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

by Chris Miller

China now spends more money each year importing chips than it spends on oil. These semiconductors are plugged into all manner of devices, from smartphones to refrigerators, that China consumes at home or exports worldwide. Armchair strategists theorize about China’s “Malacca Dilemma”—a reference to the main shipping channel between the Pacific and Indian Oceans—and the country’s ability to access supplies of oil and other commodities amid a crisis. Beijing, however, is more worried about a blockade measured in bytes rather than barrels. China is devoting its best minds and billions of dollars to developing its own semiconductor technology in a bid to free itself from America’s chip choke.

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.

in the skies above Germany, though, only 20 percent of American bombs fell within one thousand feet of their target. The war was decided by the quantity of bombs dropped and artillery shells fired, not by the knobs on the mechanical computers that tried and usually failed to guide them.

Alongside new scientific discoveries and new manufacturing processes, this ability to make a financial killing was the fundamental force driving forward Moore’s Law. As one of Fairchild’s employees put it in the exit questionnaire he filled out when leaving the company: “I… WANT… TO… GET… RICH.”

The KGB thought its campaign of theft provided Soviet semiconductor producers with extraordinary secrets, but getting a copy of a new chip didn’t guarantee Soviet engineers could produce it. The KGB began stealing semiconductor manufacturing equipment, too. The CIA claimed that the USSR had acquired nearly every facet of the semiconductor manufacturing process, including nine hundred Western machines for preparing materials needed for semiconductor fabrication; eight hundred machines for lithography and etching; and three hundred machines each for doping, packaging, and testing chips. However, a factory needed a full suite of equipment, and when machines broke down, they needed spare parts. Sometimes spare parts for foreign machines could be produced in the USSR, but this introduced new inefficiencies and defects. The system of theft and replication never worked well enough to convince Soviet military leaders they had a steady supply of quality chips, so they minimized the use of electronics and computers in military systems.

the Soviets lacked an international supply chain. Working with America’s Cold War allies, Silicon Valley had forged an ultra-efficient globalized division of labor. Japan led the production of memory chips, the U.S. produced more microprocessors, while Japan’s Nikon and Canon and the Netherland’s ASML split the market for lithography equipment. Workers in Southeast Asia conducted much of the final assembly. American, Japanese, and European companies jostled over their position in this division of labor, but they all benefitted from the ability to spread R&D costs over a far larger semiconductor market than the USSR ever had.

The government also provided generous tax benefits for TSMC, ensuring the company had plenty of money to invest. From day one, TSMC wasn’t really a private business: it was a project of the Taiwanese state.

Politicians around the world have therefore misdiagnosed the semiconductor supply chain dilemma. The problem isn’t that the chip industry’s far-flung production processes dealt poorly with COVID and the resulting lockdowns. There are few industries that sailed through the pandemic with so little disruption. Such problems that emerged, notably the shortage of auto chips, are mostly the fault of carmakers’ frantic and ill-advised cancelation of chip orders in the early days of the pandemic coupled with their just-in-time manufacturing practices that provide little margin of error. For the car industry, which suffered a several-hundred-billion-dollar hit to revenue, there’s plenty of reason to rethink how they’ve managed their own supply chains. The semiconductor industry, however, had a banner year. Besides a massive earthquake—a low but non-zero probability risk—it’s hard to imagine a more severe peacetime shock to supply chains than what the industry has survived since early 2020. The substantial increase in chip production during both 2020 and 2021 is not a sign that multinational supply chains are broken. It’s a sign that they’ve worked.

After Russia invaded, the U.S. rolled out sweeping restrictions on the sale of certain types of chips across Russia’s tech, defense, and telecoms sectors, which was coordinated with partners in Europe, Japan, South Korea, and Taiwan. Key chipmakers from America’s Intel to Taiwan’s TSMC have now cut off the Kremlin. Russia’s manufacturing sector has faced wrenching disruptions, with a substantial portion of Russian auto production knocked offline. Even in sensitive sectors like defense, Russian factories are taking evasive maneuvers such as deploying chips intended for dishwashers into missile systems, according to U.S. intelligence. Russia has little recourse other than to cut its consumption of chips, because its chipmaking capabilities today are even weaker than during the heyday of the space race.