Chronicle of the Middle East and North Africa

Arab Gulf States Enter Microchips Race

The microchips industry can catalyze Arab Gulf countries' transition to a productive industrial economy, supporting technology and industrial sectors, and strengthening their global position.

Microchips Race
Close-up of an electronic circuit board showing microchips and components. TEK IMAGE / SCIENCE PHOTO LIBRARY / ABO / Science Photo Library via AFP

Ali Noureddine

This article was translated from Arabic to English

Microchip production has become a focal point in global trade wars in recent years, particularly between the United States and China. These chips, spanning different degrees of sophistication, comprise the backbone of the electronics industry, regulating the flow of electrical signals and electron movements according to the programmed specifications of each product.

Consequently, the availability of these chips dictates the potential advancement across smart industries, from smartphones and computers to children’s toys, automobiles, aircraft and even guided missiles. As artificial intelligence technologies continue to advance, industry leaders around the world are increasingly realizing the importance of advanced models of microchips.

The Arab Gulf states are not far behind in this global race; rather, they recognize that developing this industry aligns with their objectives of economic diversification and diminishing reliance on oil and gas revenues.

Moreover, they understand that nurturing this sector would facilitate the establishment of supply chains crucial for the advancement of other electronics and technology industries.

Importantly, the Gulf countries boast the necessary capital for developing this sector, characterized by substantial industrial investments and sophisticated infrastructure requirements. The escalating global need for these products serves as a compelling incentive for Arab Gulf states to venture into this costly industry.

Reasons for the Global Race to Produce Microchips

Microchips, especially advanced and modern models, are currently coveted as rare commodities in global markets, characterized by a significant demand-supply gap.

Consequently, contemporary trade conflicts often revolve around industrialized nations vying for dominance in the supply chain of these essential components. This competition manifests through strategies such as internal production development or imposition of restrictions to hinder competitors’ access, a trend that is exemplified by the ongoing tensions between the United States and China.

In numerous instances, these trade disputes are driven by efforts to control scarce raw materials crucial for chip manufacturing or to amass substantial stockpiles of these resources.

To understand the scarcity of microchips in global markets, it’s important to highlight the industry’s reliance on a set of rare and limited-production raw materials, such as tungsten, tantalum, cobalt and gallium. This scarcity of raw materials inherently restricts microchip production.

At the same time, microchip production incurs substantial manufacturing costs due to the reliance on highly sophisticated and expensive technologies and equipment. Consequently, production capacity remains confined to a select group of international companies which possess extensive experience, advanced technology and substantial capital.

With limited production capacity, global markets have seen a consistent rise in demand for advanced microchips, mirroring the advancement of smart industries and the surging need for electronic products.

Consequently, the competition among industrialized nations for control over microchip supply chains symbolizes their battle for dominance in the production of various electronic and smart goods. It’s no exaggeration to say that the pursuit of microchips is tantamount to a race for shaping the future of the global economy.

Industrial Race and Trade War Types

In recent decades, the United States’ stake in the microchip industry has dwindled from 37 per cent in 1990 to a mere 12 per cent today. This substantial decline has been to the benefit of countries such as Taiwan, now commanding 63 percent of the global industry, and South Korea, with its share rising to 18 percent. These shifts, spanning four decades, stem from the comparatively high production costs in Western nations versus those in Southeast Asian countries.

Beginning in 2020, Western nations, notably the United States, have become increasingly alarmed by the implications of these trends on their strategic interests. This concern heightened as the world grappled with a severe shortage in microchip production relative to demand. At the same time, China renewed its focus on regional disputes, particularly concerning the status of Taiwan, the current epicenter of microchip manufacturing.

Amid escalating discussions surrounding a potential Chinese invasion of Taiwan in the coming years, the United States has initiated measures to mitigate the potential disruption to microchip supply chains. This concern arises from China’s keen interest in Taiwan, particularly due to its leading position in microchip manufacturing, notably through the renowned company TSMC.

The trade war concerning the microchip market grew more pronounced in 2020 with the imposition of U.S. restrictions on Chinese company Huawei aimed at curtailing its access to cutting-edge microchips.

Furthermore, the United States has implemented substantial tax breaks and provided financial incentives to attract specialized microchip manufacturing companies. Leveraging these incentives, the Biden administration was able to persuade TSMC, a Taiwanese firm, to establish new manufacturing facilities in Arizona. This strategic move aims to diversify the company’s supply chains away from Chinese influence and safeguard against potential disruptions stemming from tensions surrounding Taiwan.

For similar reasons, numerous other industrialized nations have successfully attracted branches, factories and supply chains from the Taiwanese giant TSMC by offering a variety of incentives, deals and infrastructure. One such example is Japan, which in February 2024 committed to covering 40 per cent of the expenses for establishing a new TSMC facility in the Japanese town of Kikuyu.

Similarly, in August 2023, Germany secured the first TSMC factory in Europe after the European Union allocated 43 billion euros in public investments to bolster the sector.

