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

by Chris Miller

The U.S. feared that Huawei’s products were now priced so attractively, partly owing to Chinese government subsidies, that they’d shortly form the backbone of next-generation telecom networks. America’s dominance of the world’s tech infrastructure would be undermined. China’s geopolitical clout would grow. To counter this threat, the U.S. barred Huawei from buying advanced computer chips made with U.S. technology. Soon, the company’s global expansion ground to a halt. Entire product lines became impossible to produce. Revenue slumped. A corporate giant faced technological asphyxiation. Huawei discovered that, like all other Chinese companies, it was fatally dependent on foreigners to make the chips upon which all modern electronics depend.

The United States still has a stranglehold on the silicon chips that gave Silicon Valley its name, though its position has weakened dangerously. 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. If Beijing succeeds, it will remake the global economy and reset the balance of military power. World War II was decided by steel and aluminum, and followed shortly thereafter by the Cold War, which was defined by atomic weapons. The rivalry between the United States and China may well be determined by computing power. Strategists in Beijing and Washington now realize that all advanced tech—from machine learning to missile systems, from automated vehicles to armed drones—requires cutting-edge chips, known more formally as semiconductors or integrated circuits. A tiny number of companies control their production. We rarely think about chips, yet t...

Around a quarter of the chip industry’s revenue comes from phones; much of the price of a new phone pays for the semiconductors inside. For the past decade, each generation of iPhone has been powered by one of the world’s most advanced processor chips. In total, it takes over a dozen semiconductors to make a smartphone work, with different chips managing the battery, Bluetooth, Wi-Fi, cellular network connections, audio, the camera, and more.

Apple makes precisely none of these chips. It buys most off-the-shelf: memory chips from Japan’s Kioxia, radio frequency chips from California’s Skyworks, audio chips from Cirrus Logic, based in Austin, Texas. Apple designs in-house the ultra-complex processors that run an iPhone’s operating system. But the Cupertino, California, colossus can’t manufacture these chips. Nor can any company in the United States, Europe, Japan, or China. Today, Apple’s most advanced processors—which are arguably the world’s most advanced semiconductors—can only be produced by a single company in a single building, the most expensive factory in human history, which on the morning of August 18, 2020, was only a couple dozen miles off the USS Mustin’s port bow.

Fabricating and miniaturizing semiconductors has been the greatest engineering challenge of our time. Today, no firm fabricates chips with more precision than the Taiwan Semiconductor Manufacturing Company, better known as TSMC. In 2020, as the world lurched between lockdowns driven by a virus whose diameter measured around one hundred nanometers—billionths of a meter—TSMC’s most advanced facility, Fab 18, was carving microscopic mazes of tiny transistors, etching shapes smaller than half the size of a coronavirus, a hundredth the size of a mitochondria. TSMC replicated this process at a scale previously unparalleled in human history. Apple sold over 100 million iPhone 12s, each powered by an A14 processor chip with 11.8 billion tiny transistors carved into its silicon. In a matter of months, in other words, for just one of the dozen chips in an iPhone, TSMC’s Fab 18 fabricated well over 1 quintillion transistors—that is, a...

It was only sixty years ago that the number of transistors on a cutting-edge chip wasn’t 11.8 billion, but 4. In 1961, south of San Francisco, a small firm called Fairchild Semiconductor announced a new product called the Micrologic, a silicon chip with four transistors embedded in it. Soon the company devised ways to put a dozen transistors on a chip, then a hundred. Fairchild cofounder Gordon Moore noticed in 1965 that the number of components that could be fit on each chip was doubling annually as engineers learned to fabricate ever smaller transistors. This prediction—that the computing power of chips would grow exponentially—came to be called “Moore’s Law” and led Moore to pred...

America’s vast reserve of scientific expertise, nurtured by government research funding and strengthened by the ability to poach the best scientists from other countries, has provided the core knowledge driving technological advances forward. The country’s network of venture capital firms and its stock markets have provided the startup capital new firms need to grow—and have ruthlessly forced out failing companies. Meanwhile, the world’s largest consumer market in the U.S. has driven the growth that’s funded decades of R&D on new types of chips.

