In MIT Technology Review's view, the year ahead is already a tough one for semiconductor companies. As we all know, the chip industry is defined by cycles of rising and falling demand, and growth is expected to slow this year as demand for consumer electronics stagnates.

But concerns about the economic cycle - and the challenges associated with making more advanced chips - are easily overshadowed by geopolitics.

In recent months, the U.S. has imposed its broadest-ever restrictions on which chips can be sold to China and who can work for Chinese companies. At the same time, it has targeted the supply side of the chip industry, introducing generous federal subsidies to lure manufacturing back to the United States. Other governments in Europe and Asia, where major chip companies are based, have introduced similar policies to maintain their own positions in the industry.

As these changes continue to take effect in 2023, they will create new uncertainty in an industry that has long relied on a globally distributed supply chain and considerable freedom to decide who to do business with.

What do these new geopolitical machinations mean for the more than $500 billion semiconductor industry? Both the MIT Technology Review and Nikkei reports share their perspectives, so let's synthesize them as follows.

Chip glut to persist

According to Nikkei, industry analysts say the semiconductor glut that emerged in the second half of last year is not expected to ease until at least this fall, but the shortage affecting the automotive industry could last a full year.

The oversupply of memory chips is particularly evident in smartphones due to falling demand for the devices.

"The industry is experiencing the most severe imbalance between DRAM and NAND [memory chip] supply and demand in the last 13 years," Micron Technology's Sanjay Mehrotra said during an earnings call last month. The company reported a 47 percent drop in revenue for the September-November quarter compared with the same period last year.

From an average estimate of analysts' findings, for smartphones, the chip oversupply problem is not expected to ease until the fourth quarter of this year. For personal computers, the oversupply is expected to peak in the third quarter and then gradually ease.

Meanwhile, according to analysts, the oversupply of data center semiconductors will likely continue into the first quarter of this year. Tech giants in the U.S. and China are scaling back investments due to weak advertising revenue, and the impact is spilling over into demand for data center chips.

The Nikkei lists the results of analyst surveys from 10 sources, including research and trading firms. Respondents were asked to rate the level of oversupply and undersupply on a five-point scale.

Considering that semiconductors take months to manufacture, current supply is heavily influenced by production volumes starting in mid-2022. Micron, along with Japanese chipmaker Kioxia Holdings and other suppliers, are focusing on correcting inventories, and producers have been cutting production sharply since October.

But those efforts haven't kept pace with falling demand. Inventories of memory and other semiconductors are swelling in the supply chain.

A survey conducted by the Japan Semiconductor and Component Distributors Association in December showed that the percentage of members reporting an oversupply was 64 percentage points higher than those in short supply.

That's an increase of 38 percentage points over a survey conducted by the association in September. Inventories at companies that make finished goods from semiconductors are also hovering at high levels.

TSMC CEO CC Wei said on an earnings call in October that the world's largest chip foundry, TSMC, expects it will take until the first half of 2023 to rebalance inventories to "healthier levels.

In contrast, the automotive industry still faces a shortage of semiconductors, even with shorter lead times for some products.

In a report, CoreStaff, a Tokyo-based semiconductor trading company, said, "If individual semiconductors or components are missing, production cannot move forward, so there is no choice but to keep the rest of the components in inventory."

Ensuring adequate supplies of semiconductors that rely on older production technologies remains a challenge. Automotive semiconductors, in particular, are expected to remain in short supply throughout the year.

Not only are automakers again increasing production, but the increasing number of semiconductors required per vehicle is also boosting the industry's demand for chips. The average electric car requires $1,600 worth of semiconductors, while gasoline-powered vehicles require about $500.

Although demand for automotive chips is rising, analysts believe that the supply of power semiconductors for current control and analog semiconductors for power management will remain tight through 2023.

Macnica Holdings, a major Japanese trading company, said, "Capital investment in these components remains low, and supply is unlikely to increase rapidly."

According to a summary by U.S. chip supplier Sourcengine, delivery time estimates for power semiconductors have increased from 31 to 51 weeks at the end of May to 39 to 64 weeks in November.

Both Toyota and Honda fell short of planned production levels in December due to chip shortages, and both companies will adjust some of their Japanese plant operations this month. Yuichi Koshiba of Boston Consulting Group said the downward pressure on auto production is likely to continue due to limited supply of some chip products.

