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

by Chris Miller

Long gone are the days when the military could count on firms like TI to design, manufacture, and assemble cutting-edge analog and digital electronics all onshore. Today there’s simply no way to avoid buying some things from abroad—and buying many from Taiwan. So DARPA’s betting on technology to enable a “zero trust” approach to microelectronics: trust nothing and verify everything, via technologies like tiny sensors implanted on a chip that can detect efforts to modify it.

The era of the “run faster” strategy saw the U.S. fall behind in certain segments of the chipmaking process, most notably in the growing dependence on Taiwan for building advanced logic chips. Intel, which for three decades had been America’s chip champion, has now very clearly stumbled. Many people in the industry think it has fallen decisively behind. Meanwhile, China is pouring billions of dollars into its chip industry while pressuring foreign companies to turn over sensitive technology. For every major chip firm, the Chinese consumer market is far more important a customer than the U.S. government.

China’s leaders have identified their reliance on foreign chipmakers as a critical vulnerability. They’ve set out a plan to rework the world’s chip industry by buying foreign chipmakers, stealing their technology, and providing billions of dollars of subsidies to Chinese chip firms. The People’s Liberation Army is now counting on these efforts to help it evade U.S. restrictions, though it can still buy legally many U.S. chips in its pursuit of “military intelligentization.” For its part, the Pentagon has launched its own offset, after admitting that China’s military modernization has closed the gap between the two superpowers’ militaries, especially in the contested waters off China’s coast. Taiwan isn’t simply the source of the advanced chips that both countries’ militaries are betting on. It’s also the most likely future battleground.

China had driven U.S. solar panel manufacturing out of business. Couldn’t it do the same in semiconductors?

most people in Washington barely knew what a semiconductor was. The Obama administration moved slowly on semiconductors, one person involved in the effort recalled, because many senior officials simply didn’t see chips as an important issue. It wasn’t until the final days of the Obama administration, therefore, that the government began to act.

“Unilateral action is increasingly ineffective in a world where the semiconductor industry is globalized,” the Obama administration’s semiconductor report declared. “Policy can, in principle, slow the diffusion of technology, but it cannot stop the spread.” Neither of these claims was backed by evidence; they were simply assumed to be true. However, “globalization” of chip fabrication hadn’t occurred; “Taiwanization” had. Technology hadn’t diffused. It was monopolized by a handful of irreplaceable companies. American tech policy was held hostage to banalities about globalization that were easily seen to be false.

Washington kept telling itself that the U.S. was running faster, blindly ignoring the deterioration in the U.S. position, the rise in China’s capabilities, and the staggering reliance on Taiwan and South Korea, which grew more conspicuous every year. Deep in the U.S. government, however, the national security bureaucracy was coming to adopt a different view.

The entire chip industry depended on sales to China—be it chipmakers like Intel, fabless designers like Qualcomm, or equipment manufacturers like Applied Materials. One U.S. semiconductor executive wryly summed things up to a White House official: “Our fundamental problem is that our number one customer is our number one competitor.”

What the ZTE saga showed above all was the extent to which all the world’s major tech firms relied on U.S. chips. Semiconductors weren’t simply the “cornerstone” of “everything we’re competing on,” as one administration official had put it. They could also be a devastatingly powerful weapon.

Around this time, two academics, Henry Farrell and Abraham Newman, noticed that international political and 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.

Nevertheless, it’s surprising that China’s done nothing to retaliate against the hobbling of its most global tech firm. It has repeatedly threatened to punish U.S. tech firms but never pulled the trigger. Beijing said it was drawing up an “unreliable entity list” of foreign companies that endanger Chinese security, but it doesn’t appear to have added any firms to the list. Beijing has evidently calculated that it’s better to accept that Huawei will become a second-rate technology player than to hit back against the United States. The U.S., it turns out, has escalation dominance when it comes to severing supply chains.

China certainly faced a Sputnik-scale shock after the U.S. banned sales of chips to firms like Huawei. Dan Wang, one of the smartest analysts of China’s tech policy, has argued that American restrictions have “boosted Beijing’s quest for tech dominance” by catalyzing new government policies to support the chip industry. In the absence of America’s new export controls, he argues, Made in China 2025 would have ended up like China’s previous industrial policy efforts, with the government wasting substantial sums of money. Thanks to U.S. pressure, China’s government may provide Chinese chipmakers more support than they’d otherwise have received.

it’s clear that billions of dollars have been wasted in China on semiconductor projects that are either hopelessly unrealistic or, like HSMC, blatant frauds. If China’s Sputnik moment inspires more state-backed semiconductor programs like these, the country won’t be on a path to technological independence.

