The Global Semiconductor Value Chain: A Technology Primer for Policy Makers
Semiconductors such as memory chips or processors are a foundational technology and the backbone of modern society. Not only are they a prerequisite for any endeavors into emerging technologies, such as artificial intelligence, quantum computing, autonomous vehicles and many more. But every industry relies on access to those chips. As a result, semiconductors are at the heart of the intensifying US-China technology rivalry. China is highly dependent on US-origin semiconductor technologies and the US government uses its export control regime to curb the technological advancements of certain Chinese companies. These export control measures work especially well in the semiconductor value chain because of strong interdependencies due to high divisions of labor.
The semiconductor value chain is defined by a few key countries – United States, Taiwan, South Korea, Japan, Europe and, increasingly, China. None of these regions have the entire production stack in their own territories since companies often specialize on particular process steps (design, fabrication, assembly) or technologies (memory chips, processors, analog semiconductors, etc.) in pursuit of economic efficiency. Ultimately, no region has achieved “strategic autonomy”, “technological sovereignty” or “self-sufficiency” in semiconductors. In fact, the semiconductor value chain is characterized by deep interdependencies, high divisions of labor and close collaboration throughout the entire production process: US fabless companies rely on Taiwanese foundries to manufacture their chips. The foundries themselves rely on equipment, chemicals and silicon wafers from Japan, Europe and the US. The semiconductor value chain is thus highly innovative and efficient but not resilient against external shocks.
Such a complex and interdependent value chain creates three challenges for policy makers: First, how to ensure and secure access to foreign technology providers through trade and foreign policy? Since any of the above-mentioned countries could severely disrupt the value chain through export control measures, foreign and trade policy plays a key role to ensure continued access to foreign technology providers. Second, how to build leverage by strengthening domestic companies through strategic industrial policy? Since no region will be able to have the entire production stack within their own territory, governments should support their domestic semiconductor industry to maintain key positions within the value chain. Third, how to foster and support a more resilient value chain? In certain parts, such as contract chip manufacturing, the value chain is highly concentrated and needs to be diversified to lower geographical and geopolitical risks.
This paper provides a first analytical basis for policy makers. It gives an overview of the global semiconductor value chain, its interdependencies, market concentrations and choke points.