EXPLAINED: Why Quad Focus On Semiconductor Chips Is All About Breaking Concentration

·6-min read

It’s a crisis that has cost the global automobile industry billions of dollars in sales and held up delivery schedules of everything from smartphones to computers. No, it is not the Covid-19 pandemic, but the crunch in supplies of semiconductor chips. To be sure, though Covid-induced lockdowns were a trigger for the problem, what has really exacerbated it is the concentration of production almost entirely in just a handful of countries. Which is why the security grouping known as the Quad, which comprises Australia, US, Japan and India, is putting great focus on resolving supply chain bottlenecks for this crucial comppnent. Here’s all you need to know.

What Is On The Quad’s Mind?

According to a report in Japanese daily Nikkei, a major item on the agenda for the first in-person meeting of the leaders of the Quad countries in Washington is the need for “creating a safe supply chain for semiconductors”. The draft for a joint statement by the Quad leaders — US President Joe Biden and the prime ministers of Australia, Japan and India, Scott Morrison, Yoshihide Suga, Narendra Modi, respectively — accessed by the publication reportedly underscores the importance of “resilient, diverse and secure technology supply chains for hardware, software, and services”.

The Quad, short for Quadrilateral Security Dialogue, has a clear focus on combating and containing China’s muscle-flexing in the Indo-Pacific region, but its objectives are not limited to just military cooperation. When the leaders of the four contries had met virtually in March this year, they had also spoken of partnering on everything from vaccine supplies to climate change. A ‘fact sheet’ on that meeting had also stated that the Quad countries will set up a ‘Critical and Emerging Technology Working Group’ because “a free, open, inclusive, and resilient Indo-Pacific requires that critical and emerging technology is governed and operates according to shared interests and values”.

While ‘critical and emerging technologies’ can be seen as a catch-all term, the Nikkei report says that the key area of concern at present in semiconductor chips. It says that “specifically, the Quad looks to ‘launch a joint initiative to map capacity, identify vulnerabilities and bolster supply chain security for semiconductors and their vital components'”.

What Has Caused The Semiconductor Chip Shortage?

Since the start of the pandemic, several major carmakers have either had to slow down or halt production while electronic gadget makers like Apple have said that the shortage of chips will hapmer production and sales. It has been reported that chip shortage could cost automobile makers worlwide a loss of USD 60.6 billion in revenues in 2021 alone.

The fact of Covid-induced lockdowns is not lost on experts and they further point to the spurt in demand for electronic goods during the pandemic as more people started working from home — from smartphones, webcams to laptops and desktops — as having created the perfect storm conditions that have exacerbated chip shortage. But as Koray Kose, an analyst at Gartner, told BBC, the pandemic “was probably just the last drop in the bucket”.

For an item that can arguably be said to sit at the heart of the global tech and digital industry it is surprising how concentrated the production lines for semiconductor chips are. The Semiconductor Industry Association (SIA) says that about 75 per cent of global semiconductor manufacturing capacity is concentrated in East Asia, adding that the production of the most advanced semiconductors is entirely located in Taiwan and South Korea. These are countries and companies that are strongly aligned with the US and, as the US and China got locked in a trade war under the previous American president Donald Trump, Washington quickly moved to squeeze China’s access to chips.

BBC says “the decision by the US to prevent the sale of semiconductors and other technology to Huawei” resulted in manufacturers outside the US becoming “quickly flooded with orders from the Chinese firm”. but far from being caught off guard, Beijing was already preparing to step up on its chip production game. Indeed, the ban on Huawei was based on claims that China was stealing high-end technologies to bolster its domestic chip production capacities. As part of its Made in China 2025 plan, Beijing hopes to achieve 70 per cent self-sufficiency in semiconductor production by 2025 and is already making big strides in that direction. Reports say that China produced 203.6 billion chips in the first seven months of 2021, a close to 50 per cent jump in year-on-year terms as against 2020.

The moves by China to put its chip industry on a secure footing has now made other leading powerhouses sit up and take notice, because the pandemic has clearly proved that concentrated supply chains are a risk to industry at large in the digital age.

What Can The Quad Do?

Taken as a whole, the Quad has substantial advantages it can exploit. A working paper published by the Institute of South Asian Studies (ISAS) at the National University of Singapore in April this year says that “each Quad member enjoys a comparative advantage in a specific sub-domain of the semiconductor supply chain” and hence the grouping “should make semiconductors a focus area”.

Though China is seeking to quickly shore up its chip production capabilities, it is the US that by far remains the global leader in this sector. But its dominance is skewed heavily towards R&D. SIA data says that while the US chip industry accounts for about 47 per cent of global chip sales, the country has only 12.5 per cent in chip manufacturing capacity.

Also, of the world’s top 10 chip design companies by revenue in 2019-20, six were American and the country is also home to the world’s leading integrated design manufacturers (IDMs), which are companies that design and fabricate their own chips, like Intel.

“Despite the overpowering advantage in the design stage, US-based semiconductor manufacturing has declined since the 1980s,” the ISAS paper says, noting that East Asia-based companies displaced American firms in this sector “due to the growing differential in manufacturing costs” while “higher labour costs made testing and packaging an unattractive proposition in the US, motivating a relocation of this segment to East and Southeast Asia”.

As for Japan, it is said to have become a “stronghold in semiconductor manufacturing materials and chemicals necessary for manufacturing chips” although it too has seen a decline in production after “higher costs… made outsourced testing and packaging unremunerative in Japan compared to South Korea and Taiwan”.

India’s advantage is said to lie in “trained human capital” given that semiconductor design requires large numbers of skilled engineers, says the ISAS paper. It notes that Indian design centres have the expertise to handle the entire design cycle and its experience with “downstream assembly of electronic components… provides a solid base for venturing into upstream stages like assembly, testing and packaging”.

Australia, though not a big player in the chip sector, is a key source of minerals that are essential for the semiconductor chip industry, ISAS says, making a case for creating a supply infrastructure cutting across national borders that would ensure that no one country or region is the lynchpin of the global chip supply ecosystem.

The March Quad ‘fact sheet’ had spoken about the members encouraging cooperation “on telecommunications deployment, diversification of equipment suppliers, and future telecommunications, including through close cooperation with our private sectors and industry”. But as the ISAS paper notes, few details are available on such cooperation, “indicating that a lot of consensus-building remains to be done”.

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