Across the chip industry, estimates suggest that China’s share of fabrication will increase from 15 percent at the start of the decade to 24 percent of global capacity by 2030, overtaking Taiwan and South Korea in terms of volume. China will almost certainly still lag technologically. But if more of the chip industry moves to China, the country will have more leverage in demanding technology transfer. It will become more costly for the U.S. and other countries to impose export restrictions, and China will have a broader pool of workers from which to draw.

According to the American Automotive Policy Council, an industry group, the world’s biggest auto companies can use over a thousand chips in each car. If even one chip is missing, the car can’t be shipped. Carmakers spent much of 2021 struggling and often failing to acquire semiconductors. These firms are estimated to have produced 7.7 million fewer cars in 2021 than would have been possible had they not faced chip shortages, which implies a $210 billion collective revenue loss, according to industry estimates.

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. Nevertheless, governments should think harder about semiconductor supply chains than they used to. The real supply chain lesson of the past few years is not about fragility but about profits and power. Taiwan’s extraordinary ascent shows how one company—with a vision and with government financial support—can remake an entire industry. Meanwhile, U.S. restrictions on China’s access to chip technology demonstrate just how powerful the chip industry’s choke points are.

The primary hope for advanced manufacturing in the United States is Intel. After years of drift, the company named Pat Gelsinger as CEO in 2021. Born in small-town Pennsylvania, Gelsinger started his career at Intel and was mentored by Andy Grove. He eventually left to take on senior roles at two cloud computing companies before he was brought back to turn Intel around. He’s set out an ambitious and expensive strategy with three prongs. The first is to regain manufacturing leadership, overtaking Samsung and TSMC. To do this, Gelsinger has cut a deal with ASML to let Intel acquire the first next-generation EUV machine, which is expected to be ready in 2025. If Intel can learn how to use these new tools before rivals, it could provide a technological edge.

The second prong of Gelsinger’s strategy is launching a foundry business that will compete directly with Samsung and TSMC, producing chips for fabless firms and helping Intel win more market share.

Yet Intel’s strategy has an uncomfortable third prong: get help from TSMC.

Yet the more indispensable TSMC has become, the more risk has risen—not to TSMC’s financials, but to its facilities. Even investors who for years chose to ignore the severity of the U.S.-China antagonism began looking nervously at the map of TSMC’s chip fabs, arrayed along the western coast of the Taiwan Strait.

Taiwan. Beijing knows that Taiwan’s defense strategy is to fight long enough for the U.S. and Japan to arrive and help. The island is so small relative to the cross-strait superpower that there’s no realistic option besides counting on friends.

It would be even worse if a war knocked out TSMC’s fabs. The world economy and the supply chains that crisscross Asia and the Taiwan Strait are predicated on this precarious peace. Every company that’s invested on either side of the Taiwan Strait, from Apple to Huawei to TSMC, is implicitly betting on peace. Trillions of dollars are invested in firms and facilities within easy missile shot of the Taiwan Strait, from Hong Kong to Hsinchu. The world’s chip industry, as well as the assembly of all the electronic goods chips enable, depends more on the Taiwan Strait and the South China coast than on any other chunk of the world’s territory except Silicon Valley.

If TSMC’s fabs were to slip into the Chelungpu Fault, whose movement caused Taiwan’s last big earthquake in 1999, the reverberations would shake the global economy. It would only take a handful of explosions, deliberate or accidental, to cause comparable damage. Some back-of-the-envelope calculations illustrate what’s at stake. Taiwan produces 11 percent of the world’s memory chips. More important, it fabricates 37 percent of the world’s logic chips. Computers, phones, data centers, and most other electronic devices simply can’t work without them, so if Taiwan’s fabs were knocked offline, we’d produce 37 percent less computing power during the following year. The impact on the world economy would be catastrophic.

It would take at least half a decade to rebuild the lost chipmaking capacity. These days, when we look five years out we hope to be building 5G networks and metaverses, but if Taiwan were taken offline we might find ourselves struggling to acquire dishwashers.