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

by Chris Miller

The mission: “acquire Western equipment and technology,” a CIA report warned, “and improve its ability to produce integrated circuits.”

In the early 1980s, the KGB reportedly employed around one thousand people to steal foreign technology. Around three hundred worked at foreign posts, with most of the rest on the eighth floor of the KGB’s imposing headquarters on Moscow’s Lubyanka Square, sitting atop the Stalin-era prison and torture chambers.

Soviet spies also blackmailed Westerners with access to advanced technology. At least one British employee of a UK computer company living in Moscow died after “falling” from the window of his high-rise apartment building.

Stealing chip designs was only useful if they could be produced at scale in the USSR. This was difficult to do during the early Cold War but almost impossible by the 1980s. As Silicon Valley crammed more transistors onto silicon chips, building them became steadily harder. 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 co...

He was a spy like James Bond, but with more desk work and fewer martinis. He decided to make life more interesting by sending a postcard to a Parisian acquaintance who, he knew, was connected with the French intelligence services. Soon

from the heart of the KGB, unveiling a vast bureaucracy focused on stealing Western industrial secrets.

The USSR’s “copy it” strategy had actually benefitted the United States, guaranteeing the Soviets faced a continued technological lag. In 1985, the CIA conducted a study of Soviet microprocessors and found that the USSR produced replicas of Intel and Motorola chips like clockwork. They were always half a decade behind.

The most pessimistic Soviet estimates suggested that if the U.S. launched a nuclear first strike in the 1980s, it could have disabled or destroyed 98 percent of Soviet ICBMs.

The Paveway laser-guided bombs that slammed into Baghdad’s telephone exchange used the same basic system design as the first generation of Paveways that destroyed the Thanh Hoa Bridge in 1972. Those were built with a handful of transistors, a laser sensor, and a couple of wings strapped to an old “dumb” bomb. By 1991, Texas Instruments had updated the Paveway multiple times, with each new version replacing existing circuitry with more advanced electronics, reducing the number of components, increasing reliability, and adding new features. By the start of the Persian Gulf War, the Paveway had become the military’s weapon of choice for the same reason Intel’s microprocessors were used across the computer industry: they were widely understood, easy to use, and cost-effective. Paveways were always cheap, but they got cheaper over the course of the 1970s and 1980s. Thanks to their low cost, every pilot had dropped Paveways in training exercises. And they were highly versatile, too. Targets didn’t need to be selected in advance but could be chosen on the battlefield. The hit rates, meanwhile, were almost as good as they looked on TV.

Sony, which was unique among Japanese semiconductor firms in never betting heavily on DRAMs, succeeded in developing innovative new products, like specialized chips for image sensors.

When photons strike their silicon, these chips create electric

charges that are correlated to the strength of the light, letting the chips convert images into digital data. Sony was therefore well placed to lead the digital camera revolution, and the company’s chips that sense images today remain world-class. Even still, the company failed to cut investment in l...

The biggest error that Japan’s chip firms made, however, was to miss the rise of PCs. None of the Japanese chip giants could replicate Intel’s pivot to microprocessors or its mastery of the PC ecosystem. Only one Japanese firm, NEC, really tried, but it never won more than a tiny share of the microprocessor market.

the PC revolution mostly benefitted American chip firms. By the time Japan’s stock market crashed, Japan’s semiconductor dominance was already eroding. In 1993, the U.S. retook first place in semiconductor shipments. In 1998, South Korean firms had overtaken Japan as the world’s largest producers of DRAM, while Japan’s market share fell from 90 percent in the late 1980s to 20 percent by 1998.

when war finally came, in the unexpected arena of the Persian Gulf, American military might astounded most observers. In the first war of the digital era, Japan declined to join the twenty-eight countries that sent troops to the Gulf to eject Iraqi forces from Kuwait. Instead, Tokyo participated by sending checks to pay for coalition armies and to support Iraq’s neighbors. As American Paveway laser-guided bombs pummeled Iraqi tank columns, this financial diplomacy looked impotent.

