HONG KONG, Sept 30 (Reuters Breakingviews) - No product has played such an outsized role in shaping the global economy and the balance of military power as semiconductors. Yet for years the $556 billion industry attracted scant attention from governments in Washington, Tokyo and other capitals in the developed world. Recently chips have become a battleground in the competition between the United States and China. Big companies and other countries will suffer from the fight.
Few other parts of the economy are so dependent on so few companies, historian Chris Miller asserts in "Chip War: The Fight for the World's Most Critical Technology". Taiwan Semiconductor Manufacturing (TSMC) (2330.TW) makes nearly all of the world's most advanced microprocessors. ASML (ASML.AS) in the Netherlands has a de facto monopoly on the ultraviolet lithography machines required to make the most sophisticated circuits. Two South Korean giants dominate the market for memory chips; three U.S.-based firms control semiconductor software.
These so-called choke points are a feature of a hyper-efficient industry that can churn out over a trillion units a year. According to Miller, a professor of U.S. and Russian foreign policy, it’s no accident that the United States and its allies control most of them. After the Second World War, pioneering companies like Fairchild Semiconductor, Intel (INTC.O) and others in Silicon Valley cemented America's technological supremacy.
A subsequent push to outsource U.S. manufacturing abroad coincided with American efforts to deepen trade and investment links with Japan and the rest of Asia. Cheap and plentiful labour allowed companies to lower their costs; Asian leaders touted better-paying jobs and economic growth; and Washington integrated its allies deeper into the U.S. economy. By the late 1970s, companies like Intel and Texas Instruments (TXN.O) employed tens of thousands of workers in South Korea, Taiwan and Southeast Asia.
Over time, though, some Asian manufacturers amassed enough expertise and scale across the supply chain to challenge America’s dominance. Japan first overtook the U.S. in memory chip production in the 1980s, only to be toppled by South Korea; Taiwan today boasts not only the world’s top contract chipmaker, but also the top companies that assemble, test and package chips.
Andy Grove, Intel's former boss, presciently warned that abandoning “commodity” manufacturing could lock manufacturers out of future emerging industries. Now the erstwhile U.S. pioneer is struggling to catch up with the $356 billion TSMC and South Korea's Samsung Electronics (005930.KS) in chip fabrication. Meanwhile, natural disasters and the Covid-19 pandemic have exposed a fragile global supply chain which Miller describes as "a perfect image of globalization gone wrong".
The combination of weakening chip leadership and a heightened awareness of supply chain vulnerabilities underpins American tech policies. The recent CHIPS and Science Act provides $53 billion to bring semiconductor development and manufacturing back to the United States. The People’s Republic, meanwhile, has long identified America’s chokehold on supply chains as a national security threat and is spending hundreds of billions of dollars to wean itself off foreign technology. U.S. sanctions against telecoms-equipment maker Huawei have accelerated these efforts in a reminder, Miller writes, that choke points are "not infinitely durable". In response, Washington has ramped up trade and investment restrictions: earlier this month it banned AMD (AMD.O) and Nvidia (NVDA.O) from exporting some advanced artificial intelligence chips to China.
This intensifying rivalry puts Taiwan, South Korea and Japan in an awkward position. All three depend on China as their largest trading partner. But if the United States is successful in reshoring advanced chipmaking, one or all of its allies' market shares must decrease, Miller argues. Multinational giants with exposure to China will be caught in the middle too. Nvidia estimates some $400 million of sales are at risk. Apple's (AAPL.O) mooted plans to use Chinese-made chips have attracted scrutiny from Washington.
For South Korea's Samsung and SK Hynix (000660.KS), the dilemma is even starker. Both are hoping to expand in the United States, but a provision in the CHIPS Act states that to receive U.S. subsidies, they will be banned from expanding or upgrading chip capacity in China for 10 years. The two companies currently produce 20% and 40%, respectively, of their memory chips in the People's Republic, according to Nikkei.
Miller lays out even more aggressive tools that Washington and Beijing have yet to deploy. The former might pressure TSMC to roll out its newest technologies simultaneously in the United States and Taiwan, or force it to invest more stateside. China might pressure foreign companies to transfer technologies to local peers, or require companies like Apple to buy local components.
The biggest escalation, of course, would be military conflict between China and Taiwan, which Beijing claims sovereignty over. Incapacitating the island’s semiconductor production facilities would be "catastrophic" for the global economy, Miller writes, as the world would produce 37% less computing power as a result and it would take at least half a decade to rebuild the capacity.
Though this is still an extreme scenario, investors and tech bosses are betting the high stakes will deter Washington and Beijing from ratcheting up tensions. That looks like wishful thinking.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
"Chip War: The Fight for the World's Most Critical Technology" by Chris Miller will be published by Simon & Schuster on Oct. 4.
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