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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.
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.
These inventions were crucial, but science alone wasn’t enough to build the chip industry. The spread of semiconductors was enabled as much by clever manufacturing techniques as academic physics.
Thanks to the “copy it” strategy, the USSR started several years behind the U.S. in transistor technology and never caught up.
all the world was looking enviously at Japan, because the country’s success selling semiconductors would make it far wealthier and more powerful than de Gaulle ever imagined.
When World War II ended, some Americans had envisioned stripping Japan of its high-tech industries as punishment for starting a brutal war. Yet within a couple years of Japan’s surrender, defense officials in Washington adopted an official policy that “a strong Japan is a better risk than a weak Japan.”
Sony’s expertise wasn’t in designing chips but devising consumer products and customizing the electronics they needed.
If only TI had found a way to market its own branded devices earlier, Haggerty later lamented, TI “would have been the Sony of consumer electronics.” Replicating Sony’s product innovation and marketing expertise, however, proved just as hard as replicating America’s semiconductor expertise.
U.S. strategy required letting Japan acquire advanced technology and build cutting-edge businesses.
A simple laser sensor and a couple of transistors had turned a weapon with a zero-for-638 hit ratio into a tool of precision destruction.
Outside a small number of military theorists and electrical engineers, therefore, hardly anyone realized Vietnam had been a successful testing ground for weapons that married microelectronics and explosives in ways that would revolutionize warfare and transform American military power.
From South Korea to Taiwan, Malaysia to Singapore, anti-Communist governments were seeking assurance that America’s retreat from Vietnam wouldn’t leave them standing alone. They were also seeking jobs and investment that could address the economic dissatisfaction that drove some of their populations toward Communism. Minister Li realized that Texas Instruments could help Taiwan solve both problems at once.
After initially accusing Mark Shepherd of being an imperialist, Minister Li quickly changed his tune. He realized a relationship with Texas Instruments could transform Taiwan’s economy, building industry and transferring technological know-how. Electronics assembly, meanwhile, would catalyze other investments, helping Taiwan produce more higher-value goods. As Americans grew skeptical of military commitments in Asia, Taiwan desperately needed to diversify its connections with the United States. Americans who weren’t interested in defending Taiwan might be willing to defend Texas Instruments.
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By the end of the 1970s, American semiconductor firms employed tens of thousands of workers internationally, mostly in Korea, Taiwan, and Southeast Asia. A new international alliance emerged between Texan and Californian chipmakers, Asian autocrats, and the often ethnic-Chinese workers who staffed many of Asia’s semiconductor assembly facilities.
Semiconductors recast the economies and politics of America’s friends in the region. Cities that had been breeding grounds for political radicalism were transformed by diligent assembly line workers, happy to trade unemployment or subsistence farming for better paying jobs in factories.
In the early 1960s, it had been possible to claim the Pentagon had created Silicon Valley. In the decade since, the tables had turned. The U.S. military lost the war in Vietnam, but the chip industry won the peace that followed, binding the rest of Asia, from Singapore to Taiwan to Japan, more closely to the U.S. via rapidly expanding investment links and supply chains. The entire world was more tightly connected to America’s innovation infrastructure, and even adversaries like the USSR spent their time copying U.S. chips and chipmaking tools. Meanwhile, the chip industry had catalyzed an
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Chips weren’t the only U.S. industry facing pressure from high-quality, ultra-efficient Japanese competitors. In the immediate postwar years, “Made in Japan” had been a synonym for “cheap.” But entrepreneurs like Sony’s Akio Morita had cast off this reputation for low price, replacing it with products that were as high quality as those of any American competitor.
American chipmakers clung to their belief that Kikuchi was right about America’s innovation advantage, even though contradictory data was piling up.
In 1979, just months before Anderson’s presentation about quality problems in American chips, Sony introduced the Walkman, a portable music player that revolutionized the music industry, incorporating five of the company’s cutting-edge integrated circuits in each device.
Unlike in the U.S., where antitrust law discouraged chip firms from collaborating, the Japanese government pushed companies to work together,
Jerry Sanders saw Silicon Valley’s biggest disadvantage as its high cost of capital. The Japanese “pay 6 percent, maybe 7 percent, for capital. I pay 18 percent on a good day,” he complained.
Even when Japanese companies were unprofitable, their banks kept them afloat by extending credit long after American lenders would have driven them to bankruptcy. Japanese society was structurally geared to produce massive savings, because its postwar baby boom and rapid shift to one-child households created a glut of middle-aged families focused on saving for retirement.
Japanese chipmakers kept investing and producing, grabbing more and more market share. Because of this, five years after the 64K DRAM chip was introduced, Intel—the company that had pioneered DRAM chips a decade earlier—was left with only 1.7 percent of the global DRAM market, while Japanese competitors’ market share soared.
In 1985, Japanese firms spent 46 percent of the world’s capital expenditure on semiconductors, compared to America’s 35 percent.
So Japan’s market share in DRAM chips grew every year during the 1980s, at the expense of American rivals. Japan’s semiconductor surge seemed unstoppable, no matter the apocalyptic predictions of American chipmakers.
It was popular to interpret the decline of GCA as an allegory about Japan’s rise and America’s fall. Some analysts saw evidence of a broader manufacturing decay that started in steel, then afflicted cars, and was now spreading to high-tech industries.