Other countries have found it impossible to keep up on their own but have succeeded when they’ve deeply integrated themselves into Silicon Valley’s supply chains. Europe has isolated islands of semiconductor expertise, notably in producing the machine tools needed to make chips and in designing chip architectures. Asian governments, in Taiwan, South Korea, and Japan, have elbowed their way into the chip industry by subsidizing firms, funding training programs, keeping their exchange rates undervalued, and imposing tariffs on imported chips. This strategy has yielded certain capabilities that no other countries can replicate—but they’ve achieved what they have in partnership with Silicon Valley, continuing to rely fundamentally on U.S. tools, software, and customers.

Most of the world’s GDP is produced with devices that rely on semiconductors. For a product that didn’t exist seventy-five years ago, this is an extraordinary ascent.

In the 1930s, Barr and Sarant were integrated into an espionage ring led by Julius Rosenberg, the infamous Cold War spy. During the 1940s, Barr and Sarant worked on classified radars and other military systems at Western Electric and Sperry Gyroscope, two leading American technology firms. Unlike others in the Rosenberg ring, Barr and Sarant didn’t possess nuclear weapons secrets, but they had gained intimate knowledge about the electronics in new weapons systems. In the late 1940s, as the FBI began unraveling the KGB’s spy networks in the U.S., Rosenberg was tried and sentenced to death by electrocution alongside his wife, Ethel.

Soviet scientists reacted angrily to the suggestion they were simply copying foreign advances. Their scientific understanding was as advanced as that of America’s chemists and physicists. Soviet exchange students in the U.S. reported learning little from lectures by William Shockley that they couldn’t have studied in Moscow. Indeed, the USSR had some of the world’s leading theoretical physicists.

could only get Shokin and his engineers so far. Simply stealing a chip didn’t explain how it was made, just as stealing a cake can’t explain how it was baked. The recipe for chips was already extraordinarily complicated. Foreign exchange students studying with Shockley at Stanford could become smart physicists, but it was engineers like Andy Grove or Mary Anne Potter who knew at what temperature certain chemicals needed to be heated, or how long photoresists should be exposed to light. Every step of the process of making chips involved specialized knowledge that was rarely shared outside of a specific company.

Zelenograd might have seemed like Silicon Valley without the sunshine. It had the country’s best scientists and stolen secrets. Yet the two countries’ semiconductor systems couldn’t have been more different. Whereas Silicon Valley’s startup founders job-hopped and gained practical “on the factory floor” experience, Shokin called the shots from his ministerial desk in Moscow.

Interdependence wasn’t always easy. In 1959, the Electronics Industries Association appealed to the U.S. government for help lest Japanese imports undermine “national security”—and their own bottom line. But letting Japan build an electronics industry was part of U.S. Cold War strategy, so, during the 1960s, Washington never put much pressure on Tokyo over the issue. Trade publications like Electronics magazine—which might have been expected to take the side of U.S. companies—instead noted that “Japan is a keystone in America’s Pacific policy…. If she cannot enter into healthy commercial intercourse with the Western hemisphere and Europe, she will seek economic sustenance elsewhere,”

Fairchild rented space in a sandal factory on Hang Yip Street, next to the old Hong Kong airport, right on the shore of Kowloon Bay. Soon a huge Fairchild logo several stories tall was mounted on the building, illuminating the junks sailing around Hong Kong’s harbor. Fairchild continued to make its silicon wafers in California but began shipping semiconductors to Hong Kong for final assembly. In 1963, its first year of operation, the Hong Kong facility assembled 120 million devices. Production quality was excellent, because low labor costs meant Fairchild could hire trained engineers to run assembly lines, which would have been prohibitively expensive in California.

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.

From South Korea to Taiwan, Singapore to the Philippines a map of semiconductor assembly facilities looked much like a map of American military bases across Asia. Yet even after the U.S. finally admitted defeat in Vietnam and drew down its military presence in the region, these trans-Pacific supply chains endured. By the end of the 1970s, rather than dominoes falling to Communism, America’s allies in Asia were even more deeply integrated with the U.S.

Japan focused on growing its economy, while America shouldered the burden of defending it. The results were more spectacular than anyone had expected. 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.