In response to these moves, China has escalated military and diplomatic pressures surrounding Taiwan. In addition, China has intensified the trade war by imposing restrictions on the export of essential materials like germanium and gallium, which form critical components in microchip manufacturing.

Given that China supplies over 60 per cent of the world’s germanium and 8 per cent of gallium, such restrictions have significant implications for global chip production. Concurrently, Chinese firms have engaged in a global scramble to acquire and stockpile microchips unaffected by U.S. restrictions or to invest in equipment that facilitate chip manufacturing.

Several influential players have emerged worldwide amid this trade dispute. For instance, the Dutch company ASML holds near-total dominance in the production of equipment used in manufacturing state-of-the-art microchips.

American corporations such as Nvidia, Intel and Qualcomm similarly dominate chip design prior to production. Consequently, China has encountered obstacles in enhancing the precision and quality of its chip manufacturing due to the adherence of these Western companies to U.S.-imposed restrictions.

Arab Gulf Countries and the Race to Produce Microchips

Amid the escalating global demand for microchips and a frantic race among industrialized nations to bridge the gap between supply and demand, Arab Gulf countries have discerned a promising opportunity to join the fray.

The Kingdom of Saudi Arabia made a decisive foray into this arena in March 2022 with the launch of the Saudi Semiconductor Program, marking a pioneering initiative in the Middle East.

Since its inception, the program has been diligently aligning Saudi academic curricula with the investment prospects within the microchip industry, thereby cultivating a skilled workforce tailored to the industry’s requirements.

Less than a year after its inauguration, the Kingdom entered into a partnership with the China Electric Power, Equipment and Technology Corporation to establish a fully integrated center dedicated to the design and fabrication of microchips.

Within the framework of projects slated for the city of NEOM, Saudi Arabia initiated discussions with the Taiwanese conglomerate Foxconn to establish a $9 billion facility aimed at producing microchips and components for electric vehicles.

As of early 2024, the Saudi sovereign fund announced its ambitious plan to inject substantial investments into the microchip industry, with the objective of fortifying the requisite supply chains vital for the electronics and technology sectors.

This dovetails with Saudi Arabia’s overarching strategy, which since 2021 has sought to attract major technology, electronics and programming companies to establish centers and branches within the kingdom.

Similarly, the United Arab Emirates ventured into this domain by focusing on the cultivation of skilled human capital, notably through a specialized program developed by Khalifa University in Abu Dhabi. Building on this foundation, Next Orbit Ventures Emirati, in collaboration with Tower Semiconductor Israel, embarked on a new venture to invest $3 billion in microchip manufacturing.

It is worth noting the announcement by the Emirati company Mubadala of its intent to invest approximately $4 billion in the microchip industry, leveraging its ownership of GlobalFoundries, the world’s third-largest chip manufacturer.

For its part, Qatar also joined this endeavor by investing in joint industrial ventures with Turkiye, capitalizing on the technology and electronics industries’ supply chains within the Turkish market.

In June/July 2023, the Qatar Investment Authority – the Qatari sovereign fund – disclosed its acquisition of a 5 percent stake in the “Kokusai Electric” company, a Japanese electronics manufacturer specializing in chip production.

This strategic move signals Qatar’s ambition to penetrate the chip manufacturing sector and ensure access to cutting-edge chip production technologies in the foreseeable future.

Competitive Advantages in the Gulf Region

Arab Gulf countries have distinct competitive advantages that they are leveraging in order to compete in various sectors.

In recent years, Gulf investment funds have amassed substantial financial reserves, serving as a crucial capital source for fostering growth, particularly in industries related to microchips. This is evident in the significant roles currently played by sovereign funds in Saudi Arabia, Qatar and the UAE in funding microchip-related industrial projects.

At the same time, the Arab Gulf states, especially Saudi Arabia and the United Arab Emirates, are engaged in a race to attract regional and global technology and electronics companies to establish their operations within their territories. Furthermore, these countries are vigorously competing for foreign investments in these specific sectors, indicating the robustness of their technology markets poised for microchip production.

Looking ahead, the Gulf countries are set to establish complete supply chains necessary for technological industrial activities through local microchip manufacturing.

On the political front, Gulf countries are delicately balancing their economic ties with China alongside their strategic relations with Western powers such as the United States and India. This balanced approach has facilitated positive investment partnerships in developing the microchip industry with both China and the Western nations.

In the future, Arab Gulf countries stand to benefit from these relationships to align their microchip manufacturing with the demands of industrial companies in the West, China and India through long-term partnerships and mutual understandings.

The microchip industry has the potential to catalyze the transition of Arab Gulf countries toward a productive and industrial economy, aligning with their strategic economic plans and visions. This industry could serve as a foundational support for other technology and industrial sectors, bolstering Gulf countries’ position in the global economy.

Importantly, these ambitions are complementary to those of Western partners, who seek to expand microchip production and diversify their sources, particularly amid concerns regarding Chinese influence over Taiwan.

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