Competitive Drive

EVs and semiconductors form the basis of the next U.S.-China superpower tech race

As the two largest economies in the world, with opposing political systems, the U.S. and China have developed a superpower rivalry that can at times be fraught with tension. At other times, it can be a fruitful relationship, as the U.S. is China’s top trading partner and China is the third most important trading partner for the U.S. Just in the last few years, the countries have been entangled in a trade war then they had high-profile disputes over the origins and spread of Covid-19. Both had to scramble to rethink policy when it came to supply chains after the pandemic shut down factories in China for long stretches and U.S. companies sought alternatives to prevent supply chain turmoil in the future.

The next conflict lies in EVs. It encompasses not just manufacturing the EVs themselves, but in the batteries for them and control over the raw materials those batteries rely on. There will also be competition over semiconductors, one of the biggest supply chain disruption stories from the pandemic. Caught in the middle is Taiwan, producer of most of the world’s semiconductors and a key U.S. ally for which the possibility of Chinese invasion looms as an existential threat.

China’s EV Jump-start

The passenger car industry was virtually nonexistent in China into the mid-1980s, and in the 1990s several domestic manufacturers began rolling out personal vehicles. Recognizing they were too far behind to compete in the gas-powered market on the world stage, Chinese automakers have spent the last couple of decades focused on EVs and EV batteries. They found EVs much easier to produce than cars with internal combustion engines and they developed a robust battery market, with two thirds of the world’s EV batteries made in China.

“Over the last 20 years, they’ve improved the quality,” Chris Tang, distinguished professor at UCLA’s Anderson School of Management and a scholar of global supply chain management, told BOSS. “So now the No.1 brand of EV is BYD, and now they’re selling in Europe. They have overtaken Tesla in terms of the number of units being sold in the world.”

China enjoys a head start in EV manufacturing, and crucially controls 80% of the cobalt supply in Democratic Republic of the Congo, the world’s leading source of battery grade cobalt, a key ingredient in current lithium-ion EV battery tech. Crucially for the semiconductor industry, China also controls more than 90% of the world’s gallium and 60% of the world’s germanium. Gallium is an ingredient in radio communication equipment, and germanium goes into fiber optics and solar cells.

“Beijing likely chose gallium and germanium because both are important for semiconductor manufacturing,” Felix Chang, a senior fellow at the Foreign Policy Research Institute, told MIT Technology Review. “That is especially true for germanium, which is prized for its high electrical conductivity. Meanwhile, gallium has unusual crystallization properties that lead to some useful alloying effects.”

U.S. Growing Pains

As the U.S. looks to ramp up EV production and adoption — the Biden administration’s stated goal is that by 2030 half of new car sales in the country will be EVs — it faces challenges. One is affordability. The average new EV in the U.S. sells for just under $60,000. That remains significantly more than the average cost of a new gas-powered car, though EVs are quickly closing the gap. One way to make EVs more affordable is with tax credits, though the rules set forth in the Inflation Reduction Act limit the EV models that are eligible for the full $7,500 federal tax credit.

“If the U.S. is really trying to speed up EV adoption, they need to make more affordable EVs available to consumers,” Tang said. “Right now, they’re blocking Chinese-made EVs, I understand that, but I think they should allow the Nissan Leaf and also some of the Hyundai or Kia models that are actually made in the U.S. eligible for the tax credits.”

Mineral sourcing requirements have made such models ineligible for credits.

Another challenge for EV adoption in the U.S. is charging infrastructure. An agreement between Tesla, Ford, and GM that allows the latter two automakers’ EVs to use Tesla’s Supercharging stations (with an adapter) should boost demand given the unreliability of the Combined Charging System network and that range anxiety is a key mental hurdle for drivers concerned about switching to an EV. An S&P Global Mobility assessment concluded that the U.S. would need to quadruple its number of charging stations from 2022 to 2025 and grow more than eight-fold by 2030 to meet demand forecasts.

Making enough semiconductors for EVs won’t be a problem, Tang said, because those chips are not the high-end nanochips Taiwan has the market cornered on. Domestic battery production is another story, he said, given the paucity of lithium reserves. As a result, the U.S. is looking to alternative sources, such as hydrogen, sodium-ion, and solid state batteries, which could dramatically improve ranges if they prove durable enough for EVs.

“The technology is evolving,” Tang said. “It’s hard to predict how it’s going to play out in the long run.”

Bargaining Chips

It’s not just cars that use semiconductors, as the industry was painfully reminded during the pandemic, when automakers had to halt production or ship out unfinished vehicles. With the ubiquity of smartphones and IoT devices, we rely on semiconductors for a wide variety of gadgets in our lives.

Taiwan-based TSMC, which makes more than half of the world’s semiconductors, and No. 2 chipmaker Samsung are largely back on track after the pandemic, but geopolitical tensions still create friction in terms of production volume, Tang said. A prolonged restriction on gallium and germanium exports by China — prompted by the U.S. blocking China from buying extreme ultraviolet lithography technology — could affect TSMC and Samsung in the long term. The EUV tech is important for making high-end nanochips useful for items ranging from smartphones to medical devices to military jets.

TSMC is keeping its most advanced chip technology in Taiwan as a defense strategy to ensure the U.S. has an interest to protect Taiwan. It is, however, building manufacturing facilities for lower-end chips in Arizona slated for operations in 2024 and 2026. Intel is building plants for low-end chips in Ohio and Arizona. Those ought to keep U.S. automakers at least well-stocked for an anticipated EV boom.

Have the lessons of the pandemic made for better supply chain management in the long run?

“Right now, it’s a bit rocky,” Tang said. “I think the U.S. is trying to build a resilient supply chains for EVs and semiconductors, but then I think that the current disputes and the tension with China make things complicated because China is still holding a lot of supplies of rare earths, minerals, and metals.”

Innovation in areas like battery tech could quickly change that dynamic, though.

“We never know what the long run is going to look like.”