US-China chip war: America is winning

For more than a century, the struggle for oil has unleashed wars, forced unlikely alliances and sparked diplomatic disputes.

Now the world’s two largest economies are fighting over another precious resource: semiconductors, the chips that literally power our daily lives.

These tiny silicon fragments are at the heart of a $500 billion industry expected to double in size by 2030. And whoever controls the supply chains – a tangled network of companies and countries that make the chips – holds the key to becoming an unrivaled superpower.

China wants the technology to make chips. Because of this, the US, a source of much of the technology, cuts Beijing off.

The two countries are clearly locked in an Asia-Pacific arms race, says Chris Miller, author of Chip Wars and an associate professor at Tufts University.

But, he adds, there’s more to the race: “[It] takes place both in traditional areas such as the number of ships or missiles produced, but increasingly also in relation to the quality of artificial intelligence (AI) algorithms that can be used in military systems.

For now, the US is winning – but the chip war they’ve declared on China is changing the global economy.

Manufacturing semiconductors is complex, specialized and deeply integrated.

An iPhone has chips that are designed in the US, manufactured in Taiwan, Japan, or South Korea, and then assembled in China. India, which invests more in the industry, could play a bigger role in the future.

Semiconductors were invented in the US, but over time East Asia evolved into a manufacturing hub, largely due to government incentives, including subsidies.

This allowed Washington to develop business ties and strategic alliances in a region vulnerable to Russian influence during the Cold War. It’s just as useful now given Beijing’s growing influence in the Asia-Pacific region.

The race is on to make the best, most efficient chips at scale, and the smaller the better. The challenge: how many transistors—tiny electrical switches that can turn a current on or off—fit on the smallest piece of a silicon wafer?

“The semiconductor industry calls Moore’s Law, essentially the doubling of transistor density over time, and that’s a tough goal to achieve,” said Jue Wang, a Silicon Valley partner at Bain & Company.

“As a result, our phones will become faster, our digital photo archive larger, our smart home devices smarter over time, and our social media content richer.”

Getting there isn’t easy, even for the top chipmakers. In mid-2022, Samsung became the first company to mass-produce large-scale three-nanometer chips. It was followed later that year by Taiwan Semiconductor Manufacturing Company (TSMC) — the world’s largest chipmaker and a key supplier to Apple.

how tight is that Much narrower than a strand of human hair, which measures around 50 to 100,000 nanometers.

These smaller “tip” chips are more powerful, which means they’re being built into more valuable devices – supercomputers and AI, the Internet of Things.

The market for “trailing edge” chips — which power the more mundane parts of our lives like microwaves, washing machines, and refrigerators — is also lucrative. But demand is likely to wither in the future.

Most of the world’s chips are currently made in Taiwan, giving the self-governing island what its president calls a “silicon shield” — in other words, protection from China’s claiming territory.

Beijing, too, has made chip production a national priority and is investing aggressively in supercomputers and AI. It’s far from a global leader, but it’s been catching up quickly over the past decade, particularly in terms of its chip design capabilities, says Mr. Miller.

“What you find in the past is that whenever powerful countries have advanced computer technology, they use it for intelligence and military systems,” he added.

This, and dependence on Taiwan and other Asian countries for supplies, is shaking America.

The Biden administration is trying to stifle China’s access to the technology that makes chips.

Last October, Washington announced sweeping export controls that made it virtually impossible for companies to sell chips, chipmaking equipment and software containing US technology to China, regardless of where in the world they are based.

It also banned US citizens and permanent residents from supporting the “development or production” of chips at certain factories in China.

This is hitting China hard, as it imports both the hardware and talent that fuels its burgeoning chip manufacturing industry.

The Dutch ASML will lose about a quarter of the revenue it used to get from China. It’s the only company that makes the most advanced lithography machines – the tools that make “leading-edge” chips.

“Talent is so important in this field … If you look at the executives of China’s semiconductor companies, many of them have American passports, they were US-educated and they have green cards. So this is a really big problem for China,” said Linghao Bao, an analyst at policy research firm Trivium China.

The US also wants to produce more chips. The Chips and Science Act provides $53 billion in grants and subsidies to companies that make semiconductors in the United States. The big players take advantage of this. TSMC is investing in two US$40 billion facilities in the US, its only facilities outside of Taiwan.

Micron, the largest US-based maker of memory chips – essential for supercomputers, military hardware and every device with a processor – has announced plans to invest up to $100 billion in a computer chip factory in upstate New York over the next 20 years invest.

“The Chips Act has the ability to bridge the cost gap that exists in manufacturing in the US versus Asia,” said Sanjay Mehrotra, chief executive of Micron Technology. “Micron will continue to invest in our factories [plants] in Asia. It is important that there is a level playing field worldwide.”

US restrictions hit China where it hurts.

Apple has reportedly postponed a deal to buy memory chips from one of China’s most successful chip companies, Yangtze Memory Technologies Corp (YMTC), amid the restrictions.

More from the BBC series looking at trade from an international perspective.

The Huawei experience shows how this is likely to play out, according to Mr. Bao. The communications giant has gone “essentially dead” from being the world’s second-biggest smartphone maker after Samsung, says Bao.

“So that’s how easy it was for Washington to shut down a Chinese tech company. China doesn’t really have a good option to respond to this. The US used to target individual Chinese companies. But this time the scope has expanded to the whole country.”

Can China do anything about it? Withdrawing goods or services, or imposing its own export controls, could do more harm than good at a time when the economy faces a sharp slowdown.

Beijing has complained to the World Trade Organization (WTO), but a solution could take years.

Meanwhile, experts say China will double investment and support for its domestic chip industry.

“We will focus on national strategic needs, gather strength to conduct domestic and leading-edge scientific and technological research, and resolutely win the battle for key technologies,” President Xi Jinping said at the 20th Chinese Communist Party Congress in October.

In the near term, the industry is grappling with a global slowdown due to the war in Ukraine, rising inflation and a bumpy reopening of the Chinese economy.

Beijing will want to tread carefully as its economy has been hit hard by the Covid pandemic.

“There will still be a lot of back and forth between US companies, Taiwanese companies, Chinese companies and companies from other countries. It’s really only at the forefront of logic and memory chips where we will see a concerted effort by the US to cut China out of innovation networks, and efforts by China to build its own US-free supply chain,” Miller said.

He adds that this could mean a partial decoupling of the ecosystem – one focused on China and one on the rest of the world.

This is having a huge impact on the global economy. It will force players to choose sides, potentially preventing many from entering the Chinese market.