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

by Chris Miller

The x86 architecture dominated PCs not because it was the best, but because IBM’s first personal computer happened to use it.

Arm adopted a business model of selling licenses for use of its architecture and letting any other chip designer buy them. This presented a new vision of a disaggregated chip industry.

Arm failed to win market share in PCs in the 1990s and 2000s, because Intel’s partnership with Microsoft’s Windows operating system was simply too strong to challenge.

Otellini, Intel’s CEO from 2005 to 2013, admitted he turned down the contract to build iPhone chips because he worried about the financial implications. A fixation on profit margins seeped deep into the firm—its hiring decisions, its product road maps, and its R&D processes. The company’s leaders were simply more focused on engineering the company’s balance sheet than its transistors.

“Levy an extra tax on the product of offshored labor. If the result is a trade war, treat it like other wars—fight to win.”

“Abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry,” he declared, pointing to the electric battery industry. The U.S. “lost its lead in batteries thirty years ago when it stopped making consumer electronics devices,” Grove wrote. Then it missed PC batteries, and now was far behind on batteries for electric vehicles. “I doubt they will ever catch up,” he predicted in 2010.

Washington concluded that export controls would do more harm than good, hurting U.S. industry without preventing China from buying goods from firms in other countries. Japan and Europe were eager to sell almost anything to the PRC. No one in Washington had the stomach for a fight with allies about export controls, especially as U.S. leaders were focused on befriending their Chinese counterparts.

By the 2000s, it was common to split the semiconductor industry into three categories. “Logic” refers to the processors that run smartphones, computers, and servers. “Memory” refers to DRAM, which provides the short-term memory computers need to operate, and flash, also called NAND, which remembers data over time.

In the 1990s, when Microsoft Office introduced an animated, paperclip called Clippy that sat at the side of the screen and dispensed advice, it represented a leap forward in graphics—and often caused computers to freeze.

Nvidia’s GPUs can render images quickly because, unlike Intel’s microprocessors or other general-purpose CPUs, they’re structured to conduct lots of simple calculations—like shading pixels—simultaneously.

In 2006, realizing that high-speed parallel computations could be used for purposes besides computer graphics, Nvidia released CUDA, software that lets GPUs be programmed in a standard programming language, without any reference to graphics at all.

The 180nm node was pioneered in 1999, followed by 130nm, 90nm, 65nm, and 45nm, with each generation shrinking transistors enough to make it possible to cram roughly twice as many in the same area. This reduced power consumption per transistor, because smaller transistors needed fewer electrons to flow through them.

Unlike the 2D design used since the 1960s, the 22nm node introduced a new 3D transistor, called a FinFET (pronounced finfet), that sets the two ends of the circuit and the channel of semiconductor material that connects them on top of a block, looking like a fin protruding from a whale’s back.

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.

Crucial components came from Cymer in California and Zeiss and Trumpf in Germany. And even these German firms relied on critical pieces of U.S.-produced equipment.

Building cutting-edge processors was too expensive for everyone except the world’s biggest chipmakers. Even the deep pockets of the Persian Gulf royals who owned GlobalFoundries weren’t deep enough. The number of companies capable of fabricating leading-edge logic chips fell from four to three.

But in the early 2010s, just as Intel completed its conquest of the data center, processing demands began to shift. The new trend was artificial intelligence—a task that Intel’s main chips were poorly designed to address.

The cloud may sound ethereal, but the silicon on which all our data lives is very real—and very expensive.

As the decade ended, only two companies could manufacture the most cutting-edge processors, TSMC and Samsung. And so far as the United States was concerned, both were problematic for the same reason: their location. Now the entire world’s production of advanced processors was taking place in Taiwan and Korea—just off the coast from America’s emerging strategic competitor: the People’s Republic of China.

“Without cybersecurity there is no national security,” declared Xi Jinping, general secretary of the Chinese Communist Party, in 2014, “and without informatization, there is no modernization.”

Without cybersecurity there is no national security,” declared Xi Jinping, general secretary of the Chinese Communist Party, in 2014, “and without informatization, there is no modernization.”

When Japan, Taiwan, and South Korea wanted to break into the complex and high-value portions of the chip industry, they poured capital into their semiconductor companies, organizing government investment but also pressing private banks to lend. Second, they tried to lure home their scientists and engineers who’d been trained at U.S. universities and worked in Silicon Valley. Third, they forged partnerships with foreign firms but required them to transfer technology or train local workers. Fourth, they played foreigners off each other, taking advantage of competition between Silicon Valley firms—and, later, between Americans and Japanese—to get the best deal for themselves.

The chip industry was changing in ways that weren’t favorable to China. “The scale of investment has risen rapidly and market share has accelerated to the concentration of dominant firms,” China’s State Council noted in one technology policy report. These dominant firms—TSMC and Samsung chief among them—would be extremely difficult to displace. Yet demand for chips was “exploding,” China’s leaders realized, driven by “cloud computing, the Internet of Things, and big data.” These trends were dangerous: chips were becoming even more important, yet the design and production of the most advanced chips was monopolized by a handful of companies, all located outside of China.

