The U.S.-China trade war over semiconductors is fragmenting value chains

This serious trend is related to the fact that companies and governments are taking steps to produce more and more strategic goods locally or to obtain them from their closest allies, politically and culturally.

In its analysis, NL highlights two new realities - one positive, one negative - that companies will now have to deal with:

Economic security: supply chains will become more resilient over time.

Efficiency losses: structural operating costs will rise in the long run.

This trade war began under the Republican administration of Donald Trump, but intensified under the Democratic administration of Joe Biden.

Two elements are of greatest concern to Washington.

One is that China will invade Taiwan, a nation of 24 million people that Beijing considers a renegade province and which produces more than 90 percent of the world's most advanced semiconductors.

A possible but unlikely danger factor, experts say.

On the other hand, China should eventually acquire the capacity to produce advanced electronic chips. This will allow it to produce more sophisticated computer products and defense systems without relying on foreign components.

Two key pieces of legislation in the U.S.

The U.S. has enacted legislation to better manage these risks.

As a first step, the U.S. government passed the CHIP and Science Act in August.

This law provides for a $52 billion (C$70 billion) investment in semiconductor manufacturing in the U.S.

It also imposes severe restrictions on U.S. companies. For 10 years, companies that receive funding cannot make new investments in advanced chip plants in China or other countries that are considered at risk.

Washington says this is in response to Beijing's massive financial support for Chinese chipmakers.

According to the Organization for Economic Cooperation and Development (OECD), from 2014 to 2018, government support accounted for at least 30 percent of the revenues of China's two largest semiconductor manufacturers, Semiconductor Manufacturing International Corporation (SMIC) and Tsinghua UniGroup.

As a second step, the Biden administration passed a new law in October banning exports to China of both chips and sophisticated equipment for their production.

Notably, this measure also applies to foreign companies that use U.S.-manufactured manufacturing inputs.

U.S. positioning vis-à-vis China

These drastic measures reflect the fact that the U.S. share of global semiconductor production has fallen threefold in the past 30 years, from 37% to 12%, according to the White House.

In contrast, Americans still dominate the market for software (85%) and related equipment (52%). As a result, most of the world's manufactured chips are designed using American-made software and hardware.

This is one reason why Taiwan SemiConductor Manufacturing Company (TSMC), the world's largest semiconductor manufacturer, locates its most advanced foundries in the United States rather than in China.

This company alone produces over 90% of the world's most advanced semiconductors!

The strategic importance of this company on the world stage may also partly explain Beijing's desire to one day take control of Taiwan, some analysts believe.

In short, there are more than just political reasons...

Finally, here is a sign of the coming shakeout in the semiconductor supply chain.

U.S. computer maker Dell intends to stop using chips made in China by 2024, Japan's Nikkei newspaper reported in early January.

The company has also asked its suppliers to significantly reduce the amount of other Chinese-made components in their products.

The business decision is part of DELL's efforts to diversify its supply chain amid political and economic tensions between Washington and Beijing.

Other U.S. companies may follow suit.

DELL's decision will inevitably increase its costs, as well as those of its suppliers.

And, ultimately, the products it sells to consumers and businesses.