Indo-Pacific.
By Satvik Pendyala, M.A Candidate in International Affairs at the Elliott School of International Affairs and Research Assistant, Rising Powers Initiative, The George Washington University.