The question of support for semiconductors was decided by lobbying in Washington. One issue on which Silicon Valley and free market economists agreed was taxes. Bob Noyce testified to Congress in favor of cutting the capital gains tax from 49 percent to 28 percent and advocated loosening financial regulation to let pension funds invest in venture capital firms. After these changes, a flood of money rushed into the venture capital firms on Palo Alto’s Sand Hill Road. Next, Congress tightened intellectual property protections via the Semiconductor Chip Protection Act, after Silicon Valley executives like Intel’s Andy Grove testified to Congress that legal copying by Japanese firms was undermining America’s market position.

In 1986, with the threat of tariffs looming, Washington and Tokyo cut a deal. Japan’s government agreed to put quotas on its exports of DRAM chips, limiting the number that were sold to the U.S. By decreasing supply, the agreement drove up the price of DRAM chips everywhere outside of Japan, to the detriment of American computer producers, which were among the biggest buyers of Japan’s chips. Higher prices actually benefitted Japan’s producers, which continued to dominate the DRAM market. Most American producers were already in the process of exiting the memory chip market. So despite the trade deal, only a few U.S. firms continued to produce DRAM chips. The trade restrictions redistributed profits within the tech industry, but they couldn’t save most of America’s memory chip firms.

America had long seen itself as Japan’s teacher, but Morita thought America had lessons to learn as it struggled with a growing trade deficit and the crisis in its high-tech industries. “The United States has been busy creating lawyers,” Morita lectured, while Japan has “been busier creating engineers.” Moreover, American executives were too focused on “this year’s profit,” in contrast to Japanese management, which was “long range.” American labor relations were hierarchical and “old style,” without enough training or motivation for shop-floor employees. Americans should stop complaining about Japan’s success, Morita believed. It was time to tell his American friends: Japan’s system simply worked better.

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.

Even with a skilled workforce, though, it wasn’t easy for firms to jump from basic assembly to cutting-edge chipmaking. Samsung had previously dabbled in simple semiconductor work but struggled to make money or produce advanced technology.

Conway and Mead eventually drew up a set of mathematical “design rules,” paving the way for computer programs to automate chip design. With Conway and Mead’s method, designers didn’t have to sketch out the location of each transistor but could draw from a library of “interchangeable parts” that their technique made possible. Mead liked to think of himself as Johannes Gutenberg, whose mechanization of book production had let writers focus on writing and printers on printing.

DARPA financed a program to let university researchers send chip designs to be produced at cutting-edge fabs. Despite its reputation for funding futuristic weapons systems, when it came to semiconductors DARPA focused as much on building educational infrastructure so that America had an ample supply of chip designers.

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.

Accustomed to low-quality microelectronics, Soviet missile designers devised elaborate workarounds. Even the mathematics they plugged into their guidance computers was simpler, to minimize the strain on the onboard computer. Soviet ballistic missiles were generally told to follow a specific flight path toward their target, with the guidance computer adjusting the missile to put it back on the preprogrammed route if it deviated. By contrast, by the 1980s, American missiles calculated their own path to the target.

“All modern military capability is based on economic innovation, technology, and economic strength,” Ogarkov explained to Gelb.

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 founding of TSMC gave all chip designers a reliable partner. Chang promised never to design chips, only to build them. TSMC didn’t compete with its customers; it succeeded if they did.

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.

The “war” to find the next, best type of beam to shoot at silicon wafers was only one of three contests underway over the future of lithography. The second battle was commercial, over which company would build the next generation of lithography tools. The enormous cost of developing new lithography equipment pushed the industry toward concentration. One or at most two companies would dominate the market. In the United States, GCA had been liquidated, while Silicon Valley Group, a lithography firm descended from Perkin Elmer, lagged far behind the market leaders, Canon and Nikon. U.S. chipmakers had fended off the Japanese challenge of the 1980s, but American lithography toolmakers hadn’t.

Jobs didn’t have time to get all his ideas into the hardware of the first-generation iPhone, which used Apple’s own iOS operating system but outsourced design and production of its chips to Samsung. The revolutionary new phone had many other chips, too: an Intel memory chip, an audio processor designed by Wolfson, a modem to connect with the cell network produced by Germany’s Infineon, a Bluetooth chip designed by CSR, and a signal amplifier from Skyworks, among others. All were designed by other companies.

