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

by Chris Miller

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.

Sematech organized seminars on reliability and good management skills, offering a sort of mini-MBA. It also began coordinating between equipment companies and chipmakers to align their production schedules.

After the company had invented the wafer stepper, a half decade of mismanagement and bad luck had left GCA a small player, far behind Japan’s Nikon and Canon and the Netherlands’ ASML.

Being “ahead of your time” is good for scientists but not necessarily for manufacturing firms seeking sales.

“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.

“Militarily we could never defeat the United States,” Morita told an American colleague at the time, “but economically we can overcome the United States and become number one in the world.”

Morita’s willingness to coauthor a book with someone like Ishihara shocked many Americans, showing that a threatening nationalism still lurked within the capitalist class that Washington had cultivated. The U.S. strategy since 1945 had been to bind Japan to the U.S. via exchanges of trade and technology. Akio Morita was arguably the greatest beneficiary of America’s tech transfers and its market openness. If even he was questioning America’s leading role, Washington needed to rethink its game plan.

Japan didn’t need to submit to U.S. demands, Ishihara argued, because America relied on Japanese semiconductors. American military strength, he noted, required Japanese chips. “Whether it be mid-range nuclear weapons or inter-continental ballistic missiles, what ensures the accuracy of weapons is none other than compact, high-precision computers,” he wrote. “If Japanese semiconductors are not used, this accuracy cannot be assured.” Ishihara speculated that Japan could even provide advanced semiconductors to the USSR, tipping the military balance in the Cold War.

“The 1-megabit semiconductors which are used in the hearts of computers, which carry hundreds of millions of circuits in an area which is one-third the size of your little fingernail, are only made in Japan,” Ishihara noted. “Japan has nearly a 100 percent share of these 1-megabit semiconductors. “Now Japan is at least five years ahead of the U.S. in this area and the gap is widening,” he continued. Computers using Japan’s chips were “central to military strength and therefore central to Japanese power… in that sense, Japan has become a very important country.”

One senior Foreign Ministry official was quoted as arguing that “Americans simply don’t want to recognize that Japan has won the economic race against the West.” Soon-to-be-prime-minister Kiichi Miyazawa publicly noted that cutting off Japanese electronics exports would cause “problems in the U.S. economy,” and predicted that “the Asian economic zone will outdo the North American zone.” Amid the collapse of its industries and its high-tech sector,...

The best result Brown could foresee was a future in which the U.S. would protect Japan, but would do so with weapons powered by Japanese tech. America’s strategy to turn Japan into a transistor salesman seemed to have gone horribly wrong.

America’s supply chain statecraft had worked brilliantly in fending off Communists, but by the 1980s, the primary beneficiary looked to have been Japan. Its trade and foreign investment had grown massively. Tokyo’s role in Asia’s economics and politics was expanding inexorably. If Japan could so swiftly establish dominance over the chip industry, what would stop it from dethroning America’s geopolitical preeminence, too?

Rather than cutting itself off from trade, Silicon Valley offshored even more production to Taiwan and South Korea to regain its competitive advantage.

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.

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.

Some of the structural factors that had favored Japanese producers in the early 1980s began to shift. Between 1985 and 1988, the value of the Japanese yen doubled against the dollar, making American exports cheaper. Interest rates in the U.S. fell sharply over the 1980s, reducing Intel’s capital costs.

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

A key part of Silicon Valley’s strategy to outmaneuver the Japanese was to find cheaper sources of supply in Asia. Lee decided this was a role Samsung could easily play.

He insisted Samsung was working for the good of the nation—and that the good of the nation depended on Samsung becoming a world-class company. “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.

Samsung’s all-in bet on chips wouldn’t have worked without support from Silicon Valley. The best way to deal with international competition in memory chips from Japan, Silicon Valley wagered, was to find an even cheaper source in Korea, while focusing America’s R&D efforts on higher-value products rather than commoditized DRAMs.

Yet Silicon Valley’s rebirth isn’t solely a story of heroic entrepreneurs and creative destruction. Alongside the rise of these new industrial titans, a new set of scientists and engineers were preparing a leap forward in chipmaking and devising revolutionary new ways to use processing power. Many of these developments occurred in coordination with government efforts, usually not the heavy hand of Congress or the White House, but the work of small, nimble organizations like DARPA that were empowered to take big bets on futuristic technologies—and to build the educational and R&D infrastructure that such gambles required.

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.

In the early 1980s, the KGB reportedly employed around one thousand people to steal foreign technology.

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.

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.

One popular Soviet joke from the 1980s recounted a Kremlin official who declared proudly, “Comrade, we have built the world’s biggest microprocessor!”

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.

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. Japan led the production of memory chips, the U.S. produced more microprocessors, while Japan’s Nikon and Canon and the Netherland’s ASML split the market for lithography equipment. Workers in Southeast Asia conducted much of the final assembly. 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. Advanced Western manufacturing equipment remained hard to access, while East Germany had none of the cheap labor that Silicon Valley firms hired across Asia.

Then in 1990 crisis hit. Japan’s financial markets crashed. The economy slumped into a deep recession. Soon the Tokyo stock market was trading at half its 1990 level. Real estate prices in Tokyo fell even further. Japan’s economic miracle seemed to screech to a halt.

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.

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.

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 Cold War was over; Silicon Valley had won.

The 1990s were the years when the word “globalization” first became commonly used, though the chip industry had relied on international production and assembly since the earliest days of Fairchild Semiconductor.

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.

since most money in the chip industry was made by firms designing and producing the most advanced chips. Officials like Minister Li knew the country’s economy would keep growing only if it advanced beyond simply assembling components designed and fabricated elsewhere.

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 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.

A crucial ingredient in TSMC’s early success was deep ties with the U.S. chip industry. Most of its customers were U.S. chip designers, and many top employees had worked in Silicon Valley.

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.

While China’s small cadre of semiconductor engineers were hoeing China’s fields, Maoists exhorted the country’s workers that “all people must make semiconductors,” as if every member of the Chinese proletariat could forge chips at home.

Bardeen told his wife that despite claims of equality he found Chinese society regimented and hierarchical.

and from unofficial government pressure on South Korea’s banks to provide credit. This financing mattered because Samsung’s main product, DRAM memory chips, required brute financial force to reach each successive technology node—spending that had to be sustained even during industry downturns.

Chang’s strategy was simple: do as TSMC had done. In Taiwan, TSMC had hired the best engineers it could find, ideally with experience at American or other advanced chip firms. TSMC bought the best tools it could afford. It focused relentlessly on training its employees in the industry’s best practices. And it took advantage of all the tax and subsidy benefits that Taiwan’s government was willing to provide.

One influential commentator declared the 1990s a “unipolar moment,” in which America’s dominance was unquestioned. The Persian Gulf War had demonstrated America’s terrifying technological and military might.

Most people in Washington thought globalization was a good thing. The dominant belief in the U.S. government was that expanding trade and supply chain connections would promote peace by encouraging powers like Russia or China to focus on acquiring wealth rather than geopolitical power.

The scientific networks that produced EUV spanned the world, bringing together scientists from countries as diverse as America, Japan, Slovenia, and Greece. However, the manufacturing of EUV wasn’t globalized, it was monopolized. A single supply chain managed by a single company would control the future of lithography.