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

by Chris Miller

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.

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.

Asia’s tremendous rise over the past half century has been built on a foundation of silicon as its growing economies have come to specialize in fabricating chips and assembling the computers and smartphones that these integrated circuits make possible.

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.

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 tran...

The people who left America’s East Coast, Europe, and Asia to build the chip industry often cited a sense of boundless opportunity in their decision to move to Silicon Valley. For the world’s smartest engineers and most creative entrepreneurs, there was simply no more exciting place to be. Once the chip industry took shape, it proved impossible to dislodge from Silicon Valley. Today’s semiconductor supply chain requires components from many cities and countries, but almost every chip made still has a Silicon Valley connection or is produced with tools designed and built in California. 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 K...

If any one of the steps in the semiconductor production process is interrupted, the world’s supply of new computing power is imperiled. In the age of AI, it’s often said that data is the new oil. Yet the real limitation we face isn’t the availability of data but of processing power.

No other facet of the economy is so dependent on so few firms. 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.

Yet the seismic shift that most imperils semiconductor supply today isn’t the crash of tectonic plates but the clash of great powers. As China and the United States struggle for supremacy, both Washington and Beijing are fixated on controlling the future of computing—and, to a frightening degree, that future is dependent on a small island that Beijing considers a renegade province and America has committed to defend by force. The interconnections between the chip industries in the U.S., China, and Taiwan are dizzyingly complex. There’s no better illustration of this than the individual who founded TSMC, a company that until 2020 counted America’s Apple and China’s Huawei as its two biggest customers. Morris Chang was born in mainland China; grew up in World War II−era Hong Kong; was educated at Harvard, MIT, and Stanford; helped build America’s early chip industry while working for Texas Instruments in Dallas; held a top secret U.S. security clearance to develop electronics for the American military; and made Taiwan the epicenter of world semiconductor manufacturing.

A single missile strike on TSMC’s most advanced chip fabrication facility could easily cause hundreds of billions of dollars of damage once delays to the production of phones, data centers, autos, telecom networks, and other technology are added up.

Endless tank columns; waves of airplanes; thousands of tons of bombs dropped from the skies; convoys of ships delivering trucks, combat vehicles, petroleum products, locomotives, rail cars, artillery, ammunition, coal, and steel—World War II was a conflict of industrial attrition.

About a year earlier, in Palo Alto, California, a group of eight engineers employed by William Shockley’s semiconductor lab had told their Nobel Prize−winning boss that they were quitting. Shockley had a knack for spotting talent, but he was an awful manager. He thrived on controversy and created a toxic atmosphere that alienated the bright young engineers he’d assembled. So these eight engineers left Shockley Semiconductor and decided to found their own company, Fairchild Semiconductor, with seed funding from an East Coast millionaire.

MIT considered the Apollo guidance computer one of its proudest accomplishments, but Bob Noyce knew that it was his chips that made the Apollo computer tick. By 1964, Noyce bragged, the integrated circuits in Apollo computers had run for 19 million hours with only two failures, one of which was caused by physical damage when a computer was being moved. Chip sales to the Apollo program transformed Fairchild from a small startup into a firm with one thousand employees. Sales ballooned from $500,000 in 1958 to $21 million two years later.

Bob Noyce knew that military and space programs were crucial for Fairchild’s early success, admitting in 1965 that military and space applications would use “over 95% of the circuits produced this year.” But he always envisioned an even larger civilian market for his chips, though in the early 1960s no such market existed. He would have to create it, which meant keeping the military at arm’s length so that he—not the Pentagon—set Fairchild’s R&D priorities. Noyce declined most military research contracts, estimating that Fairchild never relied on the Defense Department for more than 4 percent of its R&D budget. “There are very few research directors anywhere in the world who are really adequate to the job” of assessing Fairchild’s work, Noyce explained confidently, “and they are not often career officers in the Army.”

He chose to target much of Fairchild’s R&D not at the military, but at mass market products. Most of the chips used in rockets or satellites must have civilian uses, too, he reasoned. The first integrated circuit produced for commercial markets, used in a Zenith hearing aid, had initially been designed for a NASA satellite. The challenge would be making chips that civilians could afford. The military paid top dollar, but consumers were price sensitive. What remained tantalizing, though, was that the civilian market was far larger than even the bloated budgets of the Cold War Pentagon. “Selling R&D to the government was like taking your venture capital and putting it into a savings account,” Noyce declared. “Venturing is venturing; you want to take the risk.”

However, it was Fairchild’s R&D team that, under Gordon Moore’s direction, not only devised new technology but opened new civilian markets as well. In 1965, Moore was asked by Electronics magazine to write a short article on the future of integrated circuits. He predicted that every year for at least the next decade, Fairchild would double the number of components that could fit on a silicon chip. If so, by 1975, integrated circuits would have sixty-five thousand tiny transistors carved into them, creating not only more computing power but also lower prices per transistor. As costs fell, the number of users would grow. This forecast of exponential growth in computing power soon came to be known as Moore’s Law. It was the greatest technological prediction of the century.

