Chip Wars: Understanding the US-China Semiconductor Battle
The most important war that you need to understand
The US and China are in a bloody battle for semiconductor supremacy. The stakes couldn't be higher as they go head-to-head in the fight for control of the chip-making industry. This isn't just about who can produce the most chips, it's about who will lead the way in the development of cutting-edge technologies such as artificial intelligence.
Like most tech nerds, I have been getting more obsessed with Chat GPT3 and its many use cases. This technology wouldn’t exist without companies like Nvidia (read my previous post) and the ability to use cutting-edge AI chips.
So I picked up a book called Chip War by Chris Miller. Even though I have covered the tech industry for so many years, I learnt a tonne. Here are three key takeaways and some deeper thoughts.
There has been a very tight relationship between chips and military policy since the US encouraged Japan and SEA to manufacture transistors after World War 2 to “keep them close”. Japan used the latest chips to manufacture cutting-edge calculators, the equivalent to today’s iPhone. Even if cutting-edge chips are manufactured in Taiwan or the US today, they are still packaged and tested in Asia. So today’s semiconductor battle that is married to government policy is nothing new.
The US and Japanese semiconductor industries have both had huge government subsidies (implicitly or explicitly). The Semi-industry in the US was started / funded by the Space Race and then later by US military contracts during and after the Vietnam war. Today’s chips’ ancestors were killing machines.
Chips are made in a very small number of countries, with Taiwan’s TSMC leading the manufacturing of cutting-edge chips by a long way. FYI their founder Morris was trained at Texas Instruments before setting up his own company. He was a Chinese refugee that escaped communist China via Hong Kong and was never actually Taiwanese until he emigrated there to build TSMC.
Chip product is VERY concentrated.
”Chips from Taiwan provide 37 percent of the world’s new computing power each year. Two Korean companies produce 44 percent of the world’s memory chips. The Dutch company ASML builds 100 percent of the world’s extreme ultraviolet lithography machines, without which cutting-edge chips are simply impossible to make. OPEC’s 40 percent share of world oil production looks unimpressive by comparison”
Russia was obsessed with the US beating them in chip manufacturing as they knew the military advantage that it gave them during the cold war. The technical blunder they made though, was trying to simply copy chip designs vs innovating themselves.
Today, we are in a situation where China has tried and failed to copy the latest chip technology. Chip manufacturing is as much of an art as a science.
Simply stealing a chip didn’t explain how it was made, just as stealing a cake can’t explain how it was baked. The recipe for chips was already extraordinarily complicated.
Things like the exact temperature to mix chemicals, how to adjust the lens for barometric pressure changes during storms etc. All have a big impact on the outcome. This is why despite billions of dollars that were poured into chip manufacturing, China hasn’t managed to match the cutting-edge designs. China today is about a decade behind the latest tech, and the US wants to keep them there.
China has revealed a $143bln plan to boost their semiconductor industry recently. In the past, they had injected $35bln via a fund in 2014 and $21bln in 2019. Through the CHIPS act, the US is offering $76bln in grants, tax credits and subsidies to encourage companies to build in the US. India joined the party recently and looks set to give $10bln to help their Chip industry. This sounds like a lot (and it is), but to put it in perspective, TSMC invests $35mln a year in CAPEX. A mind-blowing number which underlines just how hard this is and how far ahead they are.
Whatever happens with this “war”, it is clear that more chips will be produced in more countries in the world. The US has taken an outright stance to stop China from advancing its semiconductor industry with restrictions on chip sales. They have banned the sale of advanced tech to China, cut off supplies of chip-making equipment and forced American employees at Chinese chip companies to choose between their passport and their company.
So far, we haven’t seen an aggressive response from China. Likely because they don’t really have room for manoeuvre except to try and catch up on the technology. This is why everyone is nervous about any China-Taiwan conflict. A conflict that wouldn’t be started to secure oil resources but to secure chip resources such as TSMC. There is a non-trivial possibility of this happening, and so we are seeing such a dramatic reshoring of semi-factories around the world. The Chip wars won’t be over anytime soon but watch for them to escalate into more than just a war or import or export controls. Chips are so important to our lives that one wrong step, and we could see this bubble over into something far more serious.
p.s. fun fact. De-bugging actually came from the early computers that were used to calculate artillery trajectories. The computers used vacuum tubes and the lights in them would attract bugs and break the machines. So engineers literally had to de-bug them to get them going.