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A researcher wearing cleanroom suit displaying a wafer in the lab of Shanghai Microsemi Semiconductor Co., Ltd. in Shanghai, China.
Who’s winning the war over chips?
When it comes to semiconductor production, there’s just one superpower: Taiwan. The self-governing island produces more than two-thirds of the world’s chips, and almost all of the advanced ones.
But with Taiwan’s geopolitical fate uncertain, both Washington and Beijing are racing to build their own dominance and self-sufficiency in the chip industry.
We sat down with Eurasia Group geo-technology expert Xiaomeng Lu to learn more about where this battle is heading. The interview has been edited for length and clarity.
GZERO: When did this global war over chips really get started, and what’s driving it?
Xiaomeng Lu: Before 2017 and 2018, Beijing generally had this view that China was a big digital economy power. “We're the home to the biggest platform companies in the world” and so on.
But when the US placed severe sanctions on Huawei [in 2019], it kneecapped Huawei's 5G flagship business portfolio. Huawei is one of the poster children of China's highly advanced technology system, and Beijing suddenly realized that it was heavily reliant on just a couple suppliers of semiconductors, some of which are American.
China saw it had basically no near-term leverage against US technology dominance in this area, and that they needed to address the vulnerability. So that's why China started using this term "technology self-reliance.”
That generated a sense of competition in the US and increased the focus on Taiwan [the leading chip producer overall]. Those two things are, I think, the top drivers of the US-China race in semiconductor development.
What are the US and China doing to gain their own advantage in semiconductors?
Xiaomeng Lu: China a few years ago established a national fund to support semiconductor companies [domestically], and I think the clearest number on all of it is somewhere near $50 billion for two rounds of national investment in the domestic semiconductor industry.
The US recently passed the CHIPS Act, which includes broad financial support for science and technology. But the part that's most significant is basically a lot of tax breaks for the domestic high-end manufacturing part of the semiconductor industry. That's somewhere around $52 billion dollars.
So there's definitely a race of government sponsorship in this industry to ensure they get the competitive edge. For the US, their goal is to maintain a large, existing competitive advantage over China. For China, their goal is just to catch up.
So, is China in fact catching up?
Xiaomeng Lu: There's a lot of problems with how they're spending their money. Some factories got a lot of government funding and then didn't produce much technology, and a few years later went bankrupt or were bought by industry players. There's also quite a bit of corruption in the process of allocating those funds to various national champions.
But at the same time, it’s generated some constructive results, including, for example, companies like SMIC, a national champion in manufacturing midrange semiconductors. So there's a handful of successful cases and maybe a dozen failures. It's a mixed outcome so far.
Will the CHIPS Act keep the US ahead in the chip race?
Xiaomeng Lu: It’s too early to tell. There is a detailed implementation guide for companies that want to apply for this $52 billion fund, but that guideline won’t be issued by the Department of Commerce until next February. So we don't even know who is qualified for this funding yet.
The US has recently imposed export controls that prevent American companies from sending key technologies to China. Will those measures be effective in curtailing China's tech sector strategy?
Xiaomeng Lu: In the near term, I think they're quite effective. They focus on the high-end chips used for high-performance computers and super-computers, an area where China has so far done well. So the US restrictions create an upstream crisis for Beijing that will slow down China's supercomputing industry development. Until now, some Chinese supercomputers have outperformed their American and Japanese counterparts, and I think that competitive edge will be, if not eliminated, undermined significantly in the coming years.
Some people say Taiwan’s status as a semiconductor superpower actually protects the island from invasion by China – the idea being that the risk of the Taiwanese chip factories being damaged in a war is something that worries Beijing since its own tech companies rely on Taiwanese chips. Do you believe in this “Silicon Shield”?
Xiaomeng Lu: A lot of mainland Chinese factories still rely on those [Taiwanese] components. That's a big part of China's global electronics trade flows. I think between the technology exposure and the trade element, they will try not to take drastic actions around those chip factories until the political drivers really escalate the conflict.
