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

by Chris Miller

almost every chip firm has non-core technology, in subsectors that they don’t lead, that they’d be happy to share for a price. When companies are losing market share or in need of financing, moreover, they don’t have the luxury of focusing on the long term. This gives China powerful levers to induce foreign chip firms to transfer technology, open production facilities, or license intellectual property, even when foreign companies realize they’re helping develop competitors. 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.

Starting in 1999, Huawei hired IBM’s consulting arm to teach it to operate like a world-class company. One former IBM consultant said Huawei spent $50 million in 1999 on consulting fees, at a time when its entire revenue was less than a billion dollars. At one point it employed one hundred IBM staff to redo business processes. “They weren’t too daunted by the engineering tasks,” this former consultant reported, but “they felt they were a hundred years behind when it came to economic knowledge and business knowledge.” Thanks to IBM and other Western consultants, Huawei learned to manage its supply chain, anticipate customer demand, develop top-class marketing, and sell products worldwide.

One Chinese study has estimated that as many as 95 percent of GPUs in Chinese servers running artificial intelligence workloads are designed by Nvidia, for example.

The entire chip industry depended on sales to China—be it chipmakers like Intel, fabless designers like Qualcomm, or equipment manufacturers like Applied Materials. One U.S. semiconductor executive wryly summed things up to a White House official: “Our fundamental problem is that our number one customer is our number one competitor.”

U.S. companies like Applied Materials, Lam Research, and KLA are part of a small oligopoly of companies that produce irreplaceable machinery, like the tools that deposit microscopically thin layers of materials on silicon wafers or recognize nanometer-scale defects. Without this machinery—much of it still built in the U.S.—it’s impossible to produce advanced semiconductors. Only Japan has companies producing some comparable machinery, so if Tokyo and Washington agreed, they could make it impossible for any firm, in any country, to make advanced chips.

Excluding the chips Intel builds in-house, all the most advanced logic chips are fabricated by just two companies, Samsung and TSMC, both located in countries that rely on the U.S. military for their security.

In the financial sphere, the U.S. had weaponized other countries’ reliance on access to the banking system to punish Iran, for example. These academics worried that the U.S. government’s use of trade and capital flows as political weapons threatened globalization and risked dangerous unintended consequences.

After the U.S. restrictions took place, other countries, notably Britain, decided to ban Huawei, reasoning that in the absence of U.S. chips the company would struggle to service its products.

It’s commonly argued that the escalating tech competition with the United States is like a “Sputnik moment” for China’s government. The allusion is to the United States’ fear after the launch of Sputnik in 1957 that it was falling behind its rival, driving Washington to pour funding into science and technology. China certainly faced a Sputnik-scale shock after the U.S. banned sales of chips to firms like Huawei.

Consider, for example, what it would take to replicate one of ASML’s EUV machines, which have taken nearly three decades to develop and commercialize. EUV machines have multiple components that, on their own, constitute epically complex engineering challenges. Replicating just the laser in an EUV system requires perfectly identifying and assembling 457,329 parts. A single defect could cause debilitating delays or reliability problems. No doubt the Chinese government has deployed some of its best spies to study ASML’s production processes. However, even if they’ve already hacked into the relevant systems and downloaded design specs, machinery this complex can’t simply be copied and pasted like a stolen file. Even if a spy were to gain access to specialized information, they’d need a PhD in optics or lasers to understand the science—and even still, they’d lack the three decades of experience accumulated by the engineers who’ve developed EUV.

The semiconductor shortage is mostly a story of demand growth rather than supply issues. It’s driven by new PCs, 5G phones, AI-enabled data centers—and, ultimately, our insatiable demand for computing power.

Beijing knows that Taiwan’s defense strategy is to fight long enough for the U.S. and Japan to arrive and help.

Business as usual is not nearly as fraught in California’s tech epicenter. Much of Silicon Valley’s knowledge could be easily relocated in case of war or earthquake. This was tested during the pandemic, when almost all the region’s workers were told to sit at home.

Even still, new fabs must be stocked with machinery, like tools from ASML and Applied Materials. During the 2021–2022 chip shortage, ASML and Applied Materials both announced they were facing delays in producing machinery because they couldn’t acquire enough semiconductors.

Ukraine has received huge stockpiles of guided munitions from the West, such as Javelin anti-tank missiles that rely on over 200 semiconductors each as they home in on enemy tanks.

The idea that the semiconductor industry would eventually produce more transistors each day than there are cells in the human body was something the founders of Silicon Valley would have found inconceivable.

Today, even the Pentagon’s $700 billion budget isn’t big enough to afford facilities for building cutting-edge chips for defense purposes on U.S. soil. The Defense Department has dedicated shipyards for billion-dollar submarines and ten-billion-dollar aircraft carriers, but it buys many of the chips it uses from commercial suppliers, often in Taiwan.

A facility to fabricate the most advanced logic chips costs twice as much as an aircraft carrier but will only be cutting-edge for a couple of years.

Our demand for computing power is unlikely ever to diminish, but we could run out of supply. Gordon Moore’s famous law is only a prediction, not a fact of physics. Industry luminaries from Nvidia CEO Jensen Huang to former Stanford president and Alphabet chairman John Hennessy have declared Moore’s Law dead. At some point, the laws of physics will make it impossible to shrink transistors further. Even before then, it could become too costly to manufacture them. The rate of cost declines has already significantly slowed. The tools needed to make ever-smaller chips are staggeringly expensive, none more so than the EUV lithography machines that cost more than $100 million each.