Why China is Losing the Microchip War

Zongchang Yu resigned from his position as an engineer at ASML in 2012—the only business in the world capable of producing this equipment. The most cutting-edge semiconductor chips or microchips are produced using this equipment. He founded two new businesses after leaving ASML, one in the US and one in China. Later, US and ASML attorneys would claim that Yu had hired other ASML engineers for his US business, that they had taken with them stolen knowledge of AMSL's machine, and that all of this was sanctioned by the Chinese government. This incident is only a minor part of China's massive transformation of semiconductors, one of the most important and globally relevant industries. China's efforts, however, have increasingly trapped it in a fight against the United States. Market share is not the topic here. Tariffs are not the topic here. It has to do with safety. So how precisely did a Cold War over computer chips between the US and China begin? In the 1950s, technologists in the US created the first semiconductor chip. It is a silicon chip with four transistors. The chip's power increases with the number of transistors. Engineers created one in 1960 with four times as many transistors, and they continued to find new methods to increase transistors every year after that. As a result, semiconductor technology has advanced exponentially since the early 1960s. The author of Chip War is Chris Miller. Gordon Moore, the inventor of Intel, projected in 1965 that a single chip's processing capacity would nearly double every year, and that trend has generally continued up to the present.

The US government was the sole major client of the earliest company created specifically to manufacture semiconductors. The initial applications were in the missile system's guidance computers as well as those in NASA's spacecraft. "The sophisticated guidance apparatus..." The electronic brain of the system. The US government assumed that a close relationship with chip firms would guarantee that it always had access to the most cutting-edge technology because they were producing better and better chips every year. The US administration has long held the view that computers are a key factor in determining a country's influence on the international scene. You consider how computers were employed to decipher codes during World War II or to locate Soviet submarines during the Cold War. I believe that conclusion to be accurate. These chip manufacturers once managed the whole supply chain. They created the chips, produced them, and put them all together in a box before installing them in a device. all domestically.

However, by the late 1960s, they discovered they could earn far more money by creating chips for consumer goods like business computers. Simply put, they needed to produce a lot more of them at a far lower cost. Numerous semiconductor firms relocated plants in Japan, Taiwan, South Korea, and Hong Kong for production and assembly where labor costs were lower. Additionally, the US government supported them. This was a method to boost their economies and strengthen connections with all of these nations, which were all US friends or partners. The Soviet Union and China were its adversaries, and it forbade these chip businesses from sharing technology with them. As chip technology evolved, it served to keep them years behind the US. As a result of Moore's Law, modern chips are noticeably superior to earlier generations. You're actually fairly far behind the cutting edge if you're five or ten years behind. But it didn't take long for these allies' governments to start funding their own semiconductor businesses.

Toshiba in Japan and Samsung in South Korea started creating and producing products in the 1970s and 1980s. chips that may compete with Americans'. A Taiwanese business named TSMC became so proficient at making semiconductors in the 1990s that many US corporations ceased doing it. It implied that other businesses besides American ones may now produce the most cutting-edge semiconductors. Additionally, each nation's chip sector was becoming more and more dependent on foreign nations for the supplies, tools, and technology required to produce increasingly sophisticated semiconductors. China lagged behind while the US and its partners were pushing the envelope of semiconductor technology. In addition to being denied access to chips by the US during the Cold War, Mao Zedong's regime expelled many of China's most talented scientists and engineers in the 1960s and 1970s. But New Chinese leaders will emerge during the ensuing decades. pressed to make up ground. The end of the Cold War came in the 1990s. The US had improved relations with China and removed the majority of its export restrictions. Thus, China lured a lot of semiconductor makers to relocate their production lines there. China controlled this end of the supply chain by the 2000s.

However, China was in a difficult situation since it had to import an increasing amount of chips to support its assembly sector. After studying the tech supply chain, the Chinese government came to the conclusion that the whole Chinese tech ecosystem was built on imported silicon from China's geopolitical rivals in the United States, Japan, and Taiwan.

