China’s Huawei Technologies Faced US Sanctions For Allegedly Pirating US Intellectual Property
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Semiconductors power our cloud-driven world, and are critical components of every electronic device, gadget or tool we use on a daily basis. Franklin Equity Group’s JP Scandalios, who has spent over 20 years researching the semiconductor space, offers an overview of the industry and explains why it’s not so simple to move production to local shores—even with government incentives to do so. Dina Ting, Head of Global Index Portfolio Management, Franklin Templeton Exchange- Traded Funds, explores opportunities via targeted exposure to Taiwan and South Korea—two important semiconductor hubs.
A mission-critical industry
JP Scandalios
Portfolio Manager
Franklin Equity Group
Why are semiconductors getting so much attention recently?
The semiconductor industry is mission-critical, infiltrating and influencing nearly every other segment of the global economy in some fashion. Several decades ago, semiconductor technology was primarily associated with computers, then cel phones. Today it has evolved toward machine learning and artificial intelligence. Semiconductor chips permeate everything from refrigerators to watches to cars—especially as everything becomes a smart and connected device (See Exhibit 1). That said, the semiconductor industry is still cyclical in nature. In 2019, the industry saw a downturn and many thought it would never grow by more than global gross domestic product again. But we’ve seen tremendous acceleration in recent years, partly due to COVID-19 but also partly due to new market opportunities—for example, electric vehicles.
What are potential impacts of US President Joe Biden’s CHIPS and Science Act of 2022 on semiconductors?
Many people may not realize that Taiwan—specifically Taiwan Semiconductor Manufacturing Company (TSMC)—manufactures about 90% of the world’s most advanced semiconductors. Additionally, 75% of key related materials—silicon wafers, photoresist and other specialty chemicals—originate in China and East Asia. Meanwhile, the United States holds the vast majority of intellectual property and know- how in terms of research, development and design in the Global Investment Outlook: Finding opportunities in 2023 after a (un)forgettable market year 13 semiconductor space, including the equipment and the computer-aided design (CAD) software required for fabrication and device operation.
TSMC is a foundry or “mega fab”—it makes the actual chips. And, given how it dominates the market, that’s a risk, particularly given strained relations between Taiwan and China, and China and the United States. The United States has finally woken up to that risk, and part of the CHIPS Act provides incentives or subsidies to build a redundant or parallel supply chain domestically—with more than US$38 billion allotted in manufacturing incentives for companies to build US-based semiconductor production facilities.
Why is the CHIPS Act so important?
For a long time, China has also expressed its desire to be more self-sufficient, specifically within the realm of semiconductors, as it is among the highest global chip consumers. The Trump administration intentionally put in roadblocks to protect the intellectual property of US chip companies. China’s Huawei Technologies—the smartphones and consumer electronics manufacturer—faced US sanctions for allegedly pirating US intellectual property and handing itover to the China military complex.
Fast forward to today, and the Biden administration continues to ratchet up restrictions, although not going as far as placing a complete embargo on equipment or software or even semiconductors. The CHIPS Act is an extension of US policy to maintain our lead and reduce our semiconductor manufacturing reliance upon a region where geopolitical tensions run hot. The Act is mainly about lessening our reliance upon Taiwan as a production source, but the administration also essentially said to US companies that if they want to ship goods to China, they must prove their end-users are not in any way associated with China’s military, and they can only ship lagging-edge equipment. The goal is to ensure China is always at least several generations behind. The CHIPS Act is a means to that end.