Taiwanese companies, like Foxconn and Wistron, that run these facilities for Apple in China are uniquely capable of churning out phones, PCs, and other electronics. Though the electronics assembly facilities in Chinese cities like Dongguan and Zhengzhou are the world’s most efficient, however, they aren’t irreplaceable. The world still has several hundred million subsistence farmers who’d happily fasten components into an iPhone for a dollar an hour. Foxconn assembles most of its Apple products in China, but it builds some in Vietnam and India, too.

the smartphone supply chain looks very different from the one associated with PCs. Smartphones and PCs are both assembled largely in China with high-value components mostly designed in the U.S., Europe, Japan, or Korea. For PCs, most processors come from Intel and are produced at one of the company’s fabs in the U.S., Ireland, or Israel. Smartphones are different. They’re stuffed full of chips, not only the main processor (which Apple designs itself), but modem and radio frequency chips for connecting with cellular networks, chips for WiFi and Bluetooth connections, an image sensor for the camera, at least two memory chips, chips that sense motion (so your phone knows when you turn it horizontal), as well as semiconductors that manage the battery, the audio, and wireless charging. These chips make up most of the bill of materials needed to build a smartphone.

Application processors, the electronic brain inside each smartphone, are mostly produced in Taiwan and South Korea before being sent to China for final assembly inside a phone’s plastic case and glass screen. Apple’s iPhone processors are fabricated exclusively in Taiwan. Today, no company besides TSMC has the skill or the production capacity to build the chips Apple needs. So the text etched onto the back of each iPhone—“Designed by Apple in California. Assembled in China”—is highly misleading. The iPhone’s most irreplaceable components are indeed designed in California and assembled in China. But they can only be made in Taiwan.

the precision Cymer demanded was more exacting than anything Trumpf had previously dealt with. The company proposed a laser with four components: two “seed” lasers that are low power but accurately time each pulse so that the laser can hit 50 million tin drops a second; four resonators that increase the beam’s power; an ultra-accurate “beam transport system” that directs the beam over thirty meters toward the tin droplet chamber; and a final focusing device to ensure the laser scores a direct hit, millions of times a second.

China’s problem isn’t only in chip fabrication. In nearly every step of the process of producing semiconductors, China is staggeringly dependent on foreign technology, almost all of which is controlled by China’s geopolitical rivals—Taiwan, Japan, South Korea, or the United States. The software tools used to design chips are dominated by U.S. firms, while China has less than 1 percent of the global software tool market, according to data aggregated by scholars at Georgetown University’s Center for Security and Emerging Technology. When it comes to core intellectual property, the building blocks of transistor patterns from which many chips are designed, China’s market share is 2 percent; most of the rest is American or British. China supplies 4 percent of the world’s silicon wafers and other chipmaking materials; 1 percent of the tools used to fabricate chips; 5 percent of the market for chip designs. It has only a 7 percent market share in the business of fabricating chips. None of this fabrication capacity involves high-value, leading-edge technology.

The dollar values at stake in China’s vision of reworking semiconductor supply chains were staggering. China’s import of chips—$260 billion in 2017, the year of Xi’s Davos debut—was far larger than Saudi Arabia’s export of oil or Germany’s export of cars. China spends more money buying chips each year than the entire global trade in aircraft. No product is more central to international trade than semiconductors.

Even after the Trump administration decided to blacklist Sugon, severing the relationship with AMD, chip industry analyst Anton Shilov found Sugon circuit boards with AMD chips that it shouldn’t have been able to buy. AMD told journalists it had not provided technical support for the device in question and wasn’t sure how Sugon acquired the chips.

Arm had been purchased by SoftBank, a Japanese company that has invested billions in Chinese tech startups. SoftBank was therefore dependent on favorable Chinese regulatory treatment for the success of its investments. It faced scrutiny from U.S. regulators, who worried that its exposure to China made it vulnerable to political pressure from Beijing. SoftBank had purchased Arm in 2016 for $40 billion, but it sold a 51 percent stake in the China division—which according to SoftBank accounted for a fifth of Arm’s global sales—for only $775 million.

For chip firms, it’s often easier to raise funds in China than on Wall Street.

