DIGITIMES invited Dr. Ming-chin Monique Chu, lecturer in Chinese politics in the Department of Politics and International Relations at the University of Southampton, and Alex Capri, research fellow of Singapore-based Hinrich Foundation and lecturer at the Lee Kuan Yew School of Public Policy and Business School at the National University of Singapore, for a round-table discussion on March 2 over the implications of the latest Russia-Ukraine crisis and how company strategies should evolve with the trends.
This is the second part of the discussion transcript. You may also be interested to read part 1 of the transcript.
DIGITIMES: I read in the news that some people already called the Russia-Ukraine war "the start of the New Cold War." What do you think, Monique, what is your interpretation?
Chu: Just add a few points about the question you asked earlier regarding techno-nationalism. Over time, there has always been a push and pull between techno-nationalism and techno-globalism. But if you look at the nature of the semiconductor industry over time, tech-globalism has been the mainstream, the dominating force over the past decades. And in terms of firms' preparedness for this new trend of techno-nationalism, I think the key is for any CEOs in the industry to identify forces that are of interest versus those that are against their interest in order to help them navigate through this constant competition between techno-nationalism and techno-globalism.
And going back to the description of the invasion, which can be described as the onset of the new Cold War, we need to wait and see whether Putin manages to get away with a victory on the battlefield. We need to see how NATO member states would respond to that. And the fear is, of course, the onset of the third World War. And that's why I think all NATO member states are really hesitant to get involved physically. It is a very troubling moment in history. On Monday, I joined a related round-table in my department, and I told my students that one has to be really humble as a student studying international relations at this critical juncture in time. And I encourage my students to do a lot of readings about history, and about the nature of autocratic powers. In sum, I don't have a very easy answer to your question about whether or not this marks the onset of a new Cold War.
DIGITIMES: Do you have anything to add to that? Alex?
Capri: I think "Cold War" is too simple a term to apply to the world today. If we look at this term in a historical context, it applies to the geopolitical rivalry between the former Soviet Union and the United States. In this instance, there were fundamental ideological differences that were pretty well defined. And the two original cold war powers had not been engaging in trade and investment, and they hadn't become intertwined and entangled through decades of commercial exchange in the way China has with the world's liberal democracies.
Today we face a multi-layered, bifurcated kind of global landscape where fundamentally different economic and political systems have become entangled, and suddenly certain strands of that entanglement must undergo decoupling. On one level there's commercial technology that could empower military capabilities—which extends beyond military hardware and includes AI, data, algorithms and the platform economy.
On another level, however, there's stuff that is being manufactured in China and elsewhere, moving about through ubiquitous supply chains, where a significant volume of trade is occurring every day. Overall, the boundaries between these two areas are becoming blurrier and more difficult to ascertain.
Companies will struggle to navigate this new landscape. This is terra incognita for multinational companies. MNCs have invested hugely in China, which comprises a critical part of their global value chains, yet decoupling is inevitable. This will involve the reshoring and ringfencing of strategic supply chains, as we're seeing with semiconductors.
And I think, Judy, Taiwan continues to be the global hotbed of fabrication for semiconductors, and even in innovation, with TSMC R&D at the upper end of the value chain. But, regarding semiconductors, there needs to be diversification out of Taiwan.
DIGITIMES: That is also on the minds of many semiconductor manufacturers here in Taiwan.
Chu: I want to add to that point about diversification. For my own Ph.D. project many years ago, I interviewed the CEO of UMC who told me at the time that the reason why UMC decided to set up a foundry in Singapore was really due to the diversification consideration because many of UMC's customers at the time were worried about the outbreak of war across the Taiwan Strait. So from any firm's perspective, diversification is definitely the way to go. The US has attracted TSMC to set up a foundry there. You're also reading news about TSMC considering setting up new operations in Japan and Europe. So I think it is actually in the firm's interest to diversify its production base.
DIGITIMES: Climate change can also cause, you know, havoc on their production, so they really need to diversify their supply chains. Over the past two years, we are seeing new technologies such as 5G, electric vehicles or autonomous vehicles, driving up the demand for chips, while China remains a huge market with a big appetite for chips for those applications. For the market mechanism, you need to have the demand versus the production. So, right now, since China has this huge demand, there will certainly be people trying to supply those demands. Is it possible for China to develop its own semiconductor technologies? And is it possible that you know, the US would be able to stop China from developing it?
Chu: Let me have a go with this question first. I was invited to a webinar back at Cambridge University in November last year about the opportunities and constraints faced by the Chinese semiconductor industry. So, I did quite a bit of homework looking at answers to that question earlier. Bearing in mind that the Chinese aspiration for self-dependency in this very critical industry has been longstanding. I remember when I was in the field in 2004 for my Ph.D. research, the Chinese officials kept talking about this aspiration to increase the proportion of domestic supplies of semiconductors for the Chinese consumptions. So it's nothing new.
