The quest for oil has been the cause of wars, strange alliances, and diplomatic disputes for more than a century.
These days, the two largest economies in the world are fighting over semiconductors, the chips that not only power our daily lives, but get used in defence and strategic hardware as well.
These microscopic silicon shards drive a $500 billion worth industry, which is projected to grow massively by 2030. The key to becoming an unrivalled powerhouse lies with whoever controls the supply chains, a complex web of nations and businesses that manufacture semiconductors.
Both China and the United States are aware of the above reality, with Washington showing some desperation to gain the industry lead by cutting off Beijing from the American supply chain.
According to Chris Miller, author of ‘Chip Wars’ and associate professor at Tufts University, there is no doubt that the two nations are involved in an arms race in the Asia-Pacific region.
“It takes place both in traditional areas, like numbers of ships, or missiles produced, but increasingly, it’s taking place in terms of the quality of Artificial Intelligence (AI) algorithms that can be used in military systems,” Chris Miller added.
The United States is ahead, but the chip war it started with China is not only changing the sector’s dynamics, but affecting the global economy too.
The chip creators
Designed in the US, produced in Taiwan, Japan, or South Korea, and assembled in China are the chips that go into an iPhone. India, which is making more significant investments in the sector, might have an enormous impact in the future. The Indian semiconductor market, which was worth nearly $23.2 billion in 2021, will likely reach $80.3 billion by 2028. The global chip market will have a compound annual growth rate (CAGR) of 6.7% around the same period. As per the 2021 stats, the semiconductor industry’s market value was at $527.88 billion in 2021.
Even though Asia is quickly catching up with the industry trends, the US nonetheless claimed credit for the semiconductor invention. This happened partly due to government incentives like subsidies.
During the Cold War, Washington forged strategic alliances and business relationships in a region susceptible to Russian influence, using chip leverage. It is now using the same tactic against Beijing in the Asia-Pacific.
According to Jue Wang, a partner in Silicon Valley at Bain & Company, “It’s what the semiconductor industry calls Moore’s law, basically doubling the transistor density over time, and that’s a challenging goal to attain.”
Even the top chip manufacturers are finding the journey challenging. Samsung was the first business to begin industrial-scale mass production of three-nanometer chips in 2022. Taiwan Semiconductor Manufacturing Company (TSMC), the largest chip manufacturer in the world and a significant supplier to Apple, followed later that year.
How small is a semiconductor? Much smaller than a human hair strand, which is between 50 to 100,000 nanometers. Supercomputers, artificial intelligence, and the Internet of Things use these potent, minor “leading edge” chips.
The chip industry, which powers appliances like refrigerators, microwaves, and washing machines, is also quite profitable. However, future demand is likely to decline.
Taiwan produces most of the world’s chips, giving the independent island what its president calls a “silicon shield” and protecting it from China, which also claims the area.
Beijing has also prioritized chip production at the national level and is investing significantly in AI and supercomputers. Experts believe that China has been catching up swiftly in the last ten years, particularly regarding chip design capabilities. America is jittery over this.
US is impeding China’s development
The Joe Biden administration aims to block China’s access to chip-making technology. Washington established extensive export curbs in October 2022, making it nearly impossible for businesses to ship semiconductors, chip-making equipment, and software containing American tech to China. Additionally, it forbade US national residents from aiding in the “creation or production” of chips at Chinese factories.
The ASML company from the Netherlands threatens to lose around 25% of its previous Chinese income. This is because the sole business that manufactures the most sophisticated lithographic machines, or “leading edge” chips, is this one.
The United States intends to produce more chips as well. The Chips and Science Act provides American semiconductor manufacturing enterprises with $53 billion in grants and subsidies. Important players are utilizing that. For example, the only facilities TSMC has outside of Taiwan are two $40 billion plants in the US.
Micron, the most prominent memory chip manufacturer in the US, has revealed plans to invest up to $100 billion in a computer chip plant in upstate New York over the next 20 years. Memory chips are crucial for supercomputers, military hardware, and anything with a processor.
As per the news, Impact Nano, a Massachusetts-based start-up that makes speciality chemicals for the semiconductor industry and others, raised $32 million in funding from investors including Intel Capital and Goldman Sachs Asset Management, in May 2023.
Intel Capital’s managing director, Sean Doyle, will also join the venture’s board of directors. The development comes as a happy one for the American semiconductor sector, which needs massive investments in building up the broader supply chain in addition to the multibillion-dollar chip fabrication facilities.
The year-long Ukraine war has exposed the choke points in the chemical supply chain of the chip industry. One of them is the neon gas, which is produced at a large scale in the East European nation. Impact Nano is reportedly inventing new ways to produce chemicals that chip makers use and if the start-up succeeds in the mission, the US will gain a further edge over China.
The start-up’s focus areas are increasing the purity of the chemicals, finding raw materials that are more abundant and complying with ethical guidelines of the chip industry, thereby making the manufacturing process more environmentally friendly.
Chinese dilemma
Beijing has made its first retaliatory move against Washington, by banning the use of Micron Technology chips in China. After concluding its seven-week probe into Micron products, the Xi Jinping government announced that the US chipmaker had failed to pass its cybersecurity review, claiming significant risks to its critical information infrastructure supply chain and national security.
However, the fact remains that the World’s second-largest economy is suffering as a result of US limitations. Now, expect the Biden government to aggressively hit back as the US Commerce Secretary Gina Raimondo informed the media that her administration “won’t tolerate an effective ban on sales of Micron memory chips in China.”
The restrictions have already reportedly caused Apple to abandon an agreement to purchase memory chips from Yangtze Memory Technologies Corp (YMTC), one of China’s most prosperous chip makers.
Effect on the global trade
This is expected to go similarly to the Huawei experience. After Samsung, the communications behemoth went from being the second-largest smartphone manufacturer in the world to being “almost dead,” according to expert Mr. Bao.
That demonstrates how simple it was for Washington to bring down a Chinese technology enterprise. China’s options for responding to that could be better. The US used to target certain Chinese businesses. But this time, the entire nation is included in the scope.
Can China respond in any way?
At a time when its economy is experiencing a severe slowdown, withholding goods or services or enacting its export limits could cause more harm. Beijing has filed a complaint with the World Trade Organization (WTO), but it might take years for a resolution.
According to experts, China will increase investment in and support its domestic chip manufacturing business.
At the 20th Congress of the Chinese Communist Party in October, President Xi Jinping declared, “We will concentrate on national strategic necessities, gather strength to carry out indigenous and leading scientific and technology development, and resolutely win the battle in vital core technologies.”
What follows next?
The industry must deal with issues like growing prices, a rocky reopening of China’s economy, and a short-term global recession caused by the Ukraine conflict.
Since COVID severely damaged its economy, Beijing will want to proceed cautiously.
“US corporations, Taiwanese companies, Chinese companies, and companies from other nations will continue to communicate back and forth often. China will make an effort to create its own US-free supply chain. In contrast, the US will concentrate on excluding China from innovation networks at the cutting edge of logic and memory chips,” Chris Miller noted.
That has significant effects on the world economy. Moreover, it will compel participants to choose a side, potentially preventing many from entering the Chinese market.