But I think it's a temporary shield. If a real war starts, then the Silicon Shield is not going to do anything. Right now it's kind of a very thin layer of protection when the political environment is not that dire.
If TSMC [the main Taiwanese semiconductor company] were not on the island, do you believe China would have already invaded?
Xiaomeng Lu: It's not a driving factor, it's a secondary element. The red line is always sovereignty. If Taiwan publicly declares independence, then it doesn't matter if TSMC is there or not.
Would warnings of an impending invasion lead to a brain drain that could threaten Taiwan’s semiconductor industry?
Xiaomeng Lu: I think if the tension escalates further, you will see China try to poach talent from Taiwan by offering them jobs and careers and generous financial packages, and the US would probably do the same. If those engineers are concerned about their own safety, their families’ safety, there is a scenario for at least some of them to move away from the island. And that's one of the worst-case scenarios for the Taiwanese government. They want to keep their Silicon Shield, they want to keep their high-end technology, they want to keep their talent on the ground.
House Speaker Nancy Pelosi has encouraged TSMC to move some of its production to the US, to take advantage of CHIPs act money. Is that likely to happen?
Xiaomeng Lu: I think they're considering it but if you’re TSMC, it depends on how high you think the geopolitical risk is. If [an attack] is going to happen in five years, they probably want to move. But the risk of moving the most advanced technology and their people over to the US is that if the conflict doesn't happen or doesn't escalate to a very severe level, you are wasting your resources and irking the Taiwanese government.This comes to you from the Signal newsletter team of GZERO Media. Sign up today.
Semiconductor manafacturing require a lot of water.
Hard Numbers: Thirsty industry, global economic slump, China’s contraction, India enters the fray
264 billion: Semiconductor manufacturing is extremely water intensive. Consider that the industry consumes as much as 264 billion gallons of water per year, and by some estimates, a large chip plant can use up to 10 million gallons of water a day, equivalent to the water consumption of roughly 300,000 households.
4: The global semiconductor market is set to shrink by 4% in 2023 as tech giants cut back on investment in data centers and consumer demand for tech devices declines due to tightening fiscal policy. The Chinese economy, the largest market for chips, is also expected to shrink in 2023. Economists say that the wide use of semiconductors makes the industry a bellwether for the broader global economy.
13: US restrictions on semiconductor exports to China saw the latter’s imports contract by 13% in the first 10 months of this year. While Beijing is unable to get its hands on crucial American equipment kits needed to manufacture the chips, the drop is also due to an overall economic slump in the world’s second-largest economy.
19.5 billion: India is the latest major economy to enter the semiconductor fray, getting a $19.5 billion investment from Taiwanese chip giant Foxconn and a local conglomerate to boost its nascent chip industry. India’s first semiconductor plant is being built in PM Narendra Modi’s home state of Gujarat and is expected to be up and running by 2024.A US cellphone chip's global journey
The Graphic Truth: A US cellphone chip's global journey
Semiconductors bind the electrical circuits in the tech we use every day. In mid-2021, a global semiconductor shortage caused by COVID supply/demand issues and a drought in Taiwan made many devices hard to come by. But the self-ruled island in China's crosshairs is only part of the global chipmaking supply chain, which travels back and forth between Europe, Asia, and the US. We follow its steps for a smartphone.
Taiwan’s outsize importance in manufacturing semiconductor chips
A big reason the Chinese leader is pushing harder than ever to annex Taiwan is actually quite small. The self-governing island has an outsize manufacturing capacity for semiconductors – the little chips that bind the electrical circuits we use in our daily lives. Cell phones, laptops, modern cars, and even airplanes all rely on these tiny computer wafers. Taiwanese chip manufacturer TSMC alone makes more than half of the chips outsourced by all foreign companies, which means your iPhone likely runs on Taiwanese-made semiconductors. What would happen to the world's semiconductor chips if China were to take control of Taiwan?
Watch the episode of GZERO World with Ian Bremmer: What could spark a US-China war?
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