Chip War, Chris Miller
"The United States still has a stranglehold on the silicon chips that gave Silicon Valley its name, though its position has weakened dangerously. China now spends more money each year importing chips than it spends on oil. These semiconductors are plugged into all manner of devices, from smartphones to refrigerators, that China consumes at home or exports worldwide."
"Meanwhile, the "copy it" meantality meant, bizarrely, that the pathways of innovation in Soviet semiconductors were set by the United States. One of the most sensitive and secretive industries in the USSR therefore functioned lik a poorly run outpost of Silicon Valley. Zelenograd was just another node in a globalizing network--with American chipmakers at the center."
"Interdependence wasn't always easy. In 1959, the Electronics Industries Association appealed to the U.S. government for help lest Japanese imports undermine "national security"--and their own bottom line. But letting Japan build an electronics industry was part of U.S. Cold War strategy, so, during the 1960s, Washington never put much pressure on Tokyo over the issue. Trade publications like Electronics magazine--which might have been expected to take the side of the U.S. companies--instead noted that "Japan is a keystone in America's Pacific policy. . . . If she cannot enter into healthy commercial intercourse with the Western hemisphere and Europe, she will seek economic sustenance elsewhere," like Communist China or the Soviet Union. U.S. strategy required letting Japan acquire advanced technology and build cutting-edge businesses. "A people with history won't be content to make transistor radios," President Richard Nixon later observed. They had to be allowed, even encouraged, to develop more advanced technology."
"In the early 1960s, it had been possible to claim the Pentagon had created Silicon Valley. In the decade since, the tables had turned. The U.S. military lost the war in Vietnam, but the chip industry won the peace that followed, binding the rest of Asia, from Singapore to Taiwan to Japan, more closely to the U.S. via rapidly expanding investment links and supply chains. The entire world was more tightly connected to America's innovation infrastructure, and even adversaries like the USSR spent their time copying U.S. chips and chipmaking tools. Meanwhile, the chip industry had catalyzed an array of new weapons systems that were remaking how the U.S. military would fight future wars. American power was being recast. Now the entire nation depended on Silicon Valley's success."
"A final challenge was that the Soviets lacked an international supply chain. Working with America's Cold War allies, Silicon Valley had forged an ultra-efficient globalized division of labor. Japan led the production of memory chips, the U.S. produced more microprocessors, while Japan's Nikon and Canon and the Netherland's ASML split the market for lithography equipment. Workers in Southeast Asia conducted much of the final assembly. American, Japanese, and European companies jostled over their position in this division of labor, but they all benefitted from the ability to spread R&D costs over a far larger semiconductor market than the USSR ever had."
"The biggest error that Japan's chip firms made, however, was to miss the rise of PCs. None of the Japanese chip giants could replicate Intel's pivot to microprocessors or its mastery of the PC ecosystem. Only one Japanese firm, NEC, really tried, but it never won more than a tiny share of the microprocessor market. For Andy Grove and Intel, making money on microprocessors was a matter of life or death. Japan's DRAM firms, with massive market share and few financial constraints, ignored the microprocessor market until it was too late. As a result, the PC revolution mostly benefitted American chip firms. By the time Japan's stock market crashed, Japan's semiconductor dominance was already eroding. In 1993, the U.S. retook first place in semiconductor shipments. In 1998, South Korean firms had overtaken Japan as the world's largest producers of DRAM, while Japan's market share fell from 90 percent in the late 1980s to 20 percent by 1998."
"In the chip industry, by lowering startup costs, Chang's foundry model gave birth to dozens of new "authors"--fabless chip design firms--that transformed the tech sector by putting computing power in all sorts of devices. However, the democratization of authorship coincided with a monopolization of the digital printing press. The economics of chip manufacturing required relentless consolidation. Whichever company produced the most chips had a built-in advantage, improving its yield and spreading capital investment costs over customers. TSMC's business boomed during the 1990s and its manufacturing processes improved relentlessly. Morris Chang wanted to become the Gutenberg of the digital era. He ended up vastly more powerful. Hardly anyone realized it at the time, but Chang, TSMC, and Taiwan were on a path toward dominating the production of the world's most advanced chips."
"This was a rational strategy--no one wants products with low profit margins--but it made it impossible to try anything new. A fixation on hitting short-term margin targets began to replace long-term technology leadership. The shift in power from engineers to managers accelerated this process. 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. "It had the technology, it had the people," one former finance executive at Intel reminisced. "It just didn't want to take the margin hit."
