How Quad is trying to edge China out through semi-conductor chip route

Ahead of the Quad summit in Washington scheduled for 24 September, leaders of the collective – United States, Japan, India and Australia – have decided to work together and create a safe supply for semi-conductors.

According to a report published in Nikkei Asia, the nations may confirm "resilient, diverse, and secure technology supply chains for hardware, software, and services that are of utmost importance to their national interest".

So what are semi-conductors and what is their significance to the Quad nations?

Semi-conductors explained

Semi-conductors are literally the ‘heart’ of billions of products, ranging from smartphones, data centres, computers, laptops, tablets, smart devices, vehicles, household appliances, life-saving pharmaceutical devices, agri-tech, ATMs and more.

The list goes on.

Semi-conductor chips are made from silicon as it is a good electricity conductor. These chips are fitted into microcircuits that powers numerous modern-day electronic goods and components. It may be noted that all active components, integrated circuits, microchips, transistors and electronic sensors are built with semiconductor materials.

They enable key functions such as high-end computing, operation control, data processing, storage, input and output management, sensing, wireless connectively and more.

Therefore, these chips are integral to all emerging technologies such as artificial intelligence, quantum computing, advanced wireless networks, blockchain applications, 5G, IoT, drones, robotics, gaming and wearables.

Semiconductors chips are inexpensive parts that play a key role in manufacturing modern technology products and components. Simply put, semiconductor chips are the building blocks of modern computation.

Chip famine

A shortage of semi-conductor chips was first felt after the COVID-19 pandemic devastated most countries in the world in 2020, leading to widespread restrictions.

These lockdowns led to the closure of crucial chip-making facilities in countries including Japan, South Korea, China and the United States.

According to a Bloomberg report, which quoted research by Susquehanna Financial Group, the chip lead time — the gap between when a chip is ordered and when it is delivered — increased to 17 weeks in April, from around 12 weeks at the beginning of 2020.

Countless industries across the globe were affected by the shortage. Globally, vehicles makers were worst hit by the chip shortage with major car manufacturers like Volkswagen, Ford, Renault, Nissan and Jaguar Land Rover are feeling the heat.

Not just the auto industry but consumer goods and smartphone manufacturers are also under pressure to meet the rising demand for products.

South Korean consumer durables and electronic products giant Samsung said that the chip shortage has hit its television and appliance production. Companies like Apple, LG and other Chinese electronic and smartphone manufacturing companies have also been severely impacted by the chip shortage.

In India too, the effects of the shortage were felt when Maruti Suzuki hiked car prices recently due to the increased cost of production.

Patrick Armstrong, CIO of Plurimi Investment Managers, told CNBC.comthat the chip shortage could last at least 18 months before the demand-supply equation normalises.

Where does Quad come in?

The Quad nations have decided to concentrate on creating a safe supply chain for semiconductors. This implies that they are looking forward to expanding their scope against the manufacturing giant, China in the Indo-Pacific.

A joint statement has been released that stressed the challenges that are currently being faced in regards to the illicit transfer and theft of technology.

Hence, Quad nations believe that the technology has to be designed and developed in a way that can be shared and shaped by the countries on democratic values.

The statement also says the use of advanced technologies should be based on the rule of respecting human rights.

The statement mentioned that the countries are gearing to launch a joint initiative in order to determine individual’s capacity and their vulnerability in the supply chain for semiconductors.

The four countries are also looking at building a procurement chain to counter the dominant role that China plays in supplying these elements, which are used in making smartphones and even EV batteries.

How does Quad’s decision affect China?

Beijing has truly stepped up its chip production game.

The Asian giant consumed 143.4 billion worth of chips in 2020, a nine percent yearly increase and only $22.7 billion worth (15.9 percent) were produced in China.

China has set an ambitious target for domestically-made chips to account for 70 percent of total consumption by the year 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 percent 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 the industry at large in the digital age.

This is where the Quad comes in.

According to a paper, published by the Institute of South Asian Studies at the National University of Singapore in April this year, "each Quad member enjoys a comparative advantage in a specific sub-domain of the semiconductor supply chain" and hence "should make semiconductors a focus area".

The US by far remains the global leader in this sector. However, its dominance is skewed heavily towards R&D.

The Semiconductor Industry Association (SIA) reveals that while the US chip industry accounts for about 47 percent of global chip sales, the country has only 12.5 percent in chip manufacturing capacity.

Meanwhile, Japan has established a stronghold in semiconductor manufacturing materials and chemicals necessary for manufacturing chips. The paper shows that despite its strength in the semiconductor manufacturing segment, the Japanese semiconductor design industry has declined after impressive growth in the 1980s. Higher costs have made outsourced testing and packaging unremunerative in Japan compared to South Korea and Taiwan.

The paper reveals that India's advantage is in “trained human capital".

Semiconductor design requires large numbers of skilled engineers and this is where India’s strength lies. Crucially, Indian design centres have the expertise to handle the entire design cycle.

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.

With inputs from agencies