Semiconductor alliances between U.S. and Asia could hold back China

Leading chipmaking nations including the U.S. are forming alliances, in part to secure their semiconductor supply chain and to stop China from reaching the cutting-edge of the industry, analysts told CNBC.

Places including the United States, South Korea, Japan and Taiwan, which have strong semiconductor industries, have looked to forge partnerships around the critical technology.

“The immediate reason for all this is definitely China,” said Pranay Kotasthane, chairperson of the High Tech Geopolitics Programme at Takshashila Institution, in reference to the alliances.

The teaming up underscores how important chips are to economies and national security, while at the same time highlighting a desire by countries to stem China’s advancement in the critical technology.

Kotasthane was a guest on the latest episode of CNBC’s Beyond the Valley podcast published Tuesday, which looks at the geopolitics behind semiconductors.

Why chips are in the geopolitical spotlight

But the semiconductor supply chain is complex — it includes areas ranging from design to packaging to manufacturing and the tools that are required to do that.

For example, ASML, based in the Netherlands, is the only firm in the world capable of making the highly complex machines that are needed to manufacture the most advanced chips.

The United States, while strong in many areas of the market, has lost its dominance in manufacturing. Over the last 15 years or so, Taiwan’s TSMC and South Korea’s Samsung have come to dominate the manufacturing of the world’s most advanced semiconductors. Intel, the United States’ largest chipmaker, fell far behind.

Taiwan and South Korea make up about 80% of the global foundry market. Foundries are facilities that manufacture chips that other companies design.

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The concentration of critical tools and manufacturing in a small number of companies and geographies has put governments around the world on edge, as well as thrust semiconductors into the realm of geopolitics.

“What has happened is there are many companies spread across the world doing small part of it, which means there’s a geopolitical angle to it, right? What if one company doesn’t supply the things that you need? What if, you know, one of the countries sort of puts things about espionage through chips? So those things make it a geopolitical tool,” Kotasthane said.

The concentration of power in the hands of a few economies and companies presents a business continuity risk, especially in places of contention like Taiwan, Kotasthane said. Beijing considers Taiwan a…

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