China Leads in Global Semiconductor Race, Eyes Afghanistan's Minerals

The global semiconductor race is well underway, and China has taken a large lead with its record-breaking production. Can anyone else keep up?

China Leads in Global Semiconductor Race, Eyes Afghanistan's Minerals

The space race, the arms race, and now—the chip race? Countries around the globe are pouring billions of dollars into production capacity for semiconductors to help combat the ongoing chip shortage, while also aiming to become the global leaders in chip production. It's a win-win strategy.

The US has looked to its deserts in the southwest to up its semiconductor production. Meanwhile, Japan is scrambling to increase production capacity as it attempts to remain in the competition that is primarily dominated by China, with the US right behind.

China's Record-Breaking Integrated Circuit Production

The South China Morning Post reports that China's integrated circuit (IC) output reached a record high of 31.6 billion units in July—a new monthly record. But it wasn't just July that China flexed its chip production muscles. In the first seven months of the year, the total IC output from China has reached a whopping 203.6 billion units, which equates to a hefty 47.3% increase compared to the first seven months of 2020.

Now, let's slow down a moment. 2020 was peak pandemic. And while delta strains are beginning to surge globally, it's reasonable to assume that the 47.3% increase in IC output is more of a revelation of just how stagnated chip production was in 2020.

But that assumption would actually be incorrect. According to Statista, China's output of ICs in the first seven months of 2021 has already surpassed the total output of 2019 by about 1.8 billion units.

If 2021's numbers stay on track, the PRC's IC output will surpass 2020's total by nearly 123 billion units. That projected difference in production between 2020 and 2021—of 123 billion units—would exceed 2015's total IC output. From that perspective, it's fairly revealing just how efficient China's semiconductor production has been in 2021.

China's Automotive Industry Not Immune

Despite China's record-breaking IC production, its automobile output in July was 15.8% lower than the same period in 2020. This number lends evidence to the assumption that the automotive industry continues to be prioritized behind consumer electronics and other tech industries when it comes to available chip supplies.

US Production Impacted by In-Fighting

While Intel and TSMC have committed to building new semiconductor fabs in the US, boardroom in-fighting has stagnated plans for the new TSMC fabs in Arizona. Management changes within TSMC have led to questions about the future of the new fabs in Arizona, which could create further delays. If the US is going to keep up with China, it cannot afford to shoot itself in the foot with these kinds of hangups.

Yet there is some good news for US production: total manufacturing output increased 1.4% in July, which was much more optimistic than the 0.3% net decline in manufacturing in June. Computer and electronics production, specifically, showed a 1.1% gain in production.

While these numbers pale in comparison to China's production, it's still a start.

Japan's Role in the Race

The recent, record-breaking production numbers reported in China have led to an anxious Japan. The Pacific power believes the US will continue to pour billions of dollars into chip manufacturing to compete with China.

The US's planned investment in chip production worries Japan because it could deteriorate what is left of Japan's semiconductor market share. According to Reuters, in the past 30 years, China and the US have slowly depleted Japan's chip manufacturing market share from a half to a tenth.

The trade war and security concerns fueling the chip production race between China and the US are squeezing Japan out of the picture. For now, Japan will do its best to stay in the frame.

The plan for Japan is to develop into an Asian data center hub. Becoming such a hub would generate extreme demand for semiconductors and entice chipmakers to build plants nearby. Additionally, Japan approved a strategy in June to ensure it will have enough chips to compete in future technologies like AI, high-speed 5G, and self-driving vehicles.

However, success these days depends on capital, and it will be tough for Japan to rival the capital held by the US, China, and other global economic powers. For example, the US Senate has approved $190 billion in public money for new technology, which includes $54 billion spent on chip production. The European Union plans to spend nearly $159 billion on its own digital economy.

The trouble for Japan is that to obtain this figure of spending, it will likely have to cut funding to other critical sectors like health and welfare. And if the pandemic has proven anything, it's that money spent toward the digital economy may not matter much if the population does not have access to stable healthcare and welfare options. Suffice to say, Japan faces difficult decisions in the road ahead.

China Eyes Rare Earths in Afghanistan

With the Taliban's rise to power, China has recalibrated its policy to recognize the Taliban government. Why would China recognize the Taliban? Rare earth metals.

Afghanistan is estimated to contain somewhere between $1 to $3 trillion worth of rare earths. The metals in Afghanistan are essential to manufacturing critical components in consumer technologies like iPhones; automotive tech like the lithium batteries in electric vehicles; and military and defense tech like missile guidance systems.

The rare earths in Afghanistan are also used for the following:

  • Advanced ceramics
  • Computers
  • DVD players
  • Wind turbines
  • Catalysts in cars and oil refineries
  • TVs and monitors
  • Lighting
  • Lasers
  • Fiber optics
  • Superconductors and more

China already provides over 85% of the world's rare earth minerals. And the country also is home to nearly two-thirds of the global rare earths supply.

Afghanistan, which was once coined by a classified Pentagon memo as the "Saudi Arabia of lithium," will play a key role in whether or not China continues to dominate the semiconductor and tech manufacturing race.

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