Chip Wars: The US/China Competition for Tech Supremacy

Semiconductors are the building blocks of modern technology. As the name implies, these crystalline solids contain properties of both conductors (substances that transmit electricity) and insulators (substances that do not). This quality makes them the perfect mediums for controlling electrical currents. Semiconductors are made from pure elements such as silicon and germanium, as well as compounds like gallium arsenide. After undergoing a process called doping (which increases conductivity), the crystals are diced into wafer and placed onto circuit boards. Semiconductors are able to provide power to microprocessor chips such as central processing units (CPUs), memory chips, sensor chips, and graphic processing units (GPUs). They can also provide communications between electronic devices. Otherwise known as integrated circuits (ICs) or microchips, semiconductors are the essential component in technologies ranging from smartphones, PCs, electric vehicles, aircrafts, healthcare appliances, weapons systems and countless other utilities. They are at the cutting-edge of computing, and will play an integral role in powering artificial intelligence, virtual reality, the Internet of Things, quantum computing and 5G wireless networking.

The leaders of the semiconductor industry will shape the future, and quite literally power the world. Whoever controls the industry, or significant shares of it, hold its keys. This has made the microchip, which is smaller than a postage stamp and thinner than a human hair," the object of an intense technological race between the world’s two preeminent countries, the United States and China. The COVID-19 pandemic and the U.S-China trade war has increased both countries’ resolve in becoming less reliant on each other and more self-sufficient in semiconductor production. It is highly improbable that the industry can be completely unwebbed, which means countries are better off tightening relations rather than practising isolationism.

The complex production and manufacturing processes of semiconductors is a truly global enterprise. Microchips contain millions of components. On average, they travel 25,000 miles and cross national borders 70 times before reaching their final consumer. Twenty-five countries are involved in direct supply chains, with an additional 23 countries assisting in secondary market functions.

Eighty percent of the rare-Earth metals used in electronics are located within China’s borders. Meanwhile, American companies have been at the forefront of semiconductor design for decades. It currently controls 48 percent of the microchip market in terms of sales. Eight of the largest fifteen semiconductor firms in the world are American, with Intel being the most profitable. However, Chinese consumers account for 36 percent ($70.5 billion) of American firms’ revenue. The U.S. companies rely on Chinese business to fund their hefty R&D bills, which allow them to remain on the vanguard of chip design.

The biggest manufacturer of the microchip is TSMC, a Taiwanese company. South Korea’s Samsung is also a major player. The Dutch firm ASML is currently the only supplier of UV lithography systems necessary for producing semiconductors. In 2021, the creation of semiconductors would be impossible without international cooperation. No country is close to being able to produce the chip alone from start to finish. The industry is extraordinarily diversified.

This has not stopped the U.S. and China from trying to corner the other out of the market. Beijing has long sought to become more independent in the microchip sphere. In the past three years, it has imported $300 billion in ICs, more than any other country. Chinese companies only provide 30 percent of its domestic market. According to the Office of the U.S. Trade Representative, China’s goal is to create a “closed-loop semiconductor manufacturing ecosystem” from metal extraction to the final product ready for sale. In 2014, the Chinese government started the National Integrated Circuit Industry Investment Fund (known as the Big Fund) to prop-up its domestic IC industry. $150 billion has been invested so far. This figure is equivalent to China’s annual semiconductor market value and twice what the rest of the world spends annually on R&D. President Xi Jinping has pledged to spend $1.4 trillion through 2025 to develop new technology in areas such as artificial intelligence and 5G wireless networking. Despite these efforts, 84 percent of China’s semiconductors are either imported or made domestically by foreign manufacturers. The country’s largest IC designer, SMIC, is four years behind in terms of innovation to the U.S., Taiwan and South Korea.

The U.S. government has been watching China’s moves with a wary eye. In the past few years, it has done things to make it harder for the Chinese companies to acquire the resources necessary for producing internationally competitive semiconductors. SMIC and 60 other Chinese entities were added to the U.S. Department of Commerce’s Bureau of Industry and Security Entity List, which restricts their access to American SMEs. These companies were added due to their ties to the “Chinese military, human rights abuses and/or theft of U.S. trade secrets.” In March 2018, the Trump Administration imposed tariffs on China, citing intellectual property theft. The trade pressure has continued under Biden.

The U.S. government has also coaxed its allies to end deals with Chinese tech companies. Taiwan’s TSMC stopped taking orders from Huawei, which was their second largest customer after Apple. TSMC also announced plans to build a 5-nanometer chip plant (the smallest semiconductor that can currently be made) in Arizona. Chinese investors’ attempts to acquire U.S. and European-based companies such as Micron Technology, Western Digital Corporation and Lattice were all blocked by the government due to security concerns. Taiwan has been trying to reduce its ties with the mainland by increasing trade and investment with other Southeast Asian countries. Multinational corporations are moving their factories to Vietnam, Japan and India.

These moves seem all for naught. China will never be completely isolated from the rest of the world. It is Taiwan’s largest trading partner, so it is highly unlikely that the two will decouple. No country will ever have a total monopoly on the microchip market. The production is just too complex for one nation to do it all. Even if the U.S. is able to drastically increase its manufacturing abilities, it still needs China’s rare-Earth metals and large population of consumers. Likewise, China remains reliant on ASML in The Netherlands for UV lithography, American and Taiwanese design innovations and Taiwanese manufacturing. This knot cannot be untied.

It is a shame, albeit predictable, that technology innovation is caught up in geopolitical games. If the isolation worsens, this will deprive the world of scientific advancements that can enhance the lives of billions. Surely, COVID-19 and the trade war have underscored the need to adjust international supply chains. And both countries are right to be suspicious of the other country’s technology being used as a tool of espionage. However, humanity will suffer if the U.S. and China continue to prioritize nationalistic interests over international cooperation on technology.

Written by Benjamin Karlin

Benjamin Karlin is a columnist at DecipherGrey.