Everyone knows spilling water on a cell phone is a bad idea, but did you know that it takes more than 3,000 gallons of water to make a cell phone? Water is needed to mine metals, to make the glue and plastic used for assembly and packaging, and to dilute the waste water used throughout the process. That's 10 times more water than the average Chinese person uses every day.
This is especially true of semiconductors, the tiny circuits called chips that power all of our electronic devices, including your mobile phone. Each 30-centimeter-long integrated circuit board that fits the chip in your phone requires at least 2,000 gallons of water to produce. This is because each chip needs to be flushed with ultra-pure water (UPW) -- pure water is considered an industrial solvent -- to remove debris (ions, particles, silica, etc.) from the manufacturing process and to prevent contamination of the chip. It takes 1,400 to 1,600 gallons of tap water to make 1,000 gallons of UPW.
Semiconductors are now the focus of geopolitical competition between China and the United States. If data is the new oil and artificial intelligence (AI) is the new electricity, then it makes sense to view semiconductors as a global resource that creates risks just like any other. We also need to remember the water needed to make them.
While China accounts for only 7.6 per cent of semiconductor sales, its massive planned investment in the sector -- $150bn between 2014 and 2030 -- has raised fears of a "Sputnik moment", China's determination to achieve technological greatness. Despite the surge in funding, water supply remains an important constraint because semiconductor production requires large amounts of water, which China lacks, especially in areas where chip manufacturing is concentrated.
So far, water demand for semiconductor production has not become a major concern in China, which has focused on developing domestic technology to reduce its reliance on global supply chains. While China is a latecomer in semiconductors, a July 2021 study by the Semiconductor Industry Association noted that China is fast catching up thanks to government funding, subsidies and tax incentives for the industry. The newly released 14th Five-Year Plan (2021-2025) has identified semiconductors as one of the top priorities for "cutting-edge technologies," with China's State Council outlining the government's approach to overall development.
Still, even after spending $150 billion in 2014 under the national Integrated circuit plan, China faces major technological hurdles in producing the high-end chips needed for mobile phones, laptops and other high-tech products. Experts expect China's success to be mixed -- Chinese companies will lag behind in some areas, such as cutting-edge contract manufacturing technology and materials, but become competitive in outsourcing assembly and testing (OSAT) and chip design. Global Risks Until 2021 The Taiwan drought highlights the importance of water supply in the global semiconductor supply chain, and the global risks of China's semiconductor policy focus on national security consequences, China's efforts to set global technology standards, China's role in the global supply chain, and cross-strait tensions across the sector. National security: The United States views China's emergence as a major player in the semiconductor industry as a national security risk. A series of blacklists followed. While the Biden administration has focused on improving U.S. domestic capabilities in order to expand restrictions on Chinese semiconductor companies. On June 8, 2021, the U.S. Senate passed the American Innovation and Competition Act, appropriating $50 billion in emergency funding for domestic semiconductor development, which Biden said was critical to keeping the United States ahead of the competition "in the 21st century."
Standard: The US has been pressuring its Allies and partners not to use Huawei technology. That partly speaks to concerns about possible compromises to national security, but also to Huawei's ongoing efforts to set global technical standards for 5G technology. So far, American and European companies have led the way by providing market share and responding to business needs. In its December 2020 annual report, the US Security and Economic Review Board detailed how China's efforts to shape global technology standards reflect Beijing's state-backed industrial policy of privileging Chinese companies in external markets while limiting domestic access and supporting authoritarian norms. Supply chain: Companies from many countries and many world regions are involved in the design and production process. There are economic risks in disrupting the semiconductor industry's global supply chain. For that reason, the Trump administration's actions against Chinese companies have led to shortages of products that require semiconductors, such as semiconductors and automobiles, as international companies scramble to replace S.M.I.C. as suppliers. In April 2021, the Semiconductor Industry Association concluded that it would cost $1 trillion to build a fully self-sufficient local supply chain, which could add 65% to the cost of semiconductors. Some industry experts suggest a more cautious approach to addressing the most important holes in the supply chain, such as the decline in the share of U.S. manufacturing from 37 percent in 1990 to 12 percent today, while others suggest a more comprehensive effort to fill gaps in the entire U.S. production process, including innovation, equipment and packaging. Taiwan, China: Taiwan faces multiple pressures due to its central role in the world's most advanced semiconductor manufacturing. In 2020, Taiwan Semiconductor Manufacturing (TSMC) accounted for 55.6 percent of the global semiconductor contract manufacturing market and produced 92 percent of the world's cutting-edge chips. In response to new US rules on Huawei, TSMC suspended new orders for the company, its second-largest customer after Apple, accounting for 20 per cent of its annual revenue. TSMC has also agreed to build a plant in Arizona.
In addition to all these concerns, in the spring of 2021, usually rainy, subtropical Taiwan experienced its worst drought in 56 years, threatening global semiconductor production. The drought delayed production and led to chip shortages. Semiconductor makers were forced to ration water and truck it in. Worried that climate change will reduce rainfall in the future, TSMC is building a new plant that can reuse industrial water, while other producers are digging their own Wells. Most importantly, Taiwan's 2021 drought drew attention to the importance of water to semiconductor production. Water risk Ensuring sufficient quantities of semiconductors and developing domestic production capacity are not the only challenges China faces. Making sure there's enough water to make semiconductors can be even more daunting. ChinaWaterRisk calculates that a factory producing 40,000 circuit boards would need 4.8 million gallons of water a day, enough to supply a city of 60,000 people.
Amid the unprecedented flooding in central China, it is worth remembering that China as a whole is relatively insecure about its water -- it has only 7 per cent of the world's water, despite having 20 per cent of the world's population. Water is also unevenly distributed. Northern China, where most of the semiconductor industry is located, has only one-fifth of the country's water resources. Even in the face of water shortages, China's semiconductor industry has problems with water use. A 2017 study of water used in the semiconductor industry found that China uses more water than other major producers (Japan, South Korea, Taiwan and the United States) both for the rinsing process and for the electricity needed to produce it. Compared to the United States, China uses three times as much water. In fact, 27% of China's industrial water is absorbed by the semiconductor industry.
The ambitious development of China's semiconductor needs to take into account the water resources needed to achieve this goal, which China lacks. As we saw in Taiwan's drought in 2021, even with top talent and cutting-edge technology, water shortages can derail production.