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

by Chris Miller

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.

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.

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.

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.

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.

Last year, the chip industry produced more transistors than the combined quantity of all goods produced by all other companies, in all other industries, in all human history. Nothing else comes close.

Yet the internet, the cloud, social media, and the entire digital world only exist because engineers have learned to control the most minute movement of electrons as they race across slabs of silicon. “Big tech” wouldn’t exist if the cost of processing and remembering 1s and 0s hadn’t fallen by a billionfold in the past half century.

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.

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.

America’s most successful chip firms have built supply chains that stretch across the world, driving down costs and producing the experti...

Taiwan’s TSMC builds almost all the world’s most advanced processor chips.

A typical chip might be designed with blueprints from the Japanese-owned, UK-based company called Arm, by a team of engineers in California and Israel, using design software from the United States. When a design is complete, it’s sent to a facility in Taiwan, which buys ultra-pure silicon wafers and specialized gases from Japan. 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.

Kilby called his invention an “integrated circuit,” but it became known colloquially as a “chip,” because each integrated circuit was made from a piece of silicon “chipped” off a circular silicon wafer.

Photolithography made it possible to imagine mass-producing tiny transistors.

Noyce had experienced government-directed R&D while fresh out of graduate school when he worked for Philco, an East Coast radio manufacturer with a big defense unit. “The direction of the research was being determined by people less competent,” Noyce recalled, complaining about the time he wasted writing progress reports for the military. Now that he was running Fairchild, a company seeded by a trust-fund heir, he had flexibility to treat the military as a customer rather than a boss.

“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.”

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.”

“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.”

Replicating Sony’s product innovation and marketing expertise, however, proved just as hard as replicating America’s semiconductor expertise.

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.

“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.

Chip firms hired women because they could be paid lower wages and were less likely than men to demand better working conditions.

Assembly workers in Hong Kong seemed twice as fast as Americans, Fairchild executives thought, and more “willing to tolerate monotonous work,” one executive reported.

His first meeting with Taiwan’s powerful and savvy economy minister, K. T. Li, ended acrimoniously when the minister declared that intellectual property was something “imperialists used to bully less-advanced countries.”

Li wasn’t wrong to see Shepherd as an agent of America’s empire. But unlike the North Vietnamese, who were trying to oust the United States from their country, Li eventually realized that Taiwan would benefit from integrating itself more deeply with the United States.

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. The more semiconductor plants on the island, and the more economic ties with the United States, the safer Taiwan would be.

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.

Intel wasn’t the first company to think about producing a generalized logic chip. A defense contractor had produced a chip much like Intel’s for the computer on the F-14 fighter jet. However, that chip’s existence was kept secret until the 1990s.

Some Japanese played up the idea that they excelled at implementation, whereas America was better at innovation.

occupation authorities transferred knowledge about the invention of the transistor to Japanese physicists, while policymakers in Washington ensured Japanese firms like Sony could easily sell into U.S. markets. 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.

They reported that Japanese workers were “amazingly pro-company” and that “the foreman put a priority to the company over his family.” Bosses in Japan didn’t have to worry about getting burned in effigy. It was a “beautiful story,” Sporck declared. “It was something for all of our employees to see how that competition is tough.”

We knew the dangers and we damn right well weren’t gonna let that happen to us.” Everything was at stake—jobs, fortunes, legacies, pride. “We’re at war with Japan,” Sporck insisted. “Not with guns and ammunition, but an economic war with technology, productivity, and quality.”

Sporck and Sanders pointed out that Japanese firms benefitted from a protected domestic market, too. Japanese firms could sell to the U.S., but Silicon Valley struggled to win market share in Japan. Until 1974, Japan imposed quotas limiting the number of chips U.S. firms could sell there.

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.

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.

In the 1970s, Silicon Valley firms had forgotten about the government as they replaced defense contracts with civilian computer and calculator markets. 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.

Using semiconductor technology to “offset” the Soviet conventional advantage in the Cold War had been American strategy since the mid-1970s,

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.

Suddenly Japan’s subsidies for its chip industry, widely blamed for undermining American firms like Intel and GCA, seemed like a national security issue.

The U.S. military was more dependent on electronics—and thus on chips—than ever before. By the 1980s, the report found, around 17 percent of military spending went toward electronics, compared to 6 percent at the end of World War II.

The Pentagon’s task force summarized the ramifications in four bullet points, underlining the key conclusions: 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.

Silicon Valley had a schizophrenic relationship with the government, simultaneously demanding to be left alone and requesting that it help. Noyce exemplified the contradiction. He’d spent his earliest days at Fairchild avoiding Pentagon bureaucracy while benefitting from the Cold War−era space race. Now he thought the government needed to help the semiconductor industry, but he still feared that Washington would impede innovation.

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.