But firstly, it's very important to point out that there's a difference between China being a leading consumer of advanced semiconductors for end-users markets in the field of emerging technologies, such as 5G and artificial intelligence, and China being a leading semiconductor player. As to the prospect of China becoming a leading semiconductor player, there are constraints and opportunities.
In a nutshell, I actually don't think China will be able to become a leading player anytime soon because there are many hurdles to overcome. Export control is one important external factor that we have already discussed. China is also faced with many structural problems with the Chinese state-led support in the industry because some of these measures, even under the name of techno-nationalism, can backfire. One example pertains to the numerous cases of mismanagement of state funds. This is evidenced by the collapse of Wuhan Honxin and Tsinghua Unigroup. China is also faced with human-resource constraints, such as the shortage of engineers. Another major hurdle would be the limited amount of R&D investment by Chinese firms. In one account, published in 2019, the sector's R&D spending was less than that of a single US firm, Intel.
Of course, there are opportunities. Some of the indigenous efforts may result in good developments. For example, under the joint venture agreement between Arm, which is headquartered in England, and Arm China, the subsidiary is actually entitled to getting access to the parent company's IP. So one interesting question is the extent to which Arm China will become a major IP pillar for local design firms.
In addition, Alex mentioned earlier about American firms interested in selling to the Chinese market. These firms are not alone. European firms such as ASML are still very keen to sell to the Chinese market. And so I think these kinds of factors can be a potential opportunity that China can actually utilize.
For example, one report published recently shows that the American venture-capital firms, semiconductor giants such as Intel, and other private investors have actually taken part in about 58 investment deals in the Chinese semiconductor industry between 2017 and 2020. And this amount was more than double the number from the prior four years. So again, I think money can talk and this can provide China with some potential opportunities. But in a nutshell, I don't think China will catch up anytime soon. In fact, I think the prospect is zero.
Capri: I would completely agree. China has been striving to build a domestic semiconductor industry for 40 years. But what was once a stiff challenge has now become a near-impossible challenge, because as we approach the end of Moore's law, the amount of R&D that needs to be spent, the amount of institutional knowledge and expertise that needs to be brought to bear, and the hyper-specialization of a fully rationalized global value chain, and human capital technology, to make a semiconductor is prohibitive.
So as we push the 7, 5 nanometer, the 3, the 2-nanometer thresholds, China is chasing a moving target and falling further and further behind.
So, it really does come back to what extent will the leading-edge technology firms go when it comes to investing in China? And again, I think, they're gambling. They're hedging. They're basically saying, "Look, these guys are never going to catch the leading edge. So we might as well make money off the trailing edge. Let's not get left out of that market….And as long as we can convince people at the Commerce Department and at the State Department in the United States, we're okay." And by the way, "We're taking this revenue that we're earning in China, and we're plowing it back into research and development to further enhance our advantages so leave us alone, sign off on the Export Control licenses."
So once again, I totally agree with what Monique said. Furthermore, if you look at China's "Made in China 2025" and you look at the ten sectors that they have targeted, every single one of those areas is totally dependent on leading-edge semiconductors. And that is the one thing that China cannot do. So this is the game. This is the whole thing. This is also the "in-China-for-China conundrum that faces foreign multinationals.
Having said that, if we have a further deterioration in relations between China and the West, if China is seen to be complicit in, for example, accommodating Russia by letting it use Chinese banks to alleviate the pressure of being locked out of SWIFT, then there's going to huge repercussions for China.
American companies doing business in China are going to come under extreme pressure or might even be blocked altogether from further commercial activities in China, and that includes Wall Street.
So, again, we are in terra incognita. As I said, the past 70 years appear to be a historical anomaly. As you know, I'm a child of the Pax Americana, my father was a career diplomat. I grew up moving around the world, viewing the world through a Pax Americana prism. That is all changing now. And the primacy of geopolitics over economics is going to assert itself in larger and more disorienting ways.
DIGITIMES: Yes, the world is becoming more and more complicated as geopolitics is in play. But right now, there are also other forces influencing the decisions of companies. For example, the net-zero of carbon emissions 2050, required by COP 26. Meanwhile, there are several countries including the US, EU, Japan, India, etc., trying to attract semiconductor investments from Taiwan or elsewhere to produce locally. So, in what way are we going to see global supply chains transform in the future?
Chu: My short answer is it really depends. Global giants, such as TSMC and others, may or may not be attracted by these packages of incentives put on the table by respective national governments as well as the European Union. I remember when I gave talks to Indian think tanks in Delhi a few years ago about semiconductors, they also asked me ways in which India could manage to attract companies like TSMC to set up a fab there.
