Beyond semiconductors – The geopolitics of technology and innovation

For the rest of the world, including global businesses, the impact of this tech race goes beyond superpower borders and the technology sector, according to John Lee, Director at East West Futures Consulting: “It has created the most complex technological ecosystem that humankind has ever built.”

Lee was speaking on a webinar with Zurich’s Penny Seach, Group Chief Underwriting Officer and Alex Todd, Chief Underwriting Officer, Asia Pacific, in a discussion that was moderated by Matt Holmes, Zurich’s Group Head of Political and Government Affairs.

The webinar heard how this ecosystem is inextricably linked to global politics and power play, with unpredictable consequences for global trade, supply chains – and ultimately economic growth.

For risk professionals and insurers navigating this fast-moving landscape, understanding how the geopolitics of technology impacts their value chain has never been more important.

Choke points are being exploited

The global technology supply chain extends well beyond chip production, and includes design, raw materials, highly specialized machinery, packaging and final product assembly. It is complex and geographically distributed, according to Lee, making it possible to exploit choke points – systemically significant bottlenecks – along the tech stack.

The US and China influence two of the most geopolitically significant choke points. US companies lead in the design of leading-edge chips that China requires to further its advanced computing ambitions – a vulnerability that America has targeted with export controls. However, China seems to be making progress towards closing this gap.

Meanwhile, China dominates access to critical minerals such as rare earths, nickel and graphite that are crucial for semiconductor production and a range of industrial uses. Moreover, it is also critical for the assembly and packaging of older-generation chips used in a large range of everyday industries.

Taiwan, with its near monopoly on manufacturing high-end semiconductors, continues to be a critical concentration in global supply chains. This is seen as a particular dependency for China given its targeting by US export controls.

Choke points are a major vulnerability for global supply chains – and a potential source of geopolitical power for the country or region that controls them. This was seen during Covid when the supply of front-end fabrication of chips was disrupted due to supply chain , and today, we see similar effects unfolding from the Nexperia ‘chip crunch’.

This web of interdependencies and choke points is a key feature of the current geopolitical landscape, observed Lee:

“This is an example of the way this industry is organized: one Taiwanese company has a near monopoly on the leading edge in so-called front-end production of these chips, whereas much of the back-end production happens in China.”

The application layer: superpowers diverge

The design and physical manufacturing of semiconductors and chips is just one layer of the technology ecosystem, explained Lee. The second component – the application layer – sits on top and determines how the chips will generate effects in the real world, he continued.

AI deployment is a significant and emerging feature of the application layer. Here we see a divergence in goals between the US and China. The leading US actors have devoted much effort to “developing artificial general intelligence,” said Lee. Led by the US “hyperscalers” such as Google and Amazon and leading AI development labs like OpenAI, these efforts have aspired to create humanlike AI for general application.

By contrast, Chinese policy and industry has been more oriented towards the use of advanced robotics, embodied AI and more efficient and sophisticated manufacturing processes. In car manufacturing, for example, recent reports suggest that a Chinese OEM redeveloped a vehicle for the European market in just six weeks, possibly with the aid of AI tools.

But this dichotomy should not be oversimplified, advised Lee. The superpowers’ competing AI development orientations sit on top of a complex, integrated global ecosystem of software and hardware that cannot easily be disentangled, although there are growing points of divergence between the Chinese ecosystem and its global counterpart.

“It is a technology stack, a vertical, that includes everything from the way that the chips are made all the way to the applications at the top, which has developed as a global industry,” said Lee.

AI’s potential has yet to be realized or scaled in way that is truly transformative by either China or the US, he added. Research suggests that data centers equipped to handle AI processing loads will require over $5 trillion in capex in the next five years – a huge investment without commensurate returns on investment that are yet in evidence. Whether it delivers a return or proves a “millstone that drags down the US and potentially the entire world economy,” is yet to be seen.

Which superpower holds the advantage?

Global geoeconomic powerplay sits at the heart of developments, with the superpower rivalry being both a cause and a consequence of the technology race. “We’ve seen some very clear evidence of how either side intends to exert power and leverage over the other,” observed moderator Matt Holmes. “We shouldn’t be expecting a quick resolution in their stand-off.”