In 1985, he hired Chang to lead Taiwan’s chip industry. “We want to promote a semiconductor industry in Taiwan,” he told Chang. “Tell me,” he continued, “how much money you need.”

Taiwan’s government had tried breaking into the chipmaking business by licensing semiconductor manufacturing technology from America’s RCA and founding a chipmaker called UMC in 1980, but the company’s capabilities lagged far behind the cutting edge. Taiwan boasted plenty of semiconductor industry jobs, but captured only a small share of the profit, since most money in the chip industry was made by firms designing and producing the most advanced chips. Officials like Minister Li knew the country’s economy would keep growing only if it advanced beyond simply assembling components designed and fabricated elsewhere.

So when the government of Taiwan called, offering to put him in charge of the island’s chip industry and providing a blank check to fund his plans, Chang found the offer intriguing. At age fifty-four, he was looking for a new challenge. Though most people speak of Chang “returning” to Taiwan, his strongest connection to the island was the Texas Instruments facilities that he helped establish, and by Taiwan’s claim to be the legitimate government of China, the country that Chang grew up in, but that he hadn’t visited since fleeing nearly four decades earlier. By the mid-1980s, the place Chang had lived the longest was Texas. He held a U.S. security clearance for defense-related work at TI. He was arguably more Texan than Taiwanese. “Taiwan was a strange place to me,” he’d later recall.

As early as the mid-1970s, while still at TI, Chang had toyed with the idea of creating a semiconductor company that would manufacture chips designed by customers. At the time, chip firms like TI, Intel, and Motorola mostly manufactured chips they had designed in-house. Chang pitched this new business model to fellow TI executives in March 1976. “The low cost of computing power,” he explained to his TI colleagues, “will open up a wealth of applications that are not now served by semiconductors,” creating new sources of demand for chips, which would soon be used in everything from phones to cars to dishwashers. The firms that made these goods lacked the expertise to produce semiconductors, so they’d prefer to outsource fabrication to a specialist, he reasoned. Moreover, as technology advanced and transistors shrank, the cost of manufacturing equipment and R&D would rise. Only companies that produced large volumes of chips would be cost-competitive.

The Taiwanese government provided 48 percent of the startup capital for TSMC, stipulating only that Chang find a foreign chip firm to provide advanced production technology. He was turned down by his former colleagues at TI and by Intel. “Morris, you’ve had a lot of good ideas in your time,” Gordon Moore told him. “This isn’t one of them.” However, Chang convinced Philips, the Dutch semiconductor company, to put up $58 million, transfer its production technology, and license intellectual property in exchange for a 27.5 percent stake in TSMC. The rest of the capital was raised from wealthy Taiwanese who were “asked” by the government to invest. “What generally happened was that one of the ministers in the government would call a businessman in Taiwan,” Chang explained, “to get him to invest.” The government asked several of the island’s wealthiest families, who owned firms that specialized in plastics, textiles, and chemicals, to put up the money. When one businessman declined to invest after three meetings with Chang, Taiwan’s prime minister called the stingy executive and reminded him, “The government has been very good to you for the last twenty years. You better do something for the government now.” A check for Chang’s chip foundry arrived soon after. 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.

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.

Ren Zhengfei established an electronics trading company called Huawei. Taiwan was a small island with big ambitions. It had deep connections not just with the world’s most advanced chip companies but also thousands of engineers who’d been educated at universities like Stanford and Berkeley. China, by contrast, had a vast population but was impoverished and technologically backward. A new policy of economic openness had caused trade to boom, however, particularly via Hong Kong, through which goods could be imported or smuggled. Shenzhen, where Huawei was founded, sat just across the border.

In the 1980s, the Chinese government, led by minister of the electronics industry and later president of China Jiang Zemin, identified electronics as a priority. At the time, the most advanced, widely used chip that China produced domestically was a DRAM with roughly the same storage capacity as the first DRAM Intel had brought to market in the early 1970s, putting China over a decade behind the cutting edge.

