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

by Chris Miller

Rather than cutting itself off from trade, Silicon Valley offshored even more production to Taiwan and South Korea to regain its competitive advantage. Meanwhile, as America’s chip industry recovered, the Pentagon’s bet on microelectronics began to pay off as it fielded new weapons systems that no other country could match. America’s unrivaled power during the 1990s and 2000s stemmed from its resurgent dominance in computer chips, the core technology of the era.

However, as all of Silicon Valley’s tech titans were fleeing DRAM chips amid the Japanese onslaught, Simplot instinctively understood that Ward and Joe Parkinson were entering the memory market at exactly the right time. A potato farmer like him saw clearly that Japanese competition had turned DRAM chips into a commodity market. He’d been through enough harvests to know that the best time to buy a commodity business was when prices were depressed and everyone else was in liquidation. Simplot decided to back Micron with $1 million. He’d later pour in millions more.

More than any of its Japanese or American competitors, the engineering expertise of Micron’s employees was directed toward cost cuts.

Simplot’s first $1 million investment eventually ballooned into a billion-dollar stake.

Grove realized Intel’s business model of selling DRAM chips was finished. DRAM prices might recover from the price slump, but Intel would never win back market share. It had been “disrupted” by Japanese producers. Now it would either disrupt itself or fail. Exiting the DRAM market felt impossible. Intel had pioneered memory chips, and admitting defeat would be humiliating. It was like Ford deciding to get out of cars, one employee said. “How could we give up our identity?” Grove wondered.

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. Grove saw no other choice. “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Grove asked Moore, who wanted to keep producing DRAM chips. “He would get us out of memories,” Moore admitted sheepishly. Finally, Intel decided to leave memories, surrendering the DRAM market to the Japanese and focusing on microprocessors for PCs. It was a gutsy gamble for a company that had been built on DRAMs. “Disruptive innovation” sounded attractive in Clayton Christensen’s theory, but it was gut-wrenching in practice, a time of “gnashing of teeth,” Grove remembered, and “bickering and arguments.” The disruption was obvious. The innovation would take years to pay off, if it ever did.

Each of the company’s plants began to function less like a research lab and more like a finely tuned machine.

Except for Apple’s computers, almost every PC used Intel’s chips and Windows software, both of which had been designed to work smoothly together. Intel entered the personal computer era with a virtual monopoly on chip sales for PCs.

Only the paranoid survive, Andy Grove believed. More than innovation or expertise, it was his paranoia that saved Intel.

“Serving the nation through business,” the first part of the Lee family motto read.

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.

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. Moreover, Korea’s costs and wages were substantially lower than Japan’s, so Korean firms like Samsung had a shot at winning market share even if their manufacturing processes weren’t as perfectly tuned as the ultra-efficient Japanese.

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 rebirth of America’s chip industry after Japan’s DRAM onslaught was only possible thanks to Andy Grove’s paranoia, Jerry Sanders’s bare-knuckle brawling, and Jack Simplot’s cowboy competitiveness. Silicon Valley’s testosterone and stock option−fueled competition often felt less like the sterile economics described in textbooks and more like a Darwinian struggle for the survival of the fittest. Many firms failed, fortunes were lost, and tens of thousands of employees were laid off. The companies like Intel and Micron that survived did so less thanks to their engineering skills—though these were important—than their ability to capitalize on technical aptitude to make money in a hypercompetitive, unforgiving industry.

Conway realized that the digital revolution Mead prophesied needed algorithmic rigor. After she and Mead were introduced by a mutual colleague, they began discussing how to standardize chip design.

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. Conway was soon invited by MIT to teach a course on this chip design methodology. Each of her students designed their own chips, then shipped the design to a fabrication facility for manufacturing. Six weeks later, having never stepped foot in a fab, Conway’s students received fully functioning chips in the mail. The Gutenberg moment had arrived. No one was more interested in what soon became known as the “Mead-Conway Revolution” than the Pentagon. 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. DARPA also helped universities acquire advanced computers and convened workshops with industry officials and academics to discuss research problems over fine wine. Helping companies and professors keep Moore’s Law alive, DARPA reasoned, was cruc...

Today, every chip company uses tools from each of three chip design software companies that were founded and built by alumni of these DARPA- and SRC-funded programs.

Government efforts were effective not when they tried to resuscitate failing firms, but when they capitalized on pre-existing American strengths, providing funding to let researchers turn smart ideas into prototype products.

When it came to semiconductor design, no country in the world had a better innovation ecosystem. By the end of the 1980s, a chip with a million transistors—unthinkable in the early 1970s, when Lynn Conway had arrived in Silicon Valley—had become a reality, when Intel announced its 486 microprocessor, a small piece of silicon packed with 1.2 million microscopic switches.

