Chasing chips: Semiconductors and the global techno-security contest

Introduction

It is no exaggeration to describe semiconductors as the most important technological input into the world’s economy today. For the author of a new book, Chip War, microchips are the new oil – a scarce resource on which the modern world depends.^[1] Today, military, economic, and geopolitical power are built on a foundation of computer chips.

Semiconductors are made from materials such as silicon and are used to create transistors – the basic building blocks of all electronic devices. Because they enable the processing, storage, and transmission of data, they are a vital component of nearly all modern technological consumables, including smartphones, laptops, and automobiles. Their importance extends to critical infrastructure, such as power grids and transportation systems.

More powerful and energy-efficient semiconductors are quite literally fueling critical advances in artificial intelligence (AI) technologies, the telecommunications industries, and the automotive sector. Crucially, the development of new semiconductor technologies is essential for so much of the major technological innovation taking place in the defense sector. Consequentially, a greater number and diversity of chips will be needed in new areas and products.^[2] In short, the importance of semiconductors is undeniable and swelling.

The ability to access advanced chips (and ideally to produce them domestically) is a strategic priority of the highest order for advanced countries. It is no surprise, then, that heightened great power competition combined with a soaring demand for chips has brought the industry into the realm of geopolitics.^[3] Who produces advanced semiconductors and who can acquire them is perhaps the preeminent economic and national security concern of the modern era.^[4]

Chasing chips

The semiconductor industry is a global industry, with companies spread across multiple countries. Nonetheless, the United States, China, and Taiwan are the major players in the industry, with South Korea and Japan also significant producers. The race to produce the most advanced semiconductors has been ongoing for many years but has recently become increasingly competitive. Only a handful of companies are capable of producing them or the nanometre-scale precision instruments required for their manufacture.

The United States was traditionally at the apex of chip makers, with American companies such as Intel and Qualcomm leading the industry. Although the United States remains the unchallenged world leader in semiconductor design, American chip manufacturing is at around 10 percent of the global total and lacks the onshore capability to make the most advanced semiconductors.[5] US firms are largely reliant on Taiwanese chip manufacturing. Through a massive generational strategic investment, Taiwan has become the world’s chief semiconductor factory.

Conscious of the strategic vulnerabilities inherent in relying on foreign supplies, China has been making significant investments in the industry in recent years. These investments are starting to pay off; the country is rapidly catching up. China’s ambition to become a leader in the semiconductor industry can be seen in its “Made in China 2025” plan, which aims to make China self-sufficient in semiconductor production and reduce its dependence on foreign suppliers. Investing heavily in building its own semiconductor production capabilities – in part by acquiring foreign companies and technology – China is catching up. Its chip-building ambitions are viewed as going hand in hand with its military modernization efforts.^[6]

Fearful that China will make a technological leap forward through access to ever-more powerful semiconductors, the Biden administration has enacted a number of initiatives to boost domestic semiconductor production, such as the CHIPS and Science Act, which provides $52.7 billion for American semiconductor research, development, manufacturing and workforce development.[7]

Taiwan, the aforementioned major producer of semiconductors, has also been affected by the US-China tensions. Principally, the United States has expressed concerns about Taiwan’s relationship with China (its major export market for chips) and has taken some steps to limit technology transfers to Taiwan. Indeed, evolving great power competition over chips is extremely consequential for this island nation, which Beijing claims as an integral part of China.

Taiwan stakes

Any discussion about chips necessarily involves talking about TSMC – Taiwan Semiconductor Manufacturing Company – a company worth $430bn that straddles one of the world’s most dangerous geopolitical flashpoints.[8] Founded in 1987. TSMC is the world’s largest independent semiconductor foundry and a market leader in advanced semiconductor manufacturing. TSMC’s initial focus was on producing integrated circuits (ICs) for the personal computer market. The company expanded its services to include more advanced technologies such as high-performance microprocessors, digital signal processors, and memory devices.

Most importantly, TSMC is a leader in the development of 5nm and 3nm, considered to be some of the most advanced chips in the semiconductor industry. The ‘nm’ in 7nm and 5nm refers to the size of the transistors on the chip, which is a measure of the feature size. The smaller the feature size, the more transistors can be packed onto a chip, which can improve performance and reduce power consumption. Furthermore, TSMC has announced plans to develop 3nm technology.^[9]

The manufacturing requirements for producing semiconductors of this size are mind-blowing. The manufacturing processes – considered to be the most advanced in the manufacturing of any product in the world – include using extreme ultraviolet (EUV) lithography to create smaller features on the chip.

