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How ‘Chip War’ Puts Nations In Technology Arms Race

A wafer at the Semicon Taiwan exhibition show in Taipei, Taiwan, on Wednesday, Sept. 14, 2022. The show will run through Sept. 16. Photographer: I-Hwa Cheng/Bloomberg (Bloomberg)

The incredibly complex, high-stakes business of making semiconductors has always been a battle of corporate giants. Now it’s also a race among governments. These critical bits of technology — also known as integrated circuits or, more commonly, just chips — may be the tiniest yet most exacting products ever manufactured. And because they’re so difficult and costly to produce, there’s a worldwide reliance on just a handful of companies, a dependence that was brought into stark relief by shortages during the pandemic. Access to chips has also become a geopolitical weapon, with the US ratcheting up curbs on exports to China to contain the rise of an economic rival. 

1. Why the war over chips? 

Chipmaking has become an increasingly precarious business. New plants have a price tag of more than $20 billion, take years to build and need to be run flat-out for 24 hours a day to turn a profit. The scale required has reduced the number of companies with leading-edge technology to just three — Taiwan Semiconductor Manufacturing Co. (TSMC), South Korea’s Samsung Electronics Co. and Intel Corp. of the US. Chipmakers have been under increasing scrutiny over what they sell to China, the largest market for chips. National security concerns, shifts in the global supply chain and the pandemic-era shortages led governments from the US and Europe to China and Japan to subsidize investment in new production lines costing tens of billions of dollars. More recently, slowing economies have curbed global demand, causing a glut of unwanted chips. 

2. Why are chips so critical? 

They’re what’s needed to process and understand the mountains of data that have come to rival oil as the lifeblood of the economy. Made from materials deposited on disks of silicon, chips can perform a variety of functions. Memory chips, which store data, are relatively simple and are traded like commodities. Logic chips, which run programs and act as the brains of a device, are more complex and expensive. As the technology running devices — from rockets to refrigerators — is getting smarter and more connected, semiconductors are ever more pervasive. That explosion has some analysts forecasting that the industry will double in value this decade. Spending on research and development for chips is dominated by US companies, with more than half the total. 

3. How did we go from chip shortages to a glut? 

Pandemic lockdowns and supply chain disruption made many types of chips scarce for about two years. With demand for phones and personal computers cooling off post-pandemic, the cycle has turned. PC and smartphone makers have slashed orders for chips as consumers tighten the purse strings, and there’s oversupply in areas such as industrial machinery and cloud computing. The chipmakers are responding by reining in their plans for new production capacity, even though governments are willing to foot part of the bill. 

4. How’s the geopolitical competition going?

Despite a huge Chinese spending spree, the country’s chipmakers still depend on US technology, and their access is shrinking. 

• The US imposed tighter export controls last year on some chips and chipmaking equipment to stop China from developing capabilities that could become a military threat, such as supercomputers and artificial intelligence. Japan and the Netherlands were said to have agreed to join the US in limiting China’s access to their advanced semiconductor machinery. (A major Dutch supplier, ASML Holding NV, said in February that it had been the victim of a data theft, the second in a year.)

• US politicians have decided that they need to do more than just hold back China. The 2022 Chips and Science Act will provide about $50 billion of federal money to support US production of semiconductors and foster a skilled workforce needed by the industry. All three of the biggest makers have announced plans for new US plants.

• Europe has joined the race to reduce the concentration of production in East Asia. European Union nations agreed in November on a €43 billion ($46 billion) plan to jump-start their semiconductor output. The goal is to double production in the bloc to 20% of the global market by 2030.

Separately, the US has expressed concern that Russia continues to access foreign chips and technology through intermediaries like Iran and North Korea, despite measures intended to restrict supplies following Russia’s invasion of Ukraine a year ago. Group of Seven member states were said to be discussing possible new sanctions.

5. How does Taiwan fit into all this?

The island democracy emerged as the dominant player in outsourced chipmaking partly because of a government decision in the 1970s to promote the electronics industry. TSMC almost single-handedly created the business of building chips designed by others, one that was embraced as the cost of new plants skyrocketed. Big customers like Apple Inc. gave TSMC the massive volume to build industry-leading expertise, and now the world relies on it. The company overtook Intel in terms of revenue in 2022. Matching its scale and skills would take years and cost a fortune. Politics have made the race about more than money, though, with the US signaling it will continue efforts to restrict China’s access to American-designed chips made in Taiwan’s foundries. China has long claimed the island, just 100 miles off its coast, as its own territory and threatened to invade to prevent its formal independence. 

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