Going back to the idea that firms' interests as profit maximizers, it is really up to each firm's executive board to decide if setting up a subsidiary in different continents will be in their interest. And I think the climate-change factor is certainly one major element at play. But the fact of the matter is, major firms in different segments of the semiconductor supply chain are scattered in different parts of the world, as we have already discussed. US firms are leading in EDA and IC design sub-sectors. The manufacturing equipment firms are primarily headquartered in Europe, America, and Japan. And manufacturing has been dominated by Taiwanese, Koreans and Chinese. In contrast, it's very important to point out that the US share of manufacturing has dropped tremendously. Back in 1990, American manufacturing accounted for 37% of the global total. But in 2020, that dropped to 12%. I don't think any of these region-based, state-led endeavors will change the broad landscape I have outlined earlier any time soon. However, what these region-based incentive packages can potentially do is intensify the competition for semiconductor talents at the global level. The best the US can do is to make sure that there will be some niche onshore semiconductor manufacturing for end uses in critical and sensitive defense systems. That's the best that the US government can do in order to ensure American national security.
Capri: I think this is the one place where I might differ a little bit from Monique. I do think that it is very difficult to try and supplant semiconductor fabrication, especially in a place like India. But I do think that the CHIPS Acts in the United States and in Europe, through the application of the right kind of public-private partnerships, do have a chance of succeeding. I think, in a kind of moonshot environment that is tied to a sense of urgency around national security, the fabrication of strategic chips can over time, migrate back into these ring-fenced environments. American and European companies have not ceded their overall innovation lead, after all.
I think there are a couple of other things that are going to push this along. One is the emergence of the electric vehicle markets, and how the electric vehicle sector is in fact, emerging in a very regionalized nature, again, to compete with China and avoid reliance on Chinese supply chains. There's a strong incentive to decouple around the top end of the supply chain, starting with rare-earths and lithium batteries, and so forth. And there's a very compelling argument, as I've written about extensively, as the world turns to decarbonization, to merge these EV regionalized production ecosystems with local semiconductor production capacity, along with local production for military needs.
I do think that it's possible to have successful public-private partnership spending in the semiconductor sector. We can go back to the 1980s, for example, when Japan was the dominant player in the semiconductor industry. And the Americans basically said, "Hey, what are we going to do to leapfrog the Japanese?" And they came up with Sematech, which was a combination of military spending with private investment and the involvement of universities and that whole gamut of human capital.
I do think that given the geopolitical impetus, we will see the successful ring-fencing of strategic ecosystems and supply chains. And then, finally, you mentioned climate change. The carbon footprints of semiconductor supply chains are very, very carbon-intensive because they involve the movement of things back and forth.
I remember when I started my career at customs, and I was enforcing customs laws in the tech sector. I saw cases of a wafer, one single wafer, leaving the country and coming back eight to 10 times. That hasn't changed. I believe that we are going to see some countries imposing carbon tariffs on the supply chain. And those could potentially add cost, and I do think carbon tariffs will be weaponized. So this is yet another incentive to try reshore and localize semiconductor fabrication.
DIGITIMES: For sure, we are going to see our world change in a very different way than we are seeing right now. And thank you so much for such a stimulating and intellectual interview. Thank you, Monique, and Alex. Thanks.
Capri: Thank you, Judy. And Monique, a real pleasure to meet you.
Chu: Sure the same here. Thank you.
Bio of the speakers:
Dr. Ming-chin Monique Chu; Credit: Chu
Dr Ming-chin Monique Chu is lecturer in Chinese Politics in the Department of Politics and International Relations at the University of Southampton. Her research sits within the areas of international political economy and security of international relations. Her specific research interests include the impact of globalization on security with reference to semiconductors and the concept and practice of sovereignty. In 2016, the U.S.-based Semiconductor Industry Association cited her thesis-turned research monograph, entitled The East Asian Computer Chip War, as the authoritative work on the topic in its annual report. Her other scholarly research has been published in The China Quarterly and China Perspectives. She has given talks about semiconductors at think tanks in England, Europe, the U. S. and India. In March 2018, she gave oral evidence on China's capabilities in the field of emerging technologies in front of the House of Lords International Relations Committee. She has been interviewed by numerous news outlets such as the BBC on issues pertaining to semiconductors, Chinese politics, and Cross-Strait relations. She obtained an MPhil and Ph.D. degrees in international relations from the University of Cambridge.
Alex Capri; Credit: Capri
Alex Capri is a research fellow of the Hinrich Foundation and lecturer at the Lee Kuan Yew School of Public Policy and Business School at the National University of Singapore. He is the author of "Techno-nationalism: How it's Reshaping, Trade, Geopolitics and Society: (Wiley) is due out in 2022. From 2007-2012, Alex was the Partner and Regional Leader of KPMG's International Trade & Customs Practice in Asia Pacific, based in Hong Kong. Alex has over 20 years of experience in global value chains, business and international trade—both as an academic and a professional consultant. He advises governments and businesses on matters involving trade and global value chains. Areas of focus include IT solutions for traceable supply chains, sanctions, export controls, FTAs and trade optimization. Alex has been a panelist and workshop leader for the World Economic Forum. He writes a column for Forbes Asia, Nikkei Asia and other publications and is a frequent guest on global television and radio networks. He holds an MSc from the London School of Economics in International Political Economy and a BSc in International Relations from the University of Southern California.