Taiwan’s position as the world’s semiconductor foundry and as a flashpoint in US-Chinese relations in Asia puts it front and center in contemporary geopolitics.^[10] Given that the vast majority of cutting-edge chips are produced at a single plant separated by just 110 miles of water from China raises stark questions about supply chain resilience and security.^[11]

The Taiwanese government hopes that its centrality in the chip supply chain means the US will defend it from any move from Beijing to forcibly reabsorb the island into mainland China. Despite the CHIPS and Science Act, the American economy will be reliant on TSMC chips for the foreseeable future. But this is a state of affairs US policymakers are keen to rectify. In turn, China wants to remove the risks inherent in a US attempt to disrupt the supply of semiconductors from its Taiwanese ally to the country. Both Washington and Beijing see amplifying domestic production as a key strategic priority. In the immediate term, however, Taiwanese chips will remain crucial.

Curtailing China’s rise as a semiconductor power

China has rapidly emerged as major chip player in its own right. The Chinese government has made significant efforts in recent years to develop its domestic semiconductor industry. This has included investing heavily in research and development, offering subsidies and tax breaks to domestic chipmakers, and implementing policies to encourage the use of domestic chips in government-procurement projects.^[12] These efforts have led to the growth of several Chinese semiconductor companies, such as SMIC and Tsinghua Unigroup, which have become major players in the global market. Additionally, the Chinese government has also sought to acquire foreign semiconductor companies and technologies through mergers and acquisitions.

The Chinese government’s efforts have naturally led to increased competition in the global semiconductor market, with Chinese companies becoming major competitors for established international firms. But more than this, China’s emergence on the semiconductor scene raises larger geopolitical questions about the techno-security contest; that is, who in the international systems will be the future technological leader and, by extension, the world’s premier military power?

Looking at these developments with concern, the US government is trying to restrict the Chinese semiconductor industry from using the American technology and equipment. The jury is out on the impact of these measures, but at least from the ire they have generated from Beijing it is fair to assume that they have led to a non-trivial slowdown in the Chinese semiconductor industry. By some estimates, China is already far off the path of being 70 percent semiconductor self-sufficient by 2025 – its stated goal in the ‘Made in China 2025’ policy that President Xi announced in 2015.^[13]

Furthermore, the US is pressuring Japan and the Netherlands to join it in restricting exports of semiconductor manufacturing equipment to China, with many analysts predicting (at the time of writing) that a deal is imminent.^[14] From its side, China is working on a more than 1-trillion-yuan ($143 billion) semiconductor support package to counter these moves and achieve greater self-sufficiency in this sector.^[15]

Washington’s chip renaissance 

The US government’s actions, including export controls and sanctions on Chinese semiconductor companies, are intended to limit the ability of Chinese companies to access chip-related advanced technologies and equipment.

Washington is securing its own supply chain by banning the use of Chinese-made electronics in critical infrastructure and military systems. This has not come without disruption to supply and has seen an increase in costs. But it also aims to address national security concerns related to the potential for Chinese-made chips to contain backdoors or other vulnerabilities that could be exploited by foreign actors.

To protect future prosperity and national security, US investment in chips is designed to create the next generations of semiconductors. This is also intended to spur growth in other pioneering technologies such as artificial intelligence and quantum computing that depend on advanced chips.^[16]

In response to the United States stepping up support measures for its own semiconductor industry, TSMC, Samsung Electronics, and Intel have made capital investments on American soil. Most significant, TSMC will manufacture some of its most advanced chips in a new plant in Arizona. The first phase of its $40 billion facility will manufacture advanced 4-nanometer chips from 2024, while the second phase is slated to produce 3-nm chips by 2026.^[17] TSMC’s prior move to set up an American advanced chip plant in the 1980s ended as a “nightmare,” according to the company’s founder, Morris Chang. The project was plagued by problems, including culture clashes and hiring difficulties.^[18] Nonetheless, news of the Arizona factory and others will make the US less dependent on foreign producers for the chips that are the building blocks of most modern products.

Implications for global affairs

The competition over the semiconductor chip industry between major global powers could have significant implications for the global economy. Semiconductor chips are a vital component in many modern technologies. Dominating the production and supply of the most advanced chips could give a country a significant economic and strategic advantage. Producer countries could use their chip manufacturing prowess as a weapon. The practice of restricting or limiting the export of semiconductors to other countries would, however, disrupt global supply chains and harm industries that rely on these chips.