China's authorities came to the logical conclusion that they were reluctant to take this risk.to take indefinitely. As a result, the Chinese government invested heavily in its own chip manufacturing and design enterprises, which progressively formed alliances with foreign businesses. All in the pursuit of establishing a semiconductor supply chain that was wholly Chinese. Soon, China would be able to develop, produce, and assemble certain earlier chip generations, mostly on its own. However, it was still a few years away from producing the most advanced chips. One of those chips is this one. It has around 114 billion transistors. In 1960, chips had four flavors. Future computing capabilities will be used for military purposes, much like previous computing capabilities.

The issue is that very few businesses worldwide are engaged in creating them, and none are in China to begin with, just three American businesses produce the software required to create sophisticated processors. Then, in order to translate those designs into actual chips, a machine is needed, which can only be obtained from ASML. However, this machine needs components that can only be produced in the US. Finally, the most cutting-edge processor chips can only be produced by firms in South Korea and Taiwan. These businesses are bottlenecks in the supply chain, and China was completely dependent on them for cutting-edge semiconductors. Police in the US attempted to apprehend Zongchang Yu in 2019 but were unsuccessful. Until he later made an appearance in China as the CEO of his business, which successfully produced software similar to ASML's. The Chinese government's assistance allowed his firm to prosper. And His tale was only one of several in the semiconductor business that involved IP theft. Because it recognizes that its enterprises are in a relative position of weakness, the Chinese government has at the very least been passively supportive of IP theft and in some circumstances, actively supportive of it. China was identifying choke spots like ASML and imitating them in an effort to eventually reduce its reliance on this international supply chain. But the strategy failed. And this has really infuriated other countries, including the US government, who are now viewing China's subsidies as a security concern rather than only an economic one. The US-China relationship was deteriorating at the same time as this was taking place and more cutthroat market distortions in China A serious intellectual property theft issue is playing out here, leading to a trade war between the United States and China, and the manner they deal cannot be permitted. Trump claims he intends to raise tariffs on China by 10%."I wouldn't mind at all if they decided not to deal with us anymore. The US government forbade US businesses from providing components to ZTE, a Chinese tech corporation, in 2018. Then, in 2019, it prohibited US businesses from doing business with Huawei, China's largest technology corporation, and its subsidiaries.

These restrictions nearly brought ZTE to financial ruin and significantly harmed Huawei. The semiconductor market in China was more specifically targeted by the 2022 presidential candidate Joe Biden. The sale of sophisticated semiconductors by all US corporations was formerly prohibited.

However, it also prohibited Chinese design firms from utilizing US-made design software and production machinery. Additionally, it forbade international businesses that employ US semiconductor technology from supplying sophisticated chips to China. The U.S. took advantage of these bottlenecks to halt China's semiconductor sector in its tracks. With the introduction of these export restrictions, there was a very noticeable movement from the basically positive-sum view of trade and tax exchanges with China to a considerably more negative-sum perspective of the technical competition. The US then negotiated a contract with Taiwan's largest manufacturer, TSMC, to develop production facilities in the US and approved a law that would spend billions of dollars in its own chip manufacturing businesses. all to facilitate

U.S. to maintain its lead.

When it comes to semiconductors, China and the US have a similar understanding of the political stakes. The US administration has prioritized the defense of the US lead because of this. But another disagreement between the two nations has also been subject to extreme strain as a result of this. Taiwan has been considered a renegade province by China since 1949, and the country has promised to reconnect with it, even threatening invasion. Taiwan will be protected by the US. However, Taiwan also happens to be the owner of the most significant supply chain bottleneck for chips.

63% of all chips are produced by Taiwanese businesses and 92% of all sophisticated chips. Taiwan has established some protection for itself by acquiring businesses that are essential to both the US and Chinese semiconductor sectors. even so, US export restrictions prompted Taiwan's businesses to choose between defying them and continuing to sell to China, or complying and denying China access to some of its semiconductors. They have thus far hinted that they will cut off China. However, as China and the US argue over semiconductors, more and more decisions like these will be forced onto nations and businesses globally. requesting that they choose a side in what appears to be a new Cold War.