Returning to choke points, Lee believes that China’s position is potentially stronger. “There is a better chance that the Chinese will break their choke point before the US community breaks theirs,” he said.

China already has extensive domestic capacity across most parts of the tech stack, areas although lagging technically in key areas such as lithography. Chinese industry is rapidly developing alternatives even if they are less efficient, he explained: “We are already seeing this reflected in the way that Chinese companies are still able to deliver progress.”

By contrast, it will take years for the US and other advanced economies to build mineral processing capacity outside China, creating competition among them for limited supplies. China’s dominant position in minerals thus potentially poses a more immediate, practical constraint on the rest of the world than US export controls do on China.

Power generation forms a new competitive axis

Energy power and data capacity is also emerging as a key dimension of the tech race, noted Lee. Data centers have extremely high energy demands and countries that can scale their infrastructure quickly will be at a competitive advantage.

Managing increased grid demand is technically complex. Unlike traditional energy demand which ebbs and flows throughout the day, data centers continually run at peak capacity.

There are also social and political constraints to rapid data center expansion, especially in Europe and America. “We’re starting to see political backlash at US state elections which have been fought on the impact of data center expansion, electricity prices, land availability and water resources,” said Lee.

Overall, the Chinese regulatory environment is more facilitative of rapid expansion, and its generation capacity is rising faster through its adoption of renewable energy combined with very high usage of coal and nuclear.

However, the US response is not constrained to national borders. Middle Eastern countries with abundant oil, sunshine and land, as well as fewer regulatory constraints, are likely to play a growing role through rapid expansion of data centers.

India: will it turn away from the US?

India is an important player in the global tech race but is not yet a true rival to China or the US, said Lee. Even if major companies shift production from China to India, many components for advanced systems are still heavily sourced from China.

Apple’s relocation to India, for example, has been mostly around the final assembly, not inputs upstream in the supply chain. Similarly, even a technologically advanced major US business like Tesla still relies heavily on Chinese components for robotics development.

“The likelihood that India can replicate the supply chain ecosystem in China in the next few years is very low. But that’s not to say there won't be a significant amount of reshoring from China,” Lee commented.

One development to monitor is the recent cooling in relations between New Delhi and the Washington administration, which is prompting India to “re-evaluate” its partnership with the US. How this plays out remains to be seen, but it could result in more openness to Chinese technology in the future and potentially open opportunities for other regions, including Europe.

Europe: playing catch up

Europe is also unlikely to emerge as a third pole in a meaningful timeframe, the webinar heard. For advanced computing and AI, the continent lacks the major corporate players like Alibaba or Nvidia that provide basic enabling infrastructure. Consequently, data center expansion in Europe is largely enabled by US companies or companies with significant US financial exposure.

“The idea that you could have a European tech stack as an independent player from the Chinese or US ecosystem is, I think, unrealistic,” Lee observed. “For European players that are serious [about AI] there will have to be strategic partnerships which imply a degree of dependency – and political and regulatory risk.”

The reliance of a major European car manufacturer on US and Chinese partners for next-generation vehicle design and software development is a case in point. “The only realistic way for it to remain competitive has been to partner with firms which are more specialized and much farther ahead – and they are from the US and China,” Lee commented.

While there are some European-based AI and data center infrastructure players that are scaling up healthily, the continent needs to effectively implement a strategic vision if it is to compete in the AI revolution.

Lee would like to see the region operationalizing AI and implementing it in existing industries. “It needs a scaled approach to applying AI tech to areas where Europe has an existing competitive advantage,” he said.

ASEAN and the Middle East: developing niche roles

Southeast Asia is developing a potentially significant role in the global technology ecosystem, supporting certain design or support functions. Countries like Malaysia have strengths in some niches like chip design, for example.

One Malaysian company has recently created its own proprietary IoT chip designs. However, they cannot manufacture these chips domestically, meaning production would still rely on advanced facilities in North Asia or the US.

Beyond core chipmaking, other regions can still play meaningful roles in related areas, the webinar heard. The Middle East, notably the UAE, Saudi Arabia and Israel, is becoming important for data center hosting. Even Africa could potentially develop niche capabilities in the long run.

