The battle for dominance in the global semiconductor market is often framed as one between the U.S. and China, with the latter posing a dire threat to future production of essential high-tech products in the West. And while that scenario isn’t entirely inaccurate, there’s a lot more nuance to it in reality.

To be sure, U.S. producers, especially automakers, experienced a serious shortfall in semiconductors over the past three years, driven in part by consumer demand in the wake of the COVID-19 pandemic, and reliance on “just-in-time” inventory strategies that hampered suppliers’ ability to keep pace with the surge.

The situation also laid bare the industry’s over-reliance on a small number of producers, especially in Taiwan, and the risk of supply disruption that comes with it. But a deeper look at the structure of the semiconductor industry reveals a somewhat different picture.

The term “semiconductor industry” encompasses multiple entities, each of which specializes in discrete stages of the supply chain. They include chip designers, integrated-circuit fabricators (foundries), chip packagers, semiconductor manufacturing equipment makers, vendors of software for automating the design process, and providers of pre-made blocks of software, known as intellectual property (IP) core, to chip designers.

The U.S. and its allies dominate in all of those categories except for foundries, where their market share is a mere 29%, according to Supplyframe. “In the categories that create the most value, innovation and technological differentiation between nations, we have a veritable monopoly,” the firm says.

That doesn’t square with the popular notion of the U.S. and its allies losing out to Chinese interests in semiconductor production. But China’s dominance in the foundry sector is nevertheless of concern, especially in light of the country’s Made in China 2025 Plan, which aims to increase the domestic content of basic materials to 70% by 2025.

What’s more, the acute shortage of semiconductors available to U.S. industry shows signs of easing in the coming months and years. Capital investments by major players such as Micron, Intel and Taiwan’s TSMC indicate production growth of 30% in the U.S., and between 9% and 20% in Europe, over the next three to five years, according to Supplyframe chief marketing officer Richard Barnett. In the U.S., the recently enacted CHIPS and Science Act is expected to inject some $52 billion into the construction of domestic fabs. “We’re seeing that overall medium- to long-term growth drivers are very positive across a diversified market,” he says. 

To counter China’s dominance in foundries, the U.S. has joined with Japan, Korea and Europe to create a new strategic investment model that will result in additional sources of semiconductor production over a wider geographical area, Barnett says. 

The path to a more resilient sourcing model isn’t without short-term obstacles. Barnett expects to see continued constraints in the availability of semiconductors for industrial and automotive use. In the case of the latter, the growing demand for electric vehicles will place particular pressure on semiconductor suppliers. Barnett says it will take three to five years for EV manufacturers to design out their dependency on certain types of semiconductors that are in chronically short supply.

Even as they increase inventories of automotive integrated circuits, manufacturers will continue to face the problem of the “golden screw” — that one small element whose unavailability can bring production to a halt. A typical EV platform consists of up to 4,000 individual components, Barnett notes, versus between 1,500 and 2,000 in vehicles powered by an internal combustion engine (ICE). That said, automakers must still make tough decisions on how much to allocate production capacity to EVs versus ICEs, as the industry transitions to electric models.

Progress toward that end will be driven by a combination of consumer demand and regulatory action. California, for one, has mandated that all new cars and light trucks sold in the state be zero-emission vehicles by 2035. But practicality will also play a role, with industry and government targets for EV challenged by semiconductor supply.

Among automakers vowing to make the transition entirely to EVs, “there’s going to be winners and losers regardless of their mandated plans,” Barnett says. “They need to make a conscious choice to switch over in five years.”

China, meanwhile, will continue to play a commanding role in worldwide semiconductor production, as it strives to meet goals for servicing a fast-growing domestic middle class. And western producers will still find themselves relying on components from that part of that world, even as they move to diversify sourcing and encourage domestic construction of fabs. “We’re absolutely going to see a mix [of China and other sources],” Barnett says, “but there are no market conditions that would enable full decoupling.”