As the struggle for critical tech supremacy with China escalates, the U.S. and its allies grow increasingly wary about their reliance on China for “legacy” semiconductor chips. Earlier this year, U.S. policymakers called for prompt action to reduce domestic dependence on Chinese-made trailing-edge or commodity chips. Sharing this concern, the U.S. Department of Commerce launched a survey to map the supply chains for such chips in January 2024. This issue was also a prominent focus in the April U.S.-EU Trade and Technology Council session, where both partners committed to identifying supply chain distortions caused by Beijing’s subsidized production of legacy chips. Such developments reflect a growing consensus in Washington and Brussels that China’s control over legacy chip supply chains poses serious economic and national security risks.
Legacy chips are critical components for a vast range of applications and products, from consumer electronics and vehicles to industrial equipment, military systems, and other critical infrastructure like power grids. To borrow parlance used in the U.S. CHIPS and Science Act, semiconductor chips fabricated on a process older than 28 nanometers are categorized as “legacy semiconductors.” In contrast, today’s leading-edge chips (the chips that power our smartphones and the GPUs that power AI tools like ChatGPT) are fabricated on more sophisticated 5 or 3-nanometer process nodes. While legacy chips lack the raw processing power of newer leading-edge chips, they are also vastly cheaper to produce. However, producing these chips profitably is also dependent on shipping huge volumes, with foundries operating with razor-thin profit margins.
Different perspectives abound about whether the U.S. and its allies are justified in their worries about the “overcapacity” of Chinese legacy chip foundries and the speed and scale of this capacity buildup. If China were to flood the market with cheap, subsidized chips, Western suppliers would not be able to compete on price, and therefore, it could hollow out part of the semiconductor industrial base in those countries. At the other extreme, China could retaliate against widespread sanctions by denying market access to legacy chips that are vital for many industries and, indeed, the way of life in the developed world. Finally, since these chips end up in sensitive or strategically important applications like aerospace, defense, and infrastructure, countries like the U.S. will find it difficult to stomach the idea that these are being produced by a geopolitical adversary that could potentially compromise national security through undetectable backdoors on these chips.
China’s dominant position in the supply chain for legacy chips is a result of several factors. Historically, lower labor and production costs have allowed Chinese suppliers to offer highly competitive pricing in the global market. Alongside this, a large and rapidly growing domestic market for industrial and consumer goods that rely on these chips ensured that domestic foundries serving local demand achieved economies of scale. However, the primary cause of concern for the West is Beijing’s massive investment in domestic chip manufacturing capacity through subsidies and industrial policy.
China’s goal of achieving semiconductor self-sufficiency ironically accelerated after the U.S. imposed sanctions affecting its ability to access advanced chips and chip-making equipment. Chinese firms already produce around 60 percent of the world’s legacy chips, and Beijing has announced support for major capacity expansions for facilities producing these chips over the next few years. This strategy mirrors those that Beijing has successfully used over decades to gain a significant advantage in the global value chains for goods like solar panels and electric vehicles.
For the reasons mentioned earlier, the United States and its allies are somewhat constrained in their selection of effective policy responses. Tighter export controls on chip manufacturing equipment will likely not significantly affect legacy chip production since Chinese facilities have had years to build domestic capacity in the technologies necessary for their fabrication. Imposing high tariffs on Chinese-made chips could raise costs massively for downstream industries in the West that use them as intermediate components. This could also invite retaliation in the form of restrictions on access to other important resources where Chinese suppliers dominate the market, such as critical minerals. Therefore, sanctions and denial regimes like the ones that may be effective at slowing China’s advances in making leading-edge chips are unlikely to efficiently achieve the West’s goals of reducing dependence on Chinese legacy chips. They don’t fundamentally solve the problem of China’s entrenched advantages in legacy chip manufacturing.
This is where India could potentially play a key role as an alternative production base for legacy chips. Friendshoring supply chains for legacy chips to countries like India is likely the most feasible long-term solution for the West.
India has already embarked upon its semiconductor journey, with sights set firmly on becoming a major player in the manufacturing and assembly of legacy chips. India’s cost advantages in labor and infrastructure, combined with government incentives, will serve to keep legacy chips affordable for price-sensitive markets globally; an area where it would be uncompetitive for Western countries to build up huge domestic capacity. Upstream linkages to its large pool of skilled chip design and engineering talent and downstream linkages to multiple slated assembly and packaging facilities will ensure that global clients looking for end-to-end services for their legacy chip requirements will find an entire ecosystem that can cater to their needs. Further, India is geopolitically aligned with the U.S. and the other Quad countries, and therefore, chipmakers would face less political risk than in China.
Of course, India’s rise as a chip manufacturing power, even in legacy nodes, will not happen overnight. Its first commercial fabrication facility has only recently broken ground. But it is in the West’s own interest to accelerate India’s transformation into a semiconductor power focused on legacy chips. Tangible, targeted measures like preferential market access for India-made chips, technology transfers, and talent mobility programs can be undertaken through initiatives like the iCET and platforms like the Quad’s Semiconductor Supply Chain Initiative. This exercise will be played out in decades, but such is the nature of geopolitics and the realities of a complex and fragmented global value chain.