As Washington intensifies its efforts to limit Beijing’s capacity to develop cutting-edge chips and establish supremacy over strategic technology, China will have a more challenging time catching up to the United States and its allies in the semiconductor industry.
In September 2022, Washington restricted sales of specific Nvidia and AMD advanced graphic processor units (GPUs) used in supercomputers and artificial intelligence applications to China.
The action came after the US Commerce Department said that shipments of electronic design automation (EDA) software used to create next-generation chips to China were prohibited.
Washington has been pressuring Taiwan, South Korea, and Japan, to form a “Chip 4” industry alliance to isolate China from the global tech ecosystem. Washington has also stepped up efforts to develop its domestic industry with the passage of the CHIPS Act, which provides $52 billion in subsidies to companies that manufacture chips in the US.
Chris Miller, author of the book Chip War: The Fight for the World’s Most Critical Technology, said, “The US is attempting to consolidate its pivotal role in the global semiconductor ecosystem and ensure that China is unable to create the most cutting-edge chips. Control of semiconductors is essential to military power as well as the future of the global economy, from cloud computing to autonomous driving.”
Since the US and China have been fiercely at trade war with one another, semiconductors have become one of the most heated battlegrounds. The wafer-thin chips produced today could determine tomorrow’s global balance of power because they are viewed as essential to unlocking future technological advancements and being the lifeblood of the modern economy.
Although Taiwan produces more than 90% of the world’s high-end chips, China, like other major nations, depends mainly on this source. However, China has recently made significant progress in strengthening its local sector.
After years of failing to move past a 14nm node, TechInsights researchers announced in July 2022 that Semiconductor Manufacturing International Corporation (SMIC), China’s national champion, has probably developed the ability to create a 7-nanometer (nm) chip. The length of transistor gates is a common way to compare semiconductors, with a shorter gate typically indicating a higher processing capacity.
Beijing-backed SMIC has recently announced additional plans for a fourth factory in the northern city of Tianjin as it ramps up foundry capacity.
This is the first concrete evidence that they have overcome an ostensibly impenetrable barrier. After that, however, they must gradually enhance the design and increase output to produce higher-value chips.
Since the top Dutch manufacturer ASML was denied an export permit due to US pressure on Amsterdam, China has been prevented from getting the most up-to-date machinery for manufacturing sophisticated chips, known as extreme ultraviolet (EUV) lithography machines.
However, Chinese companies may still produce high-end semiconductors using less effective deep ultraviolet (DUV) lithography tools, with longer beam wavelengths generally used to etch patterns on less sophisticated devices.
Despite Washington’s ambitions to broaden its ban on chip manufacturing equipment, China has been stockpiling ASML’s DUV lithography machines, purchasing 81 units just in 2021.
Ray Yang, a consultant director at Taiwan’s Industrial Technology Research Institute, said, “SMIC can build a 7nm process with DUV, maybe even produce it in large quantities, but that does not make it cost-effective.”
Yang compared it to driving a consumer car at Formula 1 speeds, saying, “with DUV resolution, but you are pushing the technology to its boundaries.”
China mainly depends on SMIC for the chips it urgently needs, perhaps for special non-commercial reasons, he claimed, as Huawei is no longer allowed to employ international foundries.
The rising Chinese military will use these advanced weapons, among other non-commercial purposes.
Washington has long been concerned about Huawei’s connections to the Chinese military, which led to the Trump administration adding the business to the “Entity List” of sanctioned companies in 2019. Huawei is one of China’s largest tech companies.
Utilizing technological advancements from the private sector to strengthen China’s defence industry has been elevated to a national priority under Chinese President Xi Jinping, and its Military-Civil Fusion Strategy has become a cornerstone of industrial policy.
“Chips are essential for intelligent weapons,” according to Douglas Fuller, a technology development expert at the City University of Hong Kong, who says many officials are worried about the growth of China’s semiconductor industry because of this.
Even though it is thought that China still lacks the expertise to build chips smaller than 7 nm, companies like SMIC and Shanghai Micro Electronics Equipment Co are hustling to create their homegrown machinery to end the deadlock.
China has not yet produced a well-functioning ArF lithography machine.
While using foreign tools to produce chips, China is years behind; when using domestically produced tools, China is decades behind.
Chinese companies can still design semiconductors smaller than 7 nm even if they are not yet able to manufacture them.