U.S. firms, with GCA as the leader, controlled 85 percent of the global market for semiconductor lithography equipment in 1978. A decade later this figure had dropped to 50 percent. GCA had no plan to turn things around.
Didn’t this make them “strategic”? Shouldn’t America be worried Japan was becoming “the Saudi Arabia of semiconductors”?
In the 1980s, they crawled sheepishly back to Washington. After their dinner at Ming’s, Sanders, Noyce, and Sporck joined other CEOs to create the Semiconductor Industry Association to lobby Washington to support the industry.
Perry had assumed that Noyce and his other Silicon Valley neighbors would remain on top of the industry. But in 1986, Japan had overtaken America in the number of chips produced. By the end of the 1980s, Japan was supplying 70 percent of the world’s lithography equipment. America’s share—in an industry invented by Jay Lathrop in a U.S. military lab—had fallen to 21 percent.
U.S. military forces depend heavily on technological superiority to win. Electronics is the technology that can be leveraged most highly. Semiconductors are the key to leadership in electronics. U.S. defense will soon depend on foreign sources for state-of-the-art technology in semiconductors.
Once derided as a country of transistor salesmen, Japan was now the world’s second-largest economy. It was challenging American industrial dominance in areas that were crucial to U.S. military power. Washington had long urged Tokyo to let the United States contain the Communists while Japan expanded its foreign trade, but this division of labor no longer seemed very favorable to the United States. Japan’s economy had grown at unprecedented speed, while Tokyo’s success in high-tech manufacturing was now threatening America’s military edge.
America’s supply chain statecraft had worked brilliantly in fending off Communists, but by the 1980s, the primary beneficiary looked to have been Japan. Its trade and foreign investment had grown massively. Tokyo’s role in Asia’s economics and politics was expanding inexorably. If Japan could so swiftly establish dominance over the chip industry, what would stop it from dethroning America’s geopolitical preeminence, too?
As Japanese firms grabbed market share, CEOs of America’s biggest chip firms spent more and more time in Washington, lobbying Congress and the Pentagon. They set aside their free-market beliefs the moment Japanese competition mounted, claiming the competition was unfair.
The microprocessor market seemed almost certain to grow. But the prospect that microprocessor sales could overtake DRAMs, which constituted the bulk of chip sales, seemed mind-boggling, one of Grove’s deputies recalled.
As in Japan, therefore, Korea’s tech companies emerged not from garages, but from massive conglomerates with access to cheap bank loans and government support. In February 1983, after a nervous, sleepless night, Lee picked up the phone, called the head of Samsung’s electronics division, and proclaimed: “Samsung will make semiconductors.” He bet the company’s future on semiconductors, and was ready to spend at least $100 million, he declared.
Intel therefore cheered the rise of Korean DRAM producers. It was one of several Silicon Valley firms to sign a joint venture with Samsung in the 1980s, selling chips Samsung manufactured under Intel’s own brand and wagering that helping Korea’s chip industry would reduce Japan’s threat to Silicon Valley.
The U.S. didn’t simply provide a market for South Korean DRAM chips; it provided technology, too. With Silicon Valley’s DRAM producers mostly near collapse, there was little hesitation about transferring top-notch technology to Korea.
Most of Silicon Valley was happy to work with Korean companies, undercutting Japanese competitors and helping make South Korea one of the world’s leading centers of memory chipmaking. The logic was simple, as Jerry Sanders explained: “my enemy’s enemy is my friend.”
The chip industry also funded university research on chip design techniques, establishing the Semiconductor Research Corporation to distribute research grants to universities
DARPA also backed researchers studying a second set of challenges: finding new uses for chips’ growing processing power.
Viterbi’s algorithms provided a theoretical way to pack more data into the same radio spectrum, but no one had the computing power to apply these algorithms at scale.
DARPA—ostensibly a defense agency—was wining and dining professors of computer science as they theorized about chip design. But it was efforts like these that shrank transistors, discovered new uses for semiconductors, drove new customers to buy them, and funded the subsequent generation of smaller transistors. When it came to semiconductor design, no country in the world had a better innovation ecosystem.
It took time for the West to realize the scale of the theft.
The operations of Directorate T might have remained a state secret had Vetrov not decided to add intrigue to his otherwise dull existence upon moving back to Moscow.
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.
When it came to the silicon chips undergirding this new driver of military power, the Soviet Union had fallen hopelessly behind. One popular Soviet joke from the 1980s recounted a Kremlin official who declared proudly, “Comrade, we have built the world’s biggest microprocessor!”
Combined with better surveillance and communication tools, the ability to strike targets accurately hundreds or even thousands of miles away was producing a “military-technical revolution,” Ogarkov argued to anyone who’d listen.
Bill Perry’s “offset strategy” was working, and the Soviet Union didn’t have a response. It lacked the miniaturized electronics and computing power that American and Japanese chipmakers produced.
When Ogarkov ran the numbers, he concluded that America’s semiconductor-powered advantage in missile accuracy, antisubmarine warfare, surveillance, and command and control could enable a surprise strike to threaten the survivability of the Soviet nuclear arsenal. Nukes were supposed to be the ultimate insurance policy, but the Soviet military now felt “substantially inferior in strategic weapons,” as one general put it.