Facing these headwinds, countries like India – which imports somewhere close to 100 percent of its advanced chips^[19] – will likely have to give greater priority to domestic production of semiconductors in the future in order to reduce their dependence on foreign suppliers. This could lead to increased competition and potentially higher prices for these chips.

Investing heavily in research and development to improve domestic semiconductor sectors could spur economic growth in some countries. But in most cases, it will lead to inefficiencies as the scale and investment needed to produce the most advanced chips will escape all but the wealthiest and most technologically advanced nations.

Perhaps most consequential for global affairs is the increased tensions that come with competing to gain an edge in the industry. Though traditionally thought of as a commercial technology, semiconductors simply cannot be decoupled from larger strategic matters for the great powers. They are a lynchpin resource in the techno-security race that is now fully underway. Advanced semiconductors can have a significant impact on  a country’s ability to harness AI, 5G, and the Internet of Things (IoT). Advance semiconductors are essential for the development of Quantum computing, which has the potential to greatly improve the ability to solve complex problems and speed up the processing of large amounts of data. In sum, the race to produce the most advanced semiconductors is emerging as a defining feature of great power techno-security competition.

References 

^[1] Chris Miller, Chip War: The Fight for the World's Most Critical Technology (New York: Scribner, 2022).

^[2] Makabe Akio, “Semiconductors and Geopolitics: Tensions Rise Around Global Production Center Taiwan,” Nippon, January 4, 2023, http://bitly.ws/zSyY.

^[3] Julie Zhu, “Exclusive: China Readying $143 billion Package for Its Chip Firms in Face of U.S. Curbs,” Reuters, December 13, 2022, http://bitly.ws/xMoB.

^[4] Sujai Shivakumar and Charles Wessner, “Semiconductors and National Defense: What Are the Stakes?” Center for International and Strategic Studies, June 8, 2022, http://bitly.ws/zSza.

[5] Sujai Shivakumar and Charles Wessner, “Semiconductors and National Defense: What Are the Stakes?” Center for International and Strategic Studies, June 8, 2022, http://bitly.ws/zSBn.

^[6] Elsa B. Kania, “Chinese Military Innovation in the AI Revolution,” The RUSI Journal 164, no. 5-6 (2019): pp. 26-34, https://doi.org/10.1080/03071847.2019.1693803.

[7] The White House, “Fact Sheet: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China,” August 9, 2022, http://bitly.ws/zSBL.

[8] “TSMC is Making the Best of a Bad Geopolitical Situation,” Economist, January 19, 2023, http://bitly.ws/zSAb.

^[9] Cheng Ting-Fang, “TSMC Reaffirms ‘Commitment to Taiwan’ despite US Chip Push,” Financial Times, January 4, 2023, http://bitly.ws/zSzh.

^[10] “TSMC is Making the Best of a Bad Geopolitical Situation,” Economist, January 19, 2023, http://bitly.ws/zSAb.

^[11] Sujai Shivakumar and Charles Wessner, “Semiconductors and National Defense: What Are the Stakes?” Center for International and Strategic Studies, June 8, 2022, http://bitly.ws/zSza.

^[12] John VerWey, “Chinese Semiconductor Industrial Policy: Prospects for Future Success,” Journal of International Commerce & Economics, August 2019, http://bitly.ws/zSAy.

^[13] Makabe Akio, “Semiconductors and Geopolitics: Tensions Rise Around Global Production Center Taiwan,” Nippon, January 4, 2023, http://bitly.ws/zSyY.

^[14] “Japan, Netherlands to Join U.S. in Restricting Chip Equipment Exports to China, Bloomberg Reports,” Reuters, January 27, 2023, http://bitly.ws/zSAG.

^[15] Julie Zhu, “Exclusive: China Readying $143 Billion Package for Its Chip Firms in Face of U.S. Curbs,” Reuters, December 13, 2022, http://bitly.ws/xMoB.

^[16] Rafael Reif, “The US Can Shape the Future of Semiconductors if Congress Thinks Ahead,” The Hill, December 21, 2022, http://bitly.ws/zSAQ.

^[17] Cheng Ting-Fang, “The ‘TSMC Effect’ Comes to Arizona as U.S. Pushes Chip Ambitions,” Nikkei Asia, December 28, 2022, http://bitly.ws/zSAV.

^[18] Ibid.

^[19] Sarajeet Das Gupta, “Semiconductor Chips: Govt’s Aim to Make India Self-reliant May Be Premature,” Business Standard, October 2, 2022, http://bitly.ws/zSB5.