"A more difficult question was how the U.S. government should adjust its controls on foreign sales of semiconductor technology to account for an increasingly international supply chain. Except for a couple of small chipmakers that produced specialized semiconductors for the U.S. military, Silicon Valley giants downgraded their relations with the Pentagon during the 1990s and 2000s. When they'd faced Japanese competition in the 1980s, Silicon Valley CEOs spent plenty of time in the halls of Congress. Now they didn't think they needed government help. Their main concern was for government to get out of the way, big signing trade deals with other countries and removing controls on exports. Many officials in Washington backed the industry's calls for looser controls. China had ambitious companies like SMIC, but the consensus in Washington was that trade and investment would encourage China to become a "responsible stakeholder" of the international system, as influential diplomat Robert Zoellick put it."
"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."
"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."
"Made in China 2025 was just a plan, of course. Governments often have plans that fail abjectly. China's track record in spurring production of cutting-edge chips was far from impressive. Yet the tools China could bring to bear--vast government subsidies, state-backed theft of trade secrets, and the ability to use access to the world's second-largest consumer market to force foreign firms to follow its writ--gave Beijing unparalleled power to shape the future of the chip industry. If any country could pull off such an ambitious transformation of trade flows, it was China. Many countries in the region thought Beijing might succeed. Taiwan's tech industry began worrying about what Taiwanese called the "red supply chain"--the mainland firms muscling into high-value electronics components Taiwan had previously dominated. It was easy to imagine semiconductors would be next."
"Huawei has mastered the latest generation of equipment to send calls and data via cell networks, called 5G. Yet 5G isn't really about phones--it's about the future of computing, and therefore, it's about semiconductors. The "G" in 5G stands for generation. We've already cycled through four generations of mobile networking standards, each of which required new hardware on phones and in cell towers. Just as Moore's Law has let us pack more transistors onto chips, there's been a steady increase in the number of 1s and 0s flying to and from cell phones via radio waves. 2G phones could send picture texts; 3G phones opened websites; and 4G made it possible to stream video from almost anywhere. 5G will provide a similar leap forward."
"It isn't guaranteed that China will win the race to develop and deploy systems empowered by artificial intelligence, in part because this "race" isn't about a single technology but about complex systems. The Cold War arms races, it's worth remembering, wasn't won by the first country to shoot satellite into space. Yet China's capabilities when it comes to AI systems are undeniably impressive. 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'".
"The point was less that Huawei was directly supporting China's military than that the company was advancing China's overall level of chip design and microelectronics know-how. The more advanced electronics the country produced, the more cutting-edge chips it would buy, and the more the world's semiconductor ecosystem would rely on China, at the expense of the United States. Moreover, targeting China's highest-profile tech firm would send a message worldwide, warning other countries to prepare to take sides. Hobbling Huawei's rise became a fixation of the administration."
"One might have expected the offshoring of chipmaking to have reduced the U.S. government's ability to restrict access to advanced chip fabrication. It would certainly have been easier to cut off Huawei if all the world's advanced chipmaking was still based on U.S. soil. However, the U.S. still had cards to play. For example, the process of offshoring chip fabrication had coincided with a growing monopolization of chip industry choke points. Nearly every chip in the world uses software from at least one of three U.S.-based companies, Cadence, Synopsys, and Mentor (the latter of which is owned by Germany's Siemens but based in Oregon). 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. Moreover, making advanced processors requires EUV lithography machines produced by just one company, the Netherlands' ASML, which in turn relies on its San Diego subsidiary, Cymer (which it purchased in 2013), to supply the irreplaceable light sources in its EUV lithography tools. It's far easier to control choke points remained in American hands. Those that didn't were mostly controlled by close U.S. allies."
"The Biden administration and most of the media interpreted the chip shortage as a supply chain problem. The White House commissioned 250-page report on supply chain vulnerabilities that focused on semiconductors. However, the semiconductor shortage wasn't primarily caused by issues in the chip supply chain. There were some supply disruptions, like COVID lockdowns in Malaysia, which impacted semiconductor packaging operations there. But the world produce more chips in 2021 than ever before--over 1.1 trillion semiconductor devices, according to research firm IC Insights. This was a 13 percent increase compared to 2020. 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 a computing power."