Fairchild’s vision of chips for civilians seemed prescient. The company was the first to offer a full product line of off-the-shelf integrated circuits for civilian customers. Noyce slashed prices, too, gambling that this would drastically expand the civilian market for chips. In the mid-1960s, Fairchild chips that previously sold for $20 were cut to $2. At times Fairchild even sold products below manufacturing cost, hoping to convince more customers to try them.

By 1968, the computer industry was buying as many chips as the military. Fairchild chips served 80 percent of this computer market. Bob Noyce’s price cuts had paid off, opening a new market for civilian computers that would drive chip sales for decades to come. Moore later argued that Noyce’s price cuts were as big an innovation as the technology inside Fairchild’s integrated circuits.

Yet by the time of the first lunar landing, Silicon Valley’s engineers had become far less dependent on defense and space contracts. Now they were focused on more earthly concerns. The chip market was booming. Fairchild’s success had already inspired several top employees to defect to competing chipmakers. Venture capital funding was pouring into startups that focused not on rockets but on corporate computers. Fairchild, however, was still owned by an East Coast multimillionaire who paid his employees well but refused to give them stock options, viewing the idea of giving away equity as a form of “creeping socialism.” Eventually, even Noyce, one of Fairchild’s cofounders, began wondering whether he had a future at the firm. Soon everyone began looking for the exit. The reason was obvious. 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 Soviet Union churned out coal and steel in vast quantities but lagged in nearly every type of advanced manufacturing. The USSR excelled in quantity but not in quality or purity, both of which were crucial to high-volume chipmaking.

Young Soviet students didn’t pursue electrical engineering degrees, wanting to be like Osokin, because no one knew that he existed. Career advancement required becoming a better bureaucrat, not devising new products or identifying new markets. Civilian products were always an afterthought amid an overwhelming focus on military production. Meanwhile, the “copy it” mentality meant, bizarrely, that the pathways of innovation in Soviet semiconductors were set by the United States. One of the most sensitive and secretive industries in the USSR therefore functioned like a poorly run outpost of Silicon Valley. Zelenograd was just another node in a globalizing network—with American chipmakers at the center.

The Soviets inadvertently made themselves part of this network by copying Silicon Valley’s products. Japan, by contrast, was deliberately integrated into America’s semiconductor industry, a process supported by Japanese business elites and the U.S. government.

Morita understood what Charles de Gaulle did not: electronics were the future of the world economy, and transistors, soon embedded in silicon chips, would make possible unimaginable new devices.

Sony had the benefit of cheaper wages in Japan, but its business model was ultimately about innovation, product design, and marketing. Morita’s “license it” strategy couldn’t have been more different from the “copy it” tactics of Soviet Minister Shokin. Many Japanese companies had reputations for ruthless manufacturing efficiency. Sony excelled by identifying new markets and targeting them with impressive products using Silicon Valley’s newest circuitry technology. “Our plan is to lead the public with new products rather than ask them what kind of products they want,” Morita declared. “The public does not know what is possible, but we do.”

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.

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,” like Communist China or the Soviet Union. U.S. strategy required letting Japan acquire advanced technology and build cutting-edge businesses.

With Morita’s help, and after much red tape and green tea, Japan’s bureaucrats finally approved TI’s permits to open a semiconductor plant in Japan. For Morita, it was another coup, helping to make him one of the most famous Japanese businessmen on either side of the Pacific. For foreign policy strategists in Washington, more trade and investment links between the two countries tied Tokyo ever more tightly into a U.S.-led system. It was a victory for Japanese leaders like Prime Minister Ikeda, too. His goal of doubling Japanese incomes was achieved two years ahead of schedule. Japan won a new seat on the world stage thanks to intrepid electronics entrepreneurs like Morita.

Sporck had studied engineering at Cornell before being hired by GE in the mid-1950s at the firm’s factory in Hudson Falls, New York. He was tasked with improving GE’s process for manufacturing capacitors and proposed changing the factory’s assembly line process. He believed his new technique would improve productivity, but the labor union that controlled GE’s assembly line workers saw him as threatening their control over the production process. The union revolted, staging a rally against Sporck and burning him in effigy. The factory’s management timidly backed down, promising the union that Sporck’s changes would never be implemented. To hell with this, Sporck thought. That night, he arrived home and started looking for other jobs.

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.

Sporck’s next stop was Singapore, a majority ethnic Chinese city-state whose leader, Lee Kuan Yew, had “pretty much outlawed” unions, as one Fairchild veteran remembered. Fairchild followed by opening a facility in the Malaysian city of Penang shortly thereafter. The semiconductor industry was globalizing decades before anyone had heard of the word, laying the grounds for the Asia-centric supply chains we know today.

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.

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.

The rebellion of Bob Noyce and Gordon Moore didn’t look like the protests in California’s East Bay, where Berkeley students and Black Panthers plotted violent uprisings and dreamt of abolishing capitalism. At Fairchild, Noyce and Moore were unhappy about their lack of stock options and sick of meddling from the company’s head office in New York. Their dream wasn’t to tear down the established order, but to remake it. Noyce and Moore abandoned Fairchild as quickly as they’d left Shockley’s startup a decade earlier, and founded Intel, which stood for Integrated Electronics.