Some major automakers say parts supply will not return to normal until 2024.

If the global economic slowdown intensifies, it will take longer to clear inventories, thus posing a greater risk of headwinds to the chip market. Semiconductor companies have expanded production capacity, raising concerns that the supply-demand balance will take longer to restore.

With government support, companies such as Intel and TSMC plan to start operating new U.S. chip factories in 2024. Micron and other companies have also announced large-scale investment plans.

While investment in long-term demand growth is expected to be essential, capacity will rise significantly. If the pace exceeds the recovery in demand, the balance of supply and demand for cutting-edge products may be further tightened.

"Local production" affects the chip supply chain

In the view of MIT Technology Review, the past year or so to influence the chip industry, "local manufacturing" will continue to influence the industry. For example, the U.S. through CHIPS and Science Act commitment in 2022 to invest $ 52 billion in semiconductor manufacturing and research. Of that amount, $39 billion will be used to subsidize domestic fabrication. Companies will be able to formally apply for the funding in February 2023, and information will be released on a rolling basis. 

Some of the money could be used to help companies with plants in the U.S. make military chips; the U.S. government has long been concerned about the national security risks of sourcing chips from abroad. "It's possible that more and more manufacturing will resume within the United States with the goal of rebuilding the defense supply chain," said Jason Hsu, a former Taiwan lawmaker who is currently a senior fellow at Harvard's Kennedy School and is studying the intersection of semiconductors and geopolitics. Hsu said defense applications may be one of the main reasons Taiwan chip giant TSMC decided to invest $40 billion to make 5-nanometer and 3-nanometer chips - the two most advanced generations of chips available - in the United States. 

But the "repatriation" of commercial chip production is a different matter. Most chips for consumer products and data centers and other commercial applications are made in Asia. Shifting manufacturing to the U.S. could drive up costs and reduce the commercial competitiveness of chips, even with government subsidies. in April 2022, TSMC founder Chang Chung-Mou said chip manufacturing costs in the U.S. are 50 percent higher than in Taiwan. 

"The problem is that Apple, Qualcomm and Nvidia - who will buy chips made in the U.S. - will have to figure out how to balance those costs, because those chips will still be cheaper to source in Taiwan. " said Paul Triolo, senior vice president at business strategy firm Albright Stonebridge.

If chip companies can't figure out how to pay for higher U.S. labor costs or continue to receive government subsidies, which are hard to guarantee, they will have no incentive in the long run to continue investing in U.S. production.

And the U.S. isn't the only government that wants to attract more chip factories. Taiwan passed a subsidy bill in November that gives chip companies significant tax breaks. Japan and South Korea are doing the same thing.

Woz Ahmed, a U.K.-based consultant and former chip industry executive, expects EU subsidies to be in place by 2023 as well, although he said they may not be finalized until next year. "They will take longer than the U.S. because of the bargaining among all the member states," he said.

Coping with "New Restrictions" from the U.S.

The U.S. imposed controls on the export of advanced chips and technology in October, marking an escalation of the stranglehold on China's chip industry. What was once a ban on the sale of such advanced technology to a few select Chinese companies was expanded to apply to virtually all entities in China. There are also novel measures, such as restrictions on the sale of necessary chip manufacturing equipment to China.

These policies place the industry in uncharted territory. What chips and manufacturing technologies would be considered "advanced"? If a Chinese company produces both advanced and older generation chips, can it still source U.S. technology for the latter? 

The Commerce Department answered some of these questions in a question-and-answer session in late October. Among other things, it clarified that less advanced chip production lines are exempt if they are located in a separate facility. But it's unclear how and to what extent these rules will be enforced. 

We will see this happen in 2023. Chinese companies may be looking for ways to circumvent the rules. At least one company has already tried to make its chips look less advanced. Non-Chinese companies will also have an incentive to find workarounds - the Chinese market is huge and lucrative. 

"If there aren't enough law enforcement officers on the ground, or if they can't get access, once people realize that, there will be a lot of rule violations," Ahmed said.

Some experts believe the U.S. could impose more restrictions on China this year. Those rules could take the form of more export controls, a vetting process for investments outside the United States or other initiatives targeting chip-related industries such as quantum computing. 