In 2021, Alibaba debuted the Yitian 710, a 5nm server chip made for a variety of internet-of-things (IoT) applications, which is one of China’s most cutting-edge innovations.
However, Washington’s most recent regulations are expected to make developing semiconductors with a manufacturing process smaller than 5 nm more challenging.
The upcoming gate-all-around (GAA) design, commonly regarded as a remedy to the physical restrictions of downsizing chips to infinitesimally smaller sizes, is a vital component of the next-generation processors.
Since GAA will only apply to 2nm nodes and under, which haven’t yet arrived, the ban currently affects China’s pipeline. Still, it won’t affect their products or revenue for years, as 2nm nodes might eventually account for half of the output of Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker.
Cadence, a well-known American EDA supplier, has joint ventures in China and charges less for its design software there than it does for US clients. China might therefore apply pressure on the company there through this relationship.
Yang stated that if China could not buy the requisite lithography equipment on the open market, it would make every effort to do so.
This “may mean reverse engineering, IP theft, or strategically acquiring foreign enterprises,” he added, adding that this has frequently occurred with other important technologies in the past.
China invests heavily in carbon and other non-silicon materials to pursue technological advances. Beijing’s 14th Five-Year Plan includes funding for research into carbon fibre, graphene, silicon carbide, and other carbon-based composites.
Who will win the Chip Wars?
In Taipei, a joke states that if China invades Taiwan, the only buildings that the People’s Liberation Army can’t afford to destroy are microchip manufacturing facilities. The nation in charge of cutting-edge chips will determine the direction of technology, and Taiwan has the world’s best chip fabrication foundries (or “fabs”). China would have a virtual monopoly on the most cutting-edge fabs if the mainland and its rebellious province reunited successfully. Given what Xi Jinping wants for Taiwan, it is understandable why the US government is concerned.
For this reason, the United States has taken several actions recently to hinder China’s attempts to produce sophisticated semiconductors. First, building new fabs is technically difficult and prohibitively expensive. According to a recent analysis by Boston Consulting, a major chip facility currently costs more than a new nuclear power plant or a next-generation aircraft carrier. For cutting-edge manufacturing chips, Taiwan’s Fab 18 cost $17.5 billion to construct.
China’s attempt to control future technologies is under attack from the US on two fronts. The first step in the approach is to increase America’s market share in the world’s chip fabs, which has declined from a peak of 37% in 1990 to barely 12% today. Joe Biden signed the Innovation and Competition Act in August 2022, allocating an astonishing $52 billion to support US chip manufacturing and technology development. Although the EU is making similar noises, America has prioritised it as a national issue.
A programme initially recognised and implemented by President Trump, it is an effort by Biden to reverse the hollowing out of US manufacturing and is backed by the Republican Party. The new Act, which has bipartisan support, is intended to penalise US businesses that invest in China, especially in industries with competition for dominance, like chip manufacturing.
Frightened, Xi has pushed China to expedite the pace of legislation in the areas of big data, cloud computing, artificial intelligence, internet banking, and the digital economy to improve its technological independence. A business sector in the West increasingly aware of the geopolitical implications of having such a high percentage of its global fab capacity situated in Taiwan is enthusiastically supporting America’s effort to stifle China’s technical advancement.
The semiconductor market that Intel once dominated recently began to fade, but the company is now actively playing catch-up. The startup announced ambitions to create system processors to rival Apple’s top-of-the-line M1 series in January after luring away Apple’s director of Mac system architecture. Within three years, Intel wants to reclaim its top position as the global integrated design and fabrication leader.
However, Intel’s conflict extends beyond Apple. It must compete with Taiwan Semiconductor Manufacturing Company, which controls 92% of the world’s most cutting-edge five-nanometer semiconductors and holds a 50% worldwide market share in advanced chips overall. Under the leadership of its new CEO, Pat Gelsinger, Intel hopes to regain the upper hand by emerging as a top supplier of contract chips.
Along with finishing the construction of a fab in Oregon, Intel also has new fabs planned for Arizona and Ohio. A further $80 billion is designated for Europe, with negotiations underway for locations in Germany, Italy, and Ireland. It is a large undertaking that will cost staggering amounts of money. Several analysts question Intel’s capacity to pull it off.
Deng Xiaoping’s deregulation of the Chinese economy in the 1980s led to globalization. In that case, it is conceivable that de-globalization, the retreat to national interests and autarky, will result in slower or even poorer global economic growth. Even if the chip war doesn’t end in a real-world war, both America and China will lose.