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.

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.

Western spies were shocked at just how much the Soviets stole.

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.

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!”

Whereas Perry pushed the Pentagon to embrace Moore’s Law, the inadequacies of Soviet chipmaking taught the country’s weapons designers to limit use of complex electronics whenever possible.

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.

However, discipline alone couldn’t solve the Soviets’ basic problems. One issue was political meddling. In the late 1980s, Yuri Osokin was removed from his job at the Riga semiconductor plant. The KGB had demanded that he fire several of his employees, one of whom had mailed letters to a woman in Czechoslovakia, a second who refused to work as an informant for the KGB, and a third who was a Jew. When Osokin refused to punish these workers for their “crimes,” the KGB ousted him and tried to have his wife fired, too. It was hard enough to design chips in normal times. Doing so while battling the KGB was impossible. A second issue was overreliance on military customers. The U.S., Europe, and Japan had booming consumer markets that drove chip demand. Civilian semiconductor markets helped fund the specialization of the semiconductor supply chain, creating companies with expertise in everything from ultra-pure silicon wafers to the advanced optics in lithography equipment. The Soviet Union barely had a consumer market, so it produced only a fraction of the chips built in the West. One Soviet source estimated that Japan alone spent eight times as much on capital investment in microelectronics as the USSR. A final challenge was that the Soviets lacked an international supply chain. Working with America’s Cold War allies, Silicon Valley had forged an ultra-efficient globalized division of labor.

American, Japanese, and European companies jostled over their position in this division of labor, but they all benefitted from the ability to spread R&D costs over a far larger semiconductor market than the USSR ever had.

East German chip output grew rapidly in the late 1980s, but the industry was only able to produce memory chips less advanced than Japan’s, at ten times the price.

The Soviet Union’s effort to reinvigorate its chipmakers failed completely. Neither the Soviets nor their socialist allies could ever catch up, despite vast espionage campaigns and huge sums poured into research facilities like those in Zelenograd.

A communications tower, a military command post, air force headquarters, power stations, and Saddam Hussein’s country retreat—the first U.S. airstrikes sought to decapitate the Iraqi leadership and cut their communications, limiting their ability to track the war or communicate with their forces. Soon their military was in a disorganized retreat. CNN broadcast videos of hundreds of bombs and missiles striking Iraqi tanks. Warfare looked like a video game.

Planes using laser guidance for their bomb strikes hit thirteen times as many targets as comparable planes without guided munitions.

The new technologies Perry had pushed the Pentagon to develop during the late 1970s performed even beyond his expectations. The Iraqi military—armed with some of the best equipment the Soviet Union’s defense industry produced—was helpless in the face of the American assault. “High-tech works,” Perry proclaimed. “What’s making all this work is weapons based on information instead of the volume of fire power,” one military analyst explained to the media. “It’s the triumph of silicon over steel,” declared a New York Times headline. “War Hero Status Possible for the Computer Chip,” read another.

Marshal Sergey Akhromeyev was embarrassed after his predictions of a protracted conflict were promptly disproven by Iraq’s speedy surrender.

Morita, now sixty-nine years old, watched Japan’s fortunes decline alongside Sony’s slumping stock price. He knew his country’s problems cut deeper than its financial markets. Morita had spent the previous decade lecturing Americans about their need to improve production quality, not focus on “money games” in financial markets. But as Japan’s stock market crashed, the country’s vaunted long-term thinking no longer looked so visionary. Japan’s seeming dominance had been built on an unsustainable foundation of government-backed overinvestment. Cheap capital had underwritten the construction of new semiconductor fabs, but also encouraged chipmakers to think less about profit and more about output. Japan’s biggest semiconductor firms doubled down on DRAM production even as lower cost producers like Micron and South Korea’s Samsung undercut Japanese rivals. Japan’s own media perceived overinvestment in the semiconductor sector, with newspaper headlines warning of “reckless investment competition” and “investment they cannot stop.” CEOs of Japan’s memory chip producers couldn’t bring themselves to stop building new chip fabs, even if they weren’t profitable. “If you start worrying” about overinvestment, one Hitachi executive admitted, “you can’t sleep at night.” So long as banks kept lending, it was easier for CEOs to keep spending than to admit they had no path to profitability. America’s arm’s-length capital markets hadn’t felt like an advantage in the 1980s, but the risk of l...

Most of Japan’s big DRAM producers, however, failed to take advantage of their influence in the 1980s to drive innovation. At Toshiba, a DRAM giant, a mid-ranking factory manager named Fujio Masuoka developed a new type of memory chip in 1981 that, unlike DRAM, could continue “remembering” data even after it was powered off. Toshiba ignored this discovery, so it was Intel that brought this new type of memory chip, commonly called “flash” or NAND, to market. 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. For Andy Grove and Intel, making money on microprocessors was a matter of life or death. Japan’s DRAM firms, with massive market share and few financial constraints, ignored the microprocessor market until it was too late. As a result, 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.

