Chip War: The Fight for the World's Most Critical Technology

by Chris Miller

photolithography, the process of patterning transistors using specialized chemicals and light;

The making of Moore’s Law is as much a story of manufacturing experts, supply chain specialists, and marketing managers as it is about physicists or electrical engineers.

Once the chip industry took shape, it proved impossible to dislodge from Silicon Valley. Today’s semiconductor supply chain requires components from many cities and countries, but almost every chip made still has a Silicon Valley connection or is produced with tools designed and built in California.

A typical chip might be designed with blueprints from the Japanese-owned, UK-based company called ARM, by a team of engineers in California and Israel, using design software from the United States. When a design is complete, it’s sent to a facility in Taiwan, which buys ultra-pure silicon wafers and specialized gases from Japan. The design is carved into silicon using some of the world’s most precise machinery, which can etch, deposit, and measure layers of materials a few atoms thick. These tools are produced primarily by five companies, one Dutch, one Japanese, and three Californian, without which advanced chips are basically impossible to make. Then the chip is packaged and tested, often in Southeast Asia, before being sent to China for assembly into a phone or computer.

Yet the seismic shift that most imperils semiconductor supply today isn’t the crash of tectonic plates but the clash of great powers.

The region’s governments and corporations used offshored chip assembly facilities to learn about, and eventually domesticate, more advanced technologies. Washington’s foreign policy strategists embraced complex semiconductor supply chains as a tool to bind Asia to an American-led world. Capitalism’s inexorable demand for economic efficiency drove a constant push for cost cuts and corporate consolidation. The steady tempo of technological innovation that underwrote Moore’s Law required ever more complex materials, machinery, and processes that could only be supplied or funded via global markets.

The United States wanted it that way: an industrial war was a struggle America would win. In Washington, the economists at the War Production Board measured success in terms of copper and iron, rubber and oil, aluminum and tin as America converted manufacturing might into military power.

Noyce and Moore abandoned Fairchild as quickly as they’d left Shockley’s startup a decade earlier, and founded Intel, which stood for Integrated Electronics. In their vision, transistors would become the cheapest product ever produced, but the world would consume trillions and trillions of them. Humans would be empowered by semiconductors while becoming fundamentally dependent on them. Even as the world was being wired to the United States, America’s internal circuitry was changing. The industrial era was ending. Expertise in etching transistors into silicon would now shape the world’s economy. Small California towns like Palo Alto and Mountain View were poised to become new centers of global power.

potato farmer like him saw clearly that Japanese competition had turned DRAM chips into a commodity market. He’d been through enough harvests to know that the best time to buy a commodity business was when prices were depressed and everyone else was in liquidation. Simplot decided to back Micron with $1 million. He’d later pour in millions more.

Grove described his management philosophy in his bestselling book Only the Paranoid Survive: “Fear of competition, fear of bankruptcy, fear of being wrong and fear of losing can all be powerful motivators.” After a long day of work, it was fear that kept Grove flipping through his correspondence or on the phone with subordinates, worried he’d missed news of product delays or unhappy customers.

In the chip industry, by lowering startup costs, Chang’s foundry model gave birth to dozens of new “authors”—fabless chip design firms—that transformed the tech sector by putting computing power in all sorts of devices. However, the democratization of authorship coincided with a monopolization of the digital printing press. The economics of chip manufacturing required relentless consolidation. Whichever company produced the most chips had a built-in advantage, improving its yield and spreading capital investment costs over more customers. TSMC’s business boomed during the 1990s and its manufacturing processes improved relentlessly. Morris Chang wanted to become the Gutenberg of the digital era. He ended up vastly more powerful. Hardly anyone realized it at the time, but Chang, TSMC, and Taiwan were on a path toward dominating the production of the world’s most advanced chips.

Grove was worried about the offshoring of advanced manufacturing jobs. The iPhone, which had been introduced just three years earlier, exemplified the trend. Few of the iPhone’s components were built in the U.S. Though offshoring started with low-skilled jobs, Grove didn’t think it would stop there, whether in semiconductors or any other industry. He worried about lithium batteries needed for electric vehicles, where the U.S. made up a tiny share of the market despite having invented much of the core technology. His solution: “Levy an extra tax on the product of offshored labor. If the result is a trade war, treat it like other wars—fight to win.”

Chip firms simply can’t ignore the world’s largest market for semiconductors. Chipmakers jealously guard their critical technologies, of course. But almost every chip firm has non-core technology, in subsectors that they don’t lead, that they’d be happy to share for a price. When companies are losing market share or in need of financing, moreover, they don’t have the luxury of focusing on the long term. This gives China powerful levers to induce foreign chip firms to transfer technology, open production facilities, or license intellectual property, even when foreign companies realize they’re helping develop competitors. For chip firms, its often easier to raise funds in China than on Wall Street. Accepting Chinese capital can be an implicit requirement for doing business in the country.

The world has far more sensory information than our current ability to digitize, communicate, and process.

but what’s less noticed is that Tesla is also a leading chip designer. The company hired star semiconductor designers like Jim Keller to build a chip specialized for its automated driving needs, which is fabricated using leading-edge technology. As early as 2014, some analysts were noting that Tesla cars “resemble a smartphone.” The company has been often compared to Apple, which also designs its own semiconductors. Like Apple’s products, Tesla’s finely tuned user experience and its seemingly effortless integration of advanced computing into a twentieth-century product—a car—are only possible because of custom-designed chips.

economic relations were increasingly impacted by what they called “weaponized interdependence.” Countries were more intwined than ever, they pointed out, but rather than defusing conflicts and encouraging cooperation, interdependence was creating new venues for competition. Networks that knit together nations had become a domain of conflict. In the financial sphere, the U.S. had weaponized other countries’ reliance on access to the banking system to punish Iran, for example. These academics worried that the U.S. government’s use of trade and capital flows as political weapons threatened globalization and risked dangerous unintended consequences.

The U.S., it turns out, has escalation dominance when it comes to severing supply chains. “Weaponized interdependence,” one former senior official mused after the strike on Huawei. “It’s a beautiful thing.”

The real supply chain lesson of the past few years is not about fragility but about profits and power.

Taiwan’s president Tsai Ing-wen recently argued in Foreign Affairs that the island’s chip industry is a “ ‘silicon shield’ that allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains.” That’s a highly optimistic way of looking at the situation. The island’s chip industry certainly forces the U.S. to take Taiwan’s defense more seriously. However, the concentration of semiconductor production in Taiwan also puts the world economy at risk if the “silicon shield” doesn’t deter China.

Technology only advances when it finds a market. The history of the semiconductor is also a story of sales, marketing, supply chain management, and cost reduction.