Not everyone agrees. Chris Miller, a professor of international history at Tufts University, thinks the U.S. government may take a break and focus on current restrictions. "I don't anticipate a significant expansion of chip export controls [in 2023]," Miller continued. "The Biden administration has spent most of its first two years in office enacting these restrictions. I think they want the policy to stick and that they don't have to make changes to it for some time."

How China will respond

So far, aside from some diplomatic statements and a legal dispute filed with the World Trade Organization, Beijing has done little to respond to the new U.S. export controls, which are unlikely to have much of an outcome. 

Will there be a more dramatic reaction? Most experts say no. China doesn't seem to have a big enough advantage in the chip industry to make a major push back against the U.S. with its own trade restrictions. "The Americans have enough core technology that they can [use it] against people down the supply chain, like China. So, by definition, that means [China doesn't] have the tools to retaliate," said John Lee, a principal at East-West Futures Consulting. 

But China does control 80 percent of the world's capacity to refine rare earth materials, which are critical to making military products such as fighter jet parts and components for everyday consumer devices such as batteries and screens. Restricting exports could provide China with some leverage. The Chinese could also choose to sanction some U.S. companies, whether in the chip industry or not, to send a message.

But so far, when it comes to semiconductors, China doesn't seem interested in going the scorched earth route. Miller said, "I think Chinese leaders realize that this approach will be equally costly to both China and the United States." The current Chinese chip industry cannot be separated from the global supply chain, with lithography, core chip IP and wafers all dependent on companies in other countries, so aggressive retaliation to avoid further poisoning the business environment "is probably the smartest strategy for China to start with," he said. He said. 

China may not hit back at the U.S., but focus more on bolstering its domestic chip industry. China reportedly could announce a support package for domestic companies as early as the first quarter of 2023. Providing generous subsidies is a tried-and-true approach that has helped propel China's semiconductor industry over the past decade. But there remains the question of how to effectively allocate the funds and distribute them to the right companies.

Where will Taiwan go from here?

The U.S. doesn't make the call. To lift its chip technology embargo, it must work closely with governments that control key processes for chip manufacturing that China cannot replace with domestic alternatives. These include the Netherlands, Japan, South Korea and Taiwan.

That's not as easy as it sounds, because despite their differences with China, those places also have an economic interest in maintaining trade ties.

The Netherlands and Japan have reportedly agreed to codify some of the U.S. export control rules into their countries. But the devil is in the fine print. "There's definitely support for the Americans in that regard," said Lee, who is based in Germany. "But there are also quite strong voices that believe it's not in Europe's interest to simply follow the Americans and walk in lockstep on this." Peter Wennink, CEO of Dutch lithography equipment company ASML, has said his company "sacrifices" for export controls while U.S. companies benefit.

Over time, the rift between countries and regions is likely to grow. "The history of these technology restriction alliances shows that they become complex to manage over time and require active management to keep them on track," Miller said.

Taiwan is in a particularly awkward position. Its economy is closely tied to China's because of its geographical proximity and historical ties. Many Taiwanese chip companies, such as TSMC, sell products to Chinese companies and build factories there. in October, the United States granted TSMC a one-year waiver of export restrictions, but the waiver may not be renewed after it expires in 2023.

"So Taiwanese companies have to hedge against the uncertainty," Hsu said. That doesn't mean they will exit all operations in China, but they may consider investing more in overseas facilities, such as TSMC's two chip plants planned for Arizona. 

With Taiwan's chip industry moving closer to the United States and forming alliances around the U.S. export control system, the once-globalized semiconductor industry is one step closer to being ideologically bounded. "In effect, we're going into two chip worlds," Hsu said, adding that the United States and its allies represent one of those worlds and the other includes China and various countries in Southeast Asia, the Middle East, Eurasia and Africa. China is pushing for its technology to be adopted, Hsu said, adding that countries that have traditionally relied on Chinese financial assistance and trade agreements with China are more likely to embrace Chinese standards when building digital infrastructure.

While it will unfold very slowly, Hsu said, this decoupling seems to be starting to be inevitable. Governments need to start making contingency plans to deal with this, he said: "Plan B should be - what's our China strategy?"