The country’s semiconductor firms spent the 1990s shrinking in the face of America’s resurgence. The technological basis for Japan’s challenge to American hegemony began to crumble.

Gorbachev promised to end the Cold War by withdrawing Soviet troops from Eastern Europe, and he wanted access to American technologies in exchange. Meeting with America’s tech executives, he encouraged them to invest in the USSR. When Gorbachev visited Stanford University, he high-fived spectators as he walked around campus. “The Cold War is now behind us,” the Soviet leader told an audience at Stanford. “Let’s not wrangle over who won it.” But it was obvious who won, and why. Ogarkov had identified the dynamic a decade earlier, though at the time he hoped the USSR might overcome it. Like the rest of the Soviet military leadership, he’d grown more pessimistic over time. As early as 1983, Ogarkov had gone so far as to tell American journalist Les Gelb—off the record—that “the Cold War is over and you have won.” The Soviet Union’s rockets were as powerful as ever. It had the world’s largest nuclear arsenal. But its semiconductor production couldn’t keep up, its computer industry fell behind, its communications and surveillance technologies lagged, and the military consequences were disastrous. “All modern military capability is based on economic innovation, technology, and economic strength,” Ogarkov explained to Gelb. “Military technology is based on computers. You are far, far ahead of us with computers…. In your country, every little child has a computer from age 5.”

The security chiefs led a demoralized coup attempt against Gorbachev that sputtered out after three days. It was a pathetic end for a once-powerful country, which couldn’t come to terms with the painful decline in its military power. The Russian chip industry faced humiliation of its own, with one fab reduced in the 1990s to producing tiny chips for McDonald’s Happy Meal toys. The Cold War was over; Silicon Valley had won.

In 1985, Taiwan’s powerful minister K. T. Li called Morris Chang into his office in Taipei.

“We want to promote a semiconductor industry in Taiwan,” he told Chang. “Tell me,” he continued, “how much money you need.”

In the 1990s, Taiwan’s importance began to grow, driven by the spectacular rise of the Taiwan Semiconductor Manufacturing Company, which Chang founded with strong backing from the Taiwanese government.

Under its new, post-Mao leadership, China began integrating into the global economy by attracting some of the basic manufacturing and assembly jobs that Taiwan had used to lift itself out of poverty. With lower wages and several hundred million peasants eager to trade subsistence farming for factory jobs, China’s entry into electronics assembly threatened to put Taiwan out of business. It amounted to economic “warfare,” Taiwanese officials complained to visiting Texas Instruments executives. It was impossible to compete with China on price. Taiwan had to produce advanced technology itself.

Texas Instruments never handed out blank checks like this. Chang knew he’d need a lot of money, because his business plan was based on a radical idea. If it worked, it would upend the electronics industry, placing him—and Taiwan—in control of the world’s most advanced technology. 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. TI’s other executives weren’t convinced. At the time, in 1976, there weren’t any “fabless” companies that designed chips but lacked their own fabs, though Chang predicted such companies would soon emerge.

Minister Li followed through on his promise to find the money for the business plan Chang drew up. 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 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.

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. A decade earlier, Carver Mead had prophesied a Gutenberg moment in chipmaking, but there was one key difference. The old German printer had tried and failed to establish a monopoly over printing. He couldn’t stop his technology from quickly spreading across Europe, benefitting authors and print shops alike. 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. However, the democratization of authorship coincided with a monopolization of the digital printing press. The economics of chip manufacturing required relentless consolidation. Whichever company produced the most chips had a built-in advantage, improving its yield and spreading capital investment costs over more customers. TSMC’s business boomed during the 1990s and its manufacturing processes improved relentlessly. Morris Chang wanted to become the Gutenberg of the digital era. He ended up vastly more powerful. Hardly anyone realized it at the time, but Chang, TSMC, and Taiwan were on a path toward dominating the production of the world’s most advanced chips.

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.

Were it not for Communist rule, China might have played a much larger role in the semiconductor industry. When the integrated circuit was invented, China had many of the ingredients that helped Japan, Taiwan, and South Korea attract American semiconductor investment, like a vast, low-cost workforce and a well-educated scientific elite. However, after seizing power in 1949, the Communists looked at foreign connections with suspicion. For someone like Morris Chang, returning to China after finishing his studies at Stanford would have meant certain poverty and possible imprisonment or death.

In 1965, Chinese engineers forged their first integrated circuit, a half decade after Bob Noyce and Jack Kilby. However, 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.