Viewed on their own terms, the deals that IBM, AMD, and Arm struck in China were driven by reasonable business logic. Collectively, they risk technology leakage. U.S. and UK chip architectures and designs as well as Taiwanese foundries have played a central role in the development of China’s supercomputer programs. Compared to a decade ago, though its capabilities still meaningfully lag the cutting edge, China is substantially less reliant on foreigners to design and produce chips needed in data centers. IBM CEO Ginni Rometty was right to sense “great opportunity” in technology transfer agreements with China. She was only wrong in thinking her firm would be the beneficiary.

Zhao’s real interest was in buying the island’s crown jewels—MediaTek, the leading chip designer outside the U.S., and TSMC, the foundry on which almost all the world’s fabless chip firms rely. He floated the idea of buying a 25 percent stake in TSMC and advocated merging MediaTek with Tsinghua Unigroup’s chip design businesses. Neither transaction was legal under Taiwan’s existing foreign investment rules, but when Zhao returned from Taiwan he took the stage at a public conference in Beijing and suggested China should ban imports of Taiwanese chips if Taipei didn’t change these restrictions. This pressure campaign put TSMC and MediaTek in a bind. Both companies were crucially reliant on the Chinese market. Most of the chips TSMC produced were assembled into electronics goods in workshops across China. The idea of selling Taiwan’s technological crown jewels to a state-backed investor on the mainland made little sense. The island would end up dependent on Beijing. Besides abolishing its military or welcoming occupation by the People’s Liberation Army, it was hard to think of a step that would do more to undermine Taiwan’s autonomy.

in spring 2016, Tsinghua quietly bought 6 percent of the shares in Lattice Semiconductor, another U.S. chip firm. “This is purely a financial investment,” Zhao told the Wall Street Journal. “We don’t have any intention at all to try to acquire Lattice.” Scarcely weeks after the investment was publicized, Tsinghua Unigroup began to sell its shares in Lattice. Shortly thereafter, Lattice received a buyout offer from a California-based investment firm called Canyon Bridge, which journalists from Reuters revealed had been discreetly funded by the Chinese government. The U.S. government firmly rejected the deal. The same investment fund simultaneously bought Imagination, a UK-based chip designer in financial distress. The transaction was carefully structured to exclude Imagination’s U.S. assets so that Washington didn’t block it, too. British regulators waved the deal through, only to find themselves regretting the decision when, three years later, the new owners tried to restructure the board of directors with officials appointed by a Chinese government investment fund.

Cell networks will identify a phone’s location and send radio waves directly toward a phone, using a technique called beamforming. A typical radio wave, like one that sends music to your car radio, sends signals out in every direction because it doesn’t know where your car is. This wastes power and creates more waves and more interference. With beamforming, a cell tower identifies a device’s location and sends the signal it needs only in that direction.

China’s capabilities when it comes to AI systems are undeniably impressive. Georgetown University’s Ben Buchanan has noted that a “triad” of data, algorithms, and computing power are needed to harness AI. With the exception of computing power, China’s capabilities may already equal the United States’.

Researchers at MacroPolo, a China-focused think tank, found that 29 percent of the world’s leading researchers in artificial intelligence are from China, as opposed to 20 percent from the U.S. and 18 percent from Europe. However, a staggering share of these experts end up working in the U.S., which employs 59 percent of the world’s top AI researchers. The combination of new visa and travel restrictions plus China’s effort to retain more researchers at home may neutralize America’s historical skill at stripping geopolitical rivals of their smartest minds.

In Washington and in the chip industry, almost everyone had drunk their own Kool-Aid about globalization. Newspapers and academics alike reported that globalization was in fact “global,” that technological diffusion was unstoppable, that other countries’ advancing technological capabilities were in the U.S. interest, and that even if they weren’t, nothing could halt technological progress. “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.

Media attention focused on Trump’s “trade war” with Beijing and his tariff hikes, carefully announced to maximize media attention. Among the many products that Trump imposed tariffs on were chips, causing some analysts to see semiconductors as mostly a trade issue. Within the government’s national security bureaucracy, though, the president’s tariffs and his trade war were seen as a distraction from the high-stakes technological struggle underway.