The Geopolitical Semiconductor Cold War: Challenges and Impacts of Onshoring Manufacturing

By Malik Saadi | 4Q 2024 | IN-7584

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Current State of Semiconductor Manufacturing

For decades, semiconductor manufacturing has become increasingly concentrated in East Asia. Taiwan accounts for over 60% of the global foundry market and over 95% of high-end computing chipsets for Artificial Intelligence (AI) and High-Performance Compute (HPC) applications. South Korea dominates memory chip production and end-terminal devices, while China has rapidly expanded its overall manufacturing capacity. Israel and Malaysia have become key hubs for Personal Computer (PC) and server chip manufacturing and packaging.

This regional clustering has created a stark bipolarity in the global semiconductor ecosystem. While chipset design and Intellectual Property (IP) remain heavily concentrated in the United States, most manufacturing occurs in Asia. This disconnect creates significant friction within the semiconductor supply chain, making it difficult for other regions to build independent ecosystems. The situation has been further complicated by escalating trade restrictions between the United States and China, particularly around high-end chipsets.

Onshoring Implementation Challenges

Major economies are now treating domestic semiconductor manufacturing as mission-critical infrastructure. The U.S. CHIPS Act provides US$52 billion in subsidies through 2030, while the European Chips Act aims to mobilize €43 billion in investments. Japan has allocated US$6.8 billion, and China's "Big Fund" third phase commits US$48 billion. India has launched a US$10 billion semiconductor program, including a US$5.4 billion Micron facility and Tata Group's first fab in Gujarat.

However, implementation faces significant headwinds. Intel recently delayed its €30 billion German plant and €5 billion Polish facility by 2 years, while shelving smaller projects in France and Italy. These setbacks impact Europe's strategy, with European Union (EU) chip production now projected to reach only 11% of global output by 2030, far short of its 20% target.

While the political will for onshoring is strong, the actual implementation is proving extremely challenging. New fabs take 4 to 7 years to build and become operational, with the development of a complete ecosystem (including wafer supply, dicing, packaging, and testing) taking even longer. A leading-edge fab costs US$15 billion to US$20 billion, with supporting infrastructure adding billions more. Building cohesive teams of specialized workforces and implementing the required collaborative culture to be able to run advanced fabs takes years to establish.

The complexity of the chip manufacturing ecosystem, which relies on a vast network of suppliers and partners, makes local settlement very difficult. Manufacturing costs in the United States and EU are significantly higher than in Asia, primarily due to higher labor costs. While end-to-end automation processes could address labor shortages in these countries, the immaturity of enabling technologies and the complexity of implementing automated systems are slowing down this approach. ABI Research has dedicated many studies to automated manufacturing, for more information, please visit our Industrial & Manufacturing Technologies Research Service and our Industrial, Collaborative & Commercial Robotics Research Service.

Equipment bottlenecks further complicate the onshoring landscape. ASML, the sole supplier of essential Extreme Ultraviolet (EUV) lithography machines, faces unprecedented demand, with current machines costing US$180 million and new generation High-NA systems reaching US$350 million. The next-generation Hyper-NA machines are expected to exceed US$724 million per unit. ASML's 4Q 2023 order backlog of €39 billion likely reflects significant demand inflation as regions rush to secure equipment, potentially creating future overcapacity risks. This equipment constraint has become a rate-limiting factor in fab development, forcing companies to place orders years in advance and carefully coordinate construction schedules.

Impact on Key Players

The shifting landscape creates distinct challenges across the semiconductor industry. Fabless companies like NVIDIA, AMD, and Qualcomm must navigate a complex balance between expanded manufacturing options and increased costs, while managing the risk of lost market access due to U.S.-China trade restrictions.

Integrated device manufacturers such as Intel and Samsung stand to benefit from government subsidies, but face considerable execution risks. Recent delays in European projects highlight the challenges of managing massive infrastructure projects across multiple regions. Any misalignment between promised delivery dates and actual completion can severely disappoint investors and disrupt customers' product roadmaps.

Pure-play foundries, including TSMC and GlobalFoundries, face mounting pressure to geographically diversify their manufacturing footprint, while managing overcapacity risks. TSMC's measured approach to international expansion, with larger investments in the United States compared to more modest commitments in Europe, reflects this delicate balance.

Equipment suppliers must carefully manage capacity expansion, while maintaining key customer relationships amid potential demand inflation risks. The surge in orders creates opportunities for growth, but requires careful long-term planning to avoid future overcapacity.

Economic and Market Implications

The semiconductor cold war's economic impact extends far beyond the immediate industry participants. The massive investments in regional manufacturing capacity drive up semiconductor prices as manufacturers attempt to recoup infrastructure costs, leading to slower adoption of cutting-edge technologies in price-sensitive markets. The competition for skilled talent across regions has intensified, creating significant workforce challenges and increasing operational costs.

The long-term structural changes are even more profound. The industry faces a potential slowdown in innovation as resources are diverted to duplicative infrastructure across regions. Trade restrictions are driving regional technological divergence, while the effective loss of access to China's market-representing up to 25% of the addressable opportunity-significantly impacts industry economics and innovation cycles. The semiconductor-dependent industries, including cloud computing, enterprise digitization, automotive, and consumer electronics, may face increased costs as a result of potential supply chain complexities.

The industry is at the very beginning of the new semiconductor cold war, but its impact has already reverberated through the global economy. The drive for regional independence, while understandable from a security perspective, risks slowing innovation and economic growth. Success in this transition requires careful balancing of national security concerns with the benefits of global collaboration.

Policymakers face the challenge of fostering sustainable ecosystem development beyond manufacturing capacity alone. They should encourage international Research and Development (R&D) cooperation in non-sensitive areas and technology standardization that are essential to maintaining innovation efficiency. Education and workforce development programs must be accelerated to support long-term industry growth, while clear frameworks for technology export controls need to balance security concerns with economic vitality.

Companies across the semiconductor ecosystem must develop manufacturing strategies flexible enough to adapt to evolving geopolitical constraints. This requires maintaining transparent communication with stakeholders about project timelines and challenges, while investing in automation and workforce development to address regional cost differences. Risk management frameworks must evolve to account for new geopolitical and supply chain realities.

The outcome will shape technological leadership and economic competitiveness for decades to come, making it imperative for industry stakeholders to navigate this complex transition with flexibility, realistic planning, and selective international cooperation in non-sensitive areas. The industry must focus on maintaining technological progress, while building more resilient supply chains, recognizing that complete regional independence may be neither achievable nor desirable in this highly interconnected sector.