[In-Depth Review] Challenges and Responses in the Global Semiconductor Supply Chain

Je Hyeon-jeong, Director of the Trade Support Center, Korea International Trade Association

"In the short term, the production capacity of the U.S. semiconductor industry is falling behind, and in the long term, there is a risk of losing technological supremacy."

This is part of a report released by the U.S. Defense Science Board. At first glance, one might think it is part of the U.S. supply chain review report published in June this year, but in fact, it is a report from 1987, during the height of the U.S.-Japan semiconductor dispute 34 years ago.

In the early 1980s, when Japan dominated the DRAM market, the U.S. Semiconductor Industry Association (SIA) and other private sectors began requesting the government to impose import restrictions on Japanese semiconductors. In response, the U.S. government perceived the development of Japan's semiconductor industry as a threat challenging technological supremacy and sought to curb it by signing a semiconductor agreement between the two countries in 1986. The U.S. trade offensive continued until the early 1990s when the market share of U.S. semiconductors in Japan reached 20%. Under relentless attacks, Japan eventually specialized in core materials and manufacturing equipment, while South Korea and Taiwan emerged as new players in the memory semiconductor sector, beginning to reshape the global semiconductor industry landscape.

After the U.S.-Japan semiconductor war ended in the 1990s, international division of labor among companies in the global semiconductor industry became active. While the oversupply issue calmed down due to companies’ chicken games, various semiconductor demand industries such as IT, electronics, and automobiles rapidly grew, keeping the semiconductor industry largely away from international trade disputes for a while. The global semiconductor supply chain formed during this period was maintained very efficiently from the U.S. perspective, but the era of semiconductor peace came to an end when China’s ‘semiconductor rise’ goal was revealed in 2015.

Even though China’s semiconductor industry competitiveness currently does not match Japan’s level in the 1980s, China’s development plan revealed through ‘Made in China 2025’ was enough to provoke the U.S. Moreover, after experiencing the automotive semiconductor supply shortage following the COVID-19 outbreak, the U.S. realized the importance of stability and resilience over efficiency in the global semiconductor supply chain and, above all, recognized the high dependence on China as a serious national security threat.

Accordingly, the Donald Trump administration began to actively curb China’s semiconductor industry through bans on Chinese acquisitions of U.S. companies and export restrictions on Chinese firms, and the Joe Biden administration is accelerating support to expand domestic semiconductor production capacity. If the semiconductor manufacturing incentive budget exceeding $50 billion passes Congress, it will be invested in comprehensive capacity enhancement of the semiconductor industry, including financial support for semiconductor manufacturing, research and development (R&D) facilities, and equipment.

In response to these U.S. moves, the European Union (EU) has also expressed interest in semiconductor industry internalization, Japan is promoting policies to foster its domestic semiconductor industry, and South Korea has established the K-semiconductor strategy to strengthen competitiveness. China is also pursuing semiconductor localization policies to increase self-sufficiency; in fact, SMIC, China’s largest semiconductor foundry, announced earlier this month that it will invest over 10 trillion won to build a new semiconductor factory in Shanghai. Government support competition for semiconductor industry self-reliance has thus begun in earnest.

Although the international division of labor formed over decades cannot be changed overnight by government policies alone, cracks are appearing in the once-solid supply chain, increasing uncertainty in the semiconductor industry. The key question is how the South Korean semiconductor industry, which rose as a strong player in the memory sector following the U.S.-Japan semiconductor dispute and overcame the harsh chicken game of the 1990s, will respond to these new challenges. It is a crucial time for the South Korean semiconductor industry to successfully navigate the global supply chain, where the U.S. emphasizes cooperation with allies to contain China, and China is fiercely pursuing semiconductor self-reliance amid tense relations between the two.

Je Hyun-jung, Director, Trade Support Center, Korea International Trade Association