Should businesses prepare for a decoupling scenario?

Given the lack of alternative countries or regions that can provide alternatives to the US and China, many businesses are concerned about a decoupling of the global system in the longer run, forcing them to choose between competing systems led by Chinese and US firms.

Companies will have to consider a “pick-and-mix approach,” said Lee, but this will be met with challenges and it is wise to consider the range of potential constraints, including technological, political, tariff-related and regulatory factors. This is especially important for advanced AI applications given that movement of data across borders may be challenging.

Responses will vary by sector and company. Large multinationals, for example, may have the capacity to build independent tech stacks for the different regions in which they operate. Smaller players, however, will increasingly face tough, binary choices – a trend that is already playing out, for example, for some German companies which have increasingly moved R&D and production to China.

How businesses are responding

For global corporates, navigating this extremely complex and interconnected environment presents many challenges and is fraught with uncertainty. A supply disruption within the global tech ecosystem can have major knock-on effects that ripple across sectors and regions in a way that is hard to predict or model.

Zurich’s Alex Todd observed that many businesses have been hedging against geopolitical and operational risks for some time. To reduce these vulnerabilities, they have diversified manufacturing to countries such as Singapore, Malaysia, Thailand and increasingly the US through onshoring.

From an underwriting perspective, this creates “both challenges and benefits,” he said. “There may be new risks, whether it’s regulatory, natural catastrophe or geopolitical, but at the same time it adds balance to the exposure profile. At Zurich, we’re focused on helping customers think about taking on additional risk outside their normal comfort zone.”

Zurich’s Penny Seach noted a shift in how supply chain risks are being framed: businesses are no longer talking about supply chain dependency but rather focusing on the supply chain as a strategic vulnerability.

“Previously, our conversations would be about where the choke points are or how we look at better logistics management. Now, the conversation is incorporating stronger scenario planning and robust stress testing for geopolitical shocks.”

Asking challenging questions and bringing in a range of perspectives is vital for understanding the risk and insurance implications, she said. For insurers, clear communication with customers about what risks are covered, which are not and – equally importantly – why they are not covered, becomes an imperative in the current environment:

“When the signal is not clear, we need to have the courage both ways to be speaking up and to be asking questions of each other. If, as insurers, we are articulating what we are concerned about, it opens the door for a stronger conversation about how our customers are responding.”

Insurance implications of data centers

As an example, Seach discussed the insurance complexities of the growing dependency on data centers and the related energy infrastructure. In particular, the growth in Small Modular Reactors (SMRs) which use nuclear power to extend energy capacity, is an area that raises critical insurance questions, she said.

There are a range of implications to consider, including regulatory risks, the potential role of nuclear insurance pools, and claims implications if nuclear exclusions sit within the policy. There are also possible systemic risks to consider should there be a widespread shutdown of SMRs, as well as the cyber risk of data centers intersecting with nuclear risk.

Zurich is raising these issues with its customers, asking questions and considering the insurance implications. “We must be thoughtful and clear in terms of what scenarios we need to be thinking about and, more importantly, how we address them,” said Seach. “We want to be clear, so that if there was an incident, we would know what it would look like from an insurance coverage perspective.”

Optimistic endnotes: risk, resilience and response

The global chip and technology ecosystem, containing various choke points, but drawing in a range of countries, sectors and companies, grows ever more complex.

However, one dimension that looks set to remain stable in the near-term is the leading role of the US and –the critical importance of Taiwan for high-end chip manufacturing, while China develops an increasingly self-reliant domestic capability throughout the value chain.

As the two superpowers, US and China, compete for technological supremacy and AI dominance, businesses are using scenario planning and stress testing to consider risk exposures and build resilience into their supply chains.

Zurich is committed to supporting its customers to consider how key developments could impact the success and resilience of their own businesses, and to understanding the insurance implications.

Ending on a positive note, Lee and Seach agreed that although global risks associated with the technology ecosystem are growing, so is our ability to respond.

As Seach observed, our strategic awareness and risk management capabilities are strengthening all the time: “Risk management is increasingly embedded at a board level. It's a strategic part of how businesses operate and risk managers have a far stronger seat at the boardroom table than ever before. So for that reason, I am optimistic.”