Mao’s radicalism made it impossible to attract foreign investment or conduct serious science. The year after China produced its first integrated circuit, Mao plunged the country into the Cultural Revolution, arguing that expertise was a source of privilege that undermined socialist equality. Mao’s partisans waged war on the country’s educational system. Thousands of scientists and experts were sent to work as farmers in destitute villages. Many others were simply killed. Chairman Mao’s “Brilliant Directive issued on July 21, 1968” insisted that “it is essential to shorten the length of schooling, revolutionize education, put proletarian politics in command…. Students should be selected from among workers and peasants with practical experience, and they should return to production after a few years study.”

One tiny speck of Chinese territory escaped the horrors of the Cultural Revolution. Thanks to a quirk of colonialism, Hong Kong was still governed temporarily by the British. As most Chinese were meticulously memorizing the quotations of their crazed chairman, Hong Kong workers were diligently assembling silicon components at Fairchild’s plant overlooking Kowloon Bay. A couple hundred miles away in Taiwan, multiple U.S. chip firms had facilities employing thousands of workers in jobs that were low-paying by California’s standards but far better than peasant farming. Just as Mao was sending China’s small set of skilled workers to the countryside for socialist reeducation, the chip industry in Taiwan, South Korea, and across Southeast Asia was pulling peasants from the countryside and giving them good jobs at manufacturing plants.

The geography of chip fabrication shifted drastically over the 1990s and 2000s. U.S. fabs made 37 percent of the world’s chips in 1990, but this number fell to 19 percent by 2000 and 13 percent by 2010. Japan’s market share in chip fabrication collapsed, too. South Korea, Singapore, and Taiwan each poured funds into their

chip industries and rapidly increased output. For example, Singapore’s government funded fabrication facilities and chip design centers in partnership with companies like Texas Instruments, Hewlett-Packard, and Hitachi, building a vibrant semiconductor sector in the city-state. The Singaporean government also tried replicating TSMC, establishing a foundry called Chartered Semiconductor, though the company never performed as well as its Taiwanese rival.

South Korea’s semiconductor industry did even better. After dethroning Japan’s DRAM producers and becoming the world’s leading memory chipmaker in 1992, Samsung grew rapidly through the rest of that decade. It fended off competition in the DRAM market from Taiwan and Singapore, benefitting from formal government suppo...

ASML could buy the best components on the market. As it began to focus on developing EUV tools, its ability to integrate components from different sources became its greatest strength.

But America’s power was at its peak. Most people in Washington thought globalization was a good thing. The dominant belief in the U.S. government was that expanding trade and supply chain connections would promote peace by encouraging powers like Russia or China to focus on acquiring wealth rather than geopolitical power. Claims that the decline of America’s lithography industry would imperil security were seen as out of touch with this new era of globalization and interconnection. The chip industry, meanwhile, simply wanted to build semiconductors as efficiently as possible. With no large-scale U.S. lithography firms remaining, what choice did they have but to bet on ASML?

x86 instruction set architecture—a foundational set of rules that govern how chips compute—that was the industry standard for PCs. Apple was the only major computer-maker that didn’t use x86-based chips.

By the mid-2000s, just as cloud computing was emerging, Intel had won a near monopoly over data center chips, competing only with AMD. Today, nearly every major data center uses x86 chips from either Intel or AMD. The cloud can’t function without their processors.

This presented a new vision of a disaggregated chip industry. Intel had its own architecture (x86) on which it designed and produced many different chips. Saxby wanted to sell his Arm architecture to fabless design firms that would customize Arm’s architecture for their own purposes, then outsource the manufacturing to a foundry like TSMC.

