Chip War – or the battle for the most important technology of the future

In his seminal book The Price, Daniel Yergin showed how the geopolitics of the 20th century were largely shaped by the struggle for oil. Fossil fuels will remain important for a long time to come. But who will be in charge in the 21st century will be determined by the outcome of the semiconductor war. Chris Miller shows this in his book “Chip War”, a book that was named “Business Book of the Year” by the “Financial Times”.

The importance of semiconductors or chips cannot be overemphasized. From children’s toys to cruise missiles – nothing works without chips. And this dependence will only grow exponentially. In the Internet of Things and Smart Grids, more and more devices will be linked and controlled by powerful chips.

Gordon Moore, one of the founders of the semiconductor industry, formulated the law in the 1960s according to which the performance of each new generation of chips doubles every two years. This law is still valid and has brought us not only the deadliest weapons, but also the rapid advancement in artificial intelligence.

The chip business has become extraordinarily complex. A distinction is made between the designers and the manufacturers. Usually the two are separate. Only Intel is trying to do both, which is probably why it has fallen behind.

In most industries, the designers are the bright minds who claim the lion’s share of a product’s profits, and the manufacturers are the poor, low-paid workers on the assembly line. Not so with semiconductors. To produce chips, you need the most complex factories – called fabs – out there. “It takes a factory that costs twice as much as an aircraft carrier and will only be at the top for a few more years,” Miller said.

Taiwan Semiconductor Manufacturing Company (TSMC) is the current leading fab. It does not design its own chips, but produces them according to the plans of customers such as Apple, AMD, Qualcomm or Nvidia. It does not have a secret formula like Coca-Cola, but rather a network of highly specialized suppliers, such as ASML, a Dutch manufacturer of lithography systems. And ASML in turn counts on the German optics company Zeiss. To illustrate this with a figure: the laser supplied by Zeiss for ASML’s most modern lithography machine consists of almost 500,000 separate parts. No wonder the machine costs over $100 million.

A chip factory is therefore inevitably dependent on a global supply chain. “In an industry with such a multinational supply chain and technical dependencies, independence remains an illusion,” says Miller. “That also applies to the US, which is still the most important player in the field of semiconductors.”

The US and China are both caught in a chip trap. The Chinese market is vital for American designers to survive. For Micron, a leading fab in the US, it is therefore a hard blow when – as just happened – the Chinese suddenly block access to the market. They sell about a third of their production there.

mutual dependence

Micron’s ban from the Chinese market is the latest skirmish in the US-China chip war. This war has been steadily intensifying lately and is becoming a problem not only for the manufacturers, but also for the designers. Jensen Huag, CEO of Nvidia, currently the most valuable semiconductor company in the US, warns against completely excluding the Chinese from supplying the most advanced chips. “If the Chinese can’t buy the American chips anymore, they’ll just make them themselves,” Huag told the Financial Times. “That’s why the US should be careful. China is a very important market for the technology industry.”

Conversely, however, it also becomes a shoe. Although they invest almost unlimited money in research, technically the Chinese can’t keep up with the Americans. “China’s leaders have identified reliance on foreign chipmakers as a critical vulnerability,” notes Miller. “That’s why they want to buy foreign chip makers and steal their technology, which is why they give millions of dollars in subsidies to their own makers.”

Taiwan plays a central role in the Chip War. As mentioned, TSMC is currently the main fab. That is why the statement keeps circulating that China also wants to conquer Taiwan in order to get hold of TSMC. This is nonsense. Physical ownership of the factories alone would do China little good. The associated global supply chains and the know-how of the engineers are decisive. Neither can be achieved by military force. Tsai-Ing, the president of Taiwan, has therefore also stated in “Foreign Affairs” that the chip industry is a “silicone sword” with which Taiwan can protect itself against aggressive takeover wishes.

The Chip Wars are the result of the increasing estrangement of the two superpowers. As mentioned, China wants to use all its power to catch up technologically. The US, in turn, wants to reduce its dependence on the Chinese market. That’s why the Biden administration smuggled legislation through Congress that would give the domestic semiconductor industry $50 billion in aid. Partly successfully. TSMC also wants to set up a factory in the US and Apple has just signed a multi-billion dollar supply contract with US manufacturer Broadcom.

However, neither superpower is set to become independent of semiconductors any time soon – and that’s a good thing. Interdependence also allows for the possibility of cooperation. For example, the possibility of using the chips to combat the most pressing issues of the moment, such as climate change.