[ANALYSIS] 'Chip 4 aims to control Samsung-TSMC rivalry for Intel'

US wants TSMC, Samsung's help until Intel's foundry business reaches 'competition level'

By Kim Yoo-chul

The United States passed the CHIPS and Science Act 2022. The core aim of the Act, which includes $52 billion in federal assistance to support cutting-edge chip manufacturing and research projects in the U.S., is Washington's hope for fostering a successful collaborative effort with its allies to construct a stable chip supply chain.

The passage of the Act will surely accelerate moves by the U.S. to further solidify its technology alliance, especially in the semiconductor value chain that aims to eliminate bottlenecks and improve its self-sufficiency rate. Washington hopes to bring together its "like-minded allies" in the hope of responding and handling possible outstanding issues in the face of very complex supply issues.

Once viewed as a simple electronic commodity, semiconductors have become national security assets. Semiconductor supply chains are causing huge strains between the United States and China with Washington pushing for the official launch of an alliance, known as the Chip 4, which brings together the United States, South Korea, Japan and Taiwan. It is also viewed as the right architecture to help Washington counter China in emerging industries such as quantum computing, 5G wireless technology and artificial intelligence (AI).

From a political standpoint, given the continued conflict between the world's two largest economies, it's reasonable to say that the "official purpose" of the Chip 4 is aimed at keeping China's burgeoning chip industry at bay. The U.S. dominates the global fabless market via private firms with Taiwan and Japan being viewed as the epicenter of foundry-chip manufacturing and materials such as photoresists. South Korea is home to the world's top two memory chipmakers, Samsung and SK.

However, is there a hidden intent behind Washington's moves for creating a grouping ― the U.S. and East Asian allies ―, specifically in the chip value chain? What does the Chip 4 mean for the U.S. semiconductor industry? At least from an industry viewpoint, does the U.S. want to replicate the foundry chip business even as Intel is struggling but aiming to compete with TSMC and Samsung?

Unlike memory chips, foundry services call for manufacturers that produce chips on behalf of customers rather fabricating their own designs.

Price competition in foundry business to threaten Intel

Given the significance of custom and logic-based chips ― the type of chips that are more profitable than conventional memory chips as they are used to control entire computing systems and not simply for data storage and retrieval ― amid the rise of data-intensive tech products, the United States is assisting with up to $12 billion worth of construction grants for Intel. The assistance is for two plants under construction in the state of Arizona and two more, for which, it is close to breaking ground in the state of Ohio.

CEO of Intel Corporation Pat Gelsinger holds up a semiconductor as he testifies during a hearing before the Senate Committee on Commerce, Science, and Transportation at Russell Senate Office Building on Capitol Hill, March 23, in Washington D.C. AFP-Yonhap

What matters the most in terms of providing massive federal assistance to Intel is that it has watched TSMC and Samsung Electronics pass it by in areas such as 7 nanometer (7 nm) and even the 5 nm process manufacturing. Today, the world's most advanced chips are commonly referred to as 5 nm, a nomenclature that refers to the width of transistors on the chip. Intel's chip technology is far behind that of TSMC and Samsung, the world's top two chip foundry service providers.

"The Biden administration is stressing the necessity of having a solid and strong manufacturing economy as strengthening the manufacturing sector would be a plus in terms of addressing supply chain issues and improving job market conditions. Going forward, the United States is hoping Intel reaches a 'competition level' for better contest with TSMC and Samsung in the foundry chip business. Until then, the U.S. hopes for TSMC and Samsung not to remain destructive for their chip sales," a high-ranking source based in Washington D.C., said via telephone.

"Intel has to convince investors that all of its products will stay at a high volume to keep its network of factories, each costing billions of dollars. The most threatening factor for a tech firm is that it's not developing competitive and advanced products quickly. The CHIPS Act can help the United States increase its share in the semiconductor industry for more self-sufficiency. With federal assistance, Intel could be able to improve its advanced chip-manufacturing tech," according to the source, who is very familiar with issues related to Chip 4.

Back in early 1990s, more than 35 percent of the global chips were manufactured on U.S. soil, according to Semi., an industry association. But as of last year, the U.S. global share was down to just 12 percent. All key aspects of defense, intelligence and government operations are going digital. As the critical aspects of these require the use of advanced chips, the United States is aiming to cut its reliance on foreign technology. Intel plans to surpass TSMC and Samsung by 2025.

"This is why the United States doesn't want TSMC and Samsung to pursue a 'cash-bleeding' sales strategy for more market share. Like the memory chip industry, a new order would prevail in the foundry chip industry with a few rational players controlling the entire market. The United States is hoping Intel will become one of the survivors but without the painful survival contest," a top-ranking industry executive, here, said.

U.S. Secretary of Commerce Gina Raimondo recently said the U.S.' heavy dependence on foreign chip manufacturers, with 90 percent of leading-edge chips purchased from Taiwan, creates a national security risk, adding that, it's also important to ensure companies are incentivized to expand chip manufacturing in the United States.

Samsung, SK and Intel were unavailable for comment.

In this photo released by the Taiwan Presidential Office, Arizona Gov. Doug Ducey, left, speaks during a meeting with Taiwan's President Tsai Ing-wen in Taipei, Taiwan, Aug. 26, 2022. Arizona Gov. Doug Ducey hailed economic and educational cooperation with Taiwan, marked by a $12 billion investment in his state by Taiwan Semiconductor Manufacturing Corp. AP-Yonhap

After brutal bankruptcies and exits, the global memory chip market has fundamentally changed. That means the top three players ―Samsung, SK and Micron of the United States ― dominate the market and they are well-positioned to grow.

Also, because these sector leaders are more rational any future price slump won't be as destructive as it would have been decades ago. The sector leader Samsung pursues profits over market share. This position is basically premised on the idea that more rational supply from the sector leaders in memory chips will allow a new era of increased profit.

"With the sector leaders focusing on protecting profitability, these big players can navigate other things such as ways to steadily develop advanced chips not just for survival. If TSMC and Samsung executes a cash-burning strategy for a greater share in the foundry chip market, a strategy seen decades ago, then Intel may face serious financial problems. This is the scenario which the United States doesn't want to see as the Biden administration is on track for a manufacturing renaissance," said the executive.

For example, Micron Technology suffered the most from a heavy downturn in 2016 hit by both slow demand for tech products and the South Korean duo's aggressive sales tactics to clear out inventories. In the global memory chip industry, the leader, Samsung is viewed as a rule-setter because its pricing decisions are a benchmark for the entire industry.

Wall Street investors were shocked by Intel's recent dismal quarterly reports. While Intel is questioned by some investors over the validity of its foundry ambitions to instead put priority on sharpening its existing business, Intel management didn't change its longer-term plans for the company's foundry chip facilities by saying its new plants will be central to its eventual goal of trying to compete with TSMC, the world leader in the chip foundries.

"It seems that even U.S. officials have yet to specify and decide core aims to be discussed and developed with respect to the Chip 4. Officials and sources in Washington D.C., however, believe there is no question that the hidden intention of the Chip 4 is aimed at preventing the emerging foundry business segment from overheating until Intel is ready to join the competition with TSMC and Samsung, the world's top two foundry service providers," said the source in Washington D.C.