Two years after its founding, Intel launched its first product, a chip called a dynamic random access memory, or DRAM.

This specialization drove up cost, so Intel decided to focus on memory chips, where mass production would produce economies of scale.

Intel, however, launched a chip called the 4004 and described it as the world’s first microprocessor—“a micro-programmable computer on a chip,” as the company’s advertising campaign put it. It could be used in many different types of devices and set off a revolution in computing.

“This is going to change the world.” Now general logic could be mass-produced. Computing was ready for its own industrial revolution and Intel had the world’s most advanced assembly lines.

If the future of war became a contest for accuracy, Marshall wagered, the Soviets would fall behind.

The advances in computing power that Perry’s vision required seemed like science fiction to many critics, who assumed guided missile technology would improve slowly because tanks and planes changed slowly, too. Exponential increases, which Moore’s Law dictated, are rarely seen and hard to comprehend. However, Perry wasn’t alone in predicting a “ten to a hundredfold” improvement. Intel was promising the very same thing to its customers. Perry grumbled that his congressional critics were “Luddites,” who simply didn’t understand how rapidly chips were changing.

Firms like Intel targeted corporate computers and consumer goods, not missiles. Only consumer markets had the volume to fund the vast R&D programs that Moore’s Law required.

At HP, however, Anderson didn’t simply take Toshiba and NEC seriously—he tested their chips and found that they were of far better quality than American competitors. None of the three Japanese firms reported failure rates above 0.02 percent during their first one thousand hours of use, he reported. The lowest failure rate of the three American firms was 0.09 percent—which meant four-and-a-half times as many U.S.-made chips were malfunctioning.

Sony’s research director, the famed physicist Makoto Kikuchi, told an American journalist that Japan had fewer geniuses than America, a country with “outstanding elites.” But America also had “a long tail” of people “with less than normal intelligence,” Kikuchi argued, explaining why Japan was better at mass manufacturing. American chipmakers clung to their belief that Kikuchi was right about America’s innovation advantage, even though contradictory data was piling up. The best evidence against the thesis that Japan was an “implementer” rather than an “innovator” was Kikuchi’s boss, Sony CEO Akio Morita. Morita knew that replication was a recipe for second-class status and second-rate profits. He drove his engineers not only to build the best radios and TVs, but to imagine new types of products entirely.

The aim of turning Japan into a country of democratic capitalists had worked. Now some Americans were asking whether it had worked too well. The strategy of empowering Japanese businesses seemed to be undermining America’s economic and technological edge.

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. Building advanced manufacturing facilities was brutally expensive, so the cost of credit was hugely important. A next-generation chip emerged roughly once every two years, requiring new facilities and new machinery. In the 1980s, U.S. interest rates reached 21.5 percent as the Federal Reserve sought to fight inflation. By contrast, Japanese DRAM firms got access to far cheaper capital. Chipmakers like Hitachi and Mitsubishi were part of vast conglomerates with close links to banks that provided large, long-term loans. 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. Japan’s skimpy social safety net provided a further incentive for saving. Meanwhile, tight restrictions on stock markets and other investments left people with little choice but to stuff savings in bank accounts. As a result, banks were flush with deposits, extending loans at low rates because they had so much cash on hand. Japanese companies had more debt than American peers but nevertheless paid lower...

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. Japan’s firms doubled down on DRAM production as Silicon Valley was pushed out. In 1984, Hitachi spent 80 billion yen on capital expenditure for its semiconductor business, compared to 1.5 billion a decade earlier. At Toshiba, spending grew from 3 billion to 75 billion; at NEC, from 3.5 billion to 110 billion. In 1985, Japanese firms spent 46 percent of the world’s capital expenditure on semiconductors, compared to America’s 35 percent. By 1990, the figures were even more lopsided, with Japanese firms accounting for half the world’s investment in chipmaking facilities and equipment. Japan’s CEOs kept building new facilities so long as their banks were happy to foot the bill.

Academics devised elaborate theories to explain how Japan’s huge conglomerates were better at manufacturing than America’s small startups. But the mundane reality was that GCA didn’t listen to its customers, while Nikon did. Chip firms that interacted with GCA found it “arrogant” and “not responsive.” No one said that about its Japanese rivals.

Semiconductors are the “crude oil of the 1980s,” Jerry Sanders declared, “and the people who control the crude oil will control the electronics industry.”

When Jerry Sanders described chips as “crude oil,” the Pentagon knew exactly what he meant. In fact, chips were even more strategic than petroleum. Pentagon officials knew just how important semiconductors were to American military primacy. Using semiconductor technology to “offset” the Soviet conventional advantage in the Cold War had been American strategy since the mid-1970s, when Bob Noyce’s singing partner Bill Perry ran the Pentagon’s research and engineering division. American defense firms had been instructed to pack their newest planes, tanks, and rockets with as many chips as possible, enabling better guidance, communication, and command and control. In terms of producing military power, the strategy was working better than anyone except Bill Perry had thought possible.

“High Tech Is Foreign Policy,” Brown titled the article. If America’s high-tech position was deteriorating, its foreign policy position was at risk, too.