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,

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.

Across the entire semiconductor supply chain, aggregating the impact of chip design, intellectual property, tools, fabrication, and other steps, Chinese firms have a 6 percent market share, compared to America’s 39 ...

If China only wanted a bigger part in this ecosystem, its ambitions could’ve been accommodated. However, Beijing wasn’t looking for a better position in a system dominated by America and its friends. Xi’s call to “assault the fortifications” wasn’t a request for slightly higher market share. It was about remaking the world’s semiconductor industry, not integrating with it. Some economic policymakers and semiconductor industry executives in China would have preferred a strategy of deeper integration, yet leaders in Beijing, who thought more about security than efficiency, saw interdependence as a threat. The Made in China 2025 plan didn’t advocate economic integration but the opposite. It called for slashing China’s dependence on imported chips. The primary target of the Made in China 2025 plan is to reduce the share of foreign chips used in China.

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.

Integrated circuits made up 15 percent of South Korea’s exports in 2017; 17 percent of Singapore’s; 19 percent of Malaysia’s; 21 percent of the Philippines’; and 36 percent of Taiwan’s. Made in China 2025 called all this into question.

For chip firms, its often easier to raise funds in China than on Wall Street. Accepting Chinese capital can be an implicit requirement for doing business in the country.

John Deng, the island’s economy minister, suggested relaxing Taiwan’s restrictions on Chinese investment in the chip sector. Amid Chinese pressure, he signaled that greater Chinese control of Taiwan’s chip sector was inevitable. “You cannot escape from this issue,” Deng told journalists.

First, assiduously cultivate political relationships to garner favorable regulation and cheap capital. Second, identify products pioneered in the West and Japan and learn to build them at equivalent quality and lower cost. Third, globalize relentlessly, not only to seek new customers but also to learn by competing with the world’s best companies. Executing these strategies made Samsung one of the world’s biggest companies, achieving revenues equivalent to 10 percent of South Korea’s entire GDP.

Huawei coupled this with a militaristic ethos that the company celebrates as “wolf-culture.” Calligraphy on the wall of one of the company’s research lab reads “Sacrifice is a soldier’s highest cause. Victory is a soldier’s greatest contribution,” according to a New York Times report.

Huawei spread rapidly across the world. As it grew, incumbent Western firms selling telecom equipment were forced to merge or pushed out of the market. Canada’s Nortel went bankrupt. Alcatel-Lucent, the company that inherited Bell Labs after AT&T was broken up, sold its operations to Finland’s Nokia.

However, the company asked its consultants to determine its supply chain risk. They reported that the company had two key vulnerabilities: access to Google’s Android operating system, the core software on which all non-Apple smartphones run, and the supply of the semiconductors that every smartphone requires.

America’s near monopoly on the world’s most profitable chip design businesses was under threat. This was more evidence that Huawei was successfully replicating what South Korea’s Samsung or Japan’s Sony had done decades earlier: learning to produce advanced technology, winning global markets, investing in R&D, and challenging America’s tech leaders. Moreover, Huawei seemed uniquely well placed for a new era of ubiquitous computing that would accompany the rollout of the next generation of telecom infrastructure: 5G.

Cell networks will identify a phone’s location and send radio waves directly toward a phone, using a technique called beamforming.

Around 2017, as telecom companies around the world began signing contracts with equipment providers to build 5G networks, it emerged that China’s Huawei was in a leading position, offering gear that was perceived by the industry to be high-quality and competitively priced. Huawei looked likely to play a bigger role in the construction of 5G networks than any other company, overtaking Sweden’s Ericsson and Finland’s Nokia, the only other main producers of the equipment on cell towers.

If the trends of the late 2010s were projected forward, by 2030 China’s chip industry might rival Silicon Valley for influence. This wouldn’t simply disrupt tech firms and trade flows. It would also reset the balance of military power.

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.

The U.S. faces the same basic dilemma today: China can deploy more ships and planes than the U.S., especially in theaters that matter, like the Taiwan Strait. “We will never try to match our opponents or our competitors tank for tank, plane for plane, person for person,” declared Bob Work, the former deputy defense secretary who is the intellectual godfather of this new offset, in a clear echo of the logic of the late 1970s. The U.S. military will only succeed, in other words, if it has a decisive technological advantage.

What will this technological advantage look like? The 1970s offset was driven by “digital microprocessors, information technologies, new sensors, stealth,” Work has argued. This time, it will be “advances in Artificial Intelligence (AI) and autonomy.”

The warfare of the future will be more reliant than ever on chips—powerful processors to run AI algorithms, big memory chips to crunch data, perfectly tuned analog chips to sense and produce radio waves.

Today even designing a leading-edge chip—which can cost several hundred million dollars—is too expensive for all but the most important projects.

For every major chip firm, the Chinese consumer market is far more important a customer than the U.S. government.

Taiwan isn’t simply the source of the advanced chips that both countries’ militaries are betting on. It’s also the most likely future battleground.

“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.

They also presumed China would use its position as the world’s key manufacturer of electronics to insert back doors and to spy more effectively, just as the U.S. had done for decades.