Nintendo chose Arm-based chips for its handheld video games, for example, a small market that Intel never paid much attention to. Intel’s computer processor oligopoly was too profitable to justify thinking about niche markets. Intel didn’t realize until too late that it ought to compete in another seemingly niche market for a portable computing device: the mobile phone.

in the 1990s and 2000s, Intel was one of America’s most profitable firms. The problem wasn’t that no one realized Intel ought to consider new products, but that the status quo was simply too profitable. If Intel did nothing at all, it would still own two of the world’s most valuable castles—PC and server chips—surrounded by a deep x86 moat.

The early iPhone processors were produced by Samsung, which had followed TSMC into the foundry business. Otellini’s prediction that the iPhone would be a niche product proved horribly wrong. By the time he realized his mistake, however, it was too late. Intel would later scramble to win a share of the smartphone business. Despite eventually pouring billions of dollars into products for smartphones, Intel never had much to show for it. Apple dug a deep moat around its immensely profitable castle before Otellini and Intel realized what was happening.

Intel never found a way to win a foothold in mobile devices, which today consume nearly a third of chips sold. It still hasn’t.

A fixation on hitting short-term margin targets began to replace long-term technology leadership. The shift in power from engineers to managers accelerated this process. Otellini, Intel’s CEO from 2005 to 2013, admitted he turned down the contract to build iPhone chips because he worried about the financial implications. A fixation on profit margins seeped deep into the firm—its hiring decisions, its product road maps, and its R&D processes. The company’s leaders were simply more focused on engineering the company’s balance sheet than its transistors.

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.”

True, new semiconductor foundries like TSMC were largely offshore. Yet foreign foundries produced chips largely designed by American fabless firms. Moreover, their fabs were full of U.S.-made manufacturing equipment.

“Abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry,”

Applied Materials remained the world’s largest semiconductor toolmaking company, building equipment like the machines that deposited thin films of chemicals on top of silicon wafers as they were processed. Lam Research had world-beating expertise in etching circuits into silicon wafers. And KLA, also based in Silicon Valley, had the world’s best tools for finding nanometer-sized errors on wafers and lithography masks. These three toolmakers were rolling out new generations of equipment that could deposit, etch, and measure features at the atomic scale, which would be crucial for making the next generation of chips.

By the early 2010s, the most advanced microprocessors had a billion transistors on each chip. The software capable of laying out these transistors was provided by three American firms, Cadence, Synopsys, and Mentor, which controlled around three-quarters of the market. It was impossible to design a chip without using at least one of these firms’ software. Moreover, most of the smaller firms providing chip design software were U.S.-based, too. No other country came close.

Unlike the USSR, China in the 2000s was far more integrated into the world economy. Washington concluded that export controls would do more harm than good, hurting U.S. industry without preventing China from buying goods from firms in other countries. Japan and Europe were eager to sell almost anything to the PRC. No one in Washington had the stomach for a fight with allies about export controls, especially as U.S. leaders were focused on befriending their Chinese counterparts.

Amid the hubris of America’s unipolar moment, hardly anyone was willing to listen. Most people in Washington simply concluded the U.S. was “running faster” without even glancing at the evidence.

Sanders never dreamed of giving up AMD’s manufacturing facilities, even as the rise of foundries like TSMC made it possible for big chip firms to consider divesting their manufacturing operations and outsourcing to a foundry in Asia. Having brawled with the Japanese for DRAM market share in the 1980s and with Intel for the PC market in the 1990s, Sanders was committed to his fabs. He thought they were crucial to AMD’s success. Even he admitted, though, that it was becoming harder to make money while owning and operating a fab. The problem was simple: each generation of technological improvement made fabs more expensive.

By the 2000s, it was common to split the semiconductor industry into three categories. “Logic” refers to the processors that run smartphones, computers, and servers. “Memory” refers to DRAM, which provides the short-term memory computers need to operate, and flash, also called NAND, which remembers data over time. The third category of chips is more diffuse, including analog chips like sensors that convert visual or audio signals into digital data, radio frequency chips that communicate with cell phone networks, and semiconductors that manage how devices use electricity.