Chip War

“China now spends more money each year importing chips than it spends on oil.”

Chips1 driven by semiconductors are the foundation of the modern world and their ubiquitous presence in almost every household product ranging from cars to smartphones and even in weapon systems make them an indispensable and vital resource. Countries that manufacture chips and further their development have a stranglehold on the supply chains of the world making chips the new oil of the 21st century. Chip Wars examines the history of semiconductors and provides a ringside view of the global struggle for technological dominance. The book is written in eight parts with each part being populated by short focussed chapters.

Miller begins his story in 1947 with the invention of the transistor in the U.S. by researchers at the Bell Labs. The invention led to the founding of Fairchild Semiconductor International Inc., Silicon Valley’s first semiconductor company in 1957 by a group of engineers dubbed the “traitorous eight.” This motley group included some remarkable pioneers such as William Shockley2, Gordon Moore3 , and Bob Noyce4. Centered on the idea of increasing the number of transistors on a piece of silicon, pathbreaking technological developments eventually led to the creation of an “integrated circuit” or “chip” The development of the “ chip” led to

1 Miller defines Chip (also "integrated circuit" or “semiconductor”) as a small piece of semiconducting material, usually silicon, with millions or billions of microscopic transistors carved into it. 2 1965 Nobel Prize for semiconductors 3 The proponent of Moore's law and co-founder of Intel. An empirical relationship linked to gains from experience in production of microchips. Originally (1965), Moore’s prediction was that the number of transistors in a dense integrated circuit will double every year for atleast a decade. 4 The inventor of the microchip, co-founder of Intel, and the unofficial “Mayor of Silicon Valley”

a booming industry in the San Francisco Bay area later renowned as the Silicon valley. The numbers required to sustain a nascent industry came from the missile development and the American space program.

Miller, thereafter chronicles the geopolitical and economic turns leading to the present-day mastery of a handful of nations in chip fabrication and design. During the Cold War, as America raced to semiconductor superiority, Russia adopted a strategy of copying American tech using its network of spies. However, Russians never realised that such a strategy supported by dated Russian governmental systems was never going to counter American semiconductor supremacy. The Russian copies were inferior and always many a step behind the improvements in the industry-driven tech industry. Meanwhile, Japan seeking a pie of the blossoming Chip industry chose a “ license it ” approach. As Japan’s integration with the world after the Second World War was steered by America, it wholeheartedly supported its efforts. Before long, Japan started building consumer products using transistors designed in the US. Companies like Sony and Sharp Electronics were innovative with a keen sense of business acumen. Along this journey, the Japanese government offered significant governmental support and made large R&D investments. As Japan began to grab more of the chip industry pie, the U.S. government propped up the rise of the South Korean chip industry by limiting Japan’s access to the U.S. market and enabling technology transfers to Korean firms. Subsequently, by the early 1990s, Samsung had become the world’s leading memory chip maker.

The emergence of Japan and Korea as semiconductor hubs sent U.S. supremacy in semiconductors into a tailspin. Most companies were shutting shops and merging with Japanese and Korean companies. Seeking to recover lost ground America turned to becoming the leader in the processor market. Intel, under the leadership of Andy Grove, realised that the booming PC market was the stepping stone to the U.S. gaining supremacy in the development of processors. Japan missed the bus by continuing to stick to building lower-level chips while Korea sensed an opportunity to become a strong US strategic and business ally. Supported by a conducive political ecosystem, low labour costs, and the support of the U.S, enabled Korean company to cut costs. Reducing profits and rising competition from the US and Korea, coupled with declining investments, led to Japan’s market share decreasing exponentially between 1980 and 2000.

Miller also chronicles the journey of Taiwan in becoming a hub for the manufacturing of chips. Morris Chang was the founder of the Taiwan Semiconductor Manufacturing Company (TSMC) in 1987, after being passed over as CEO at Texas Instruments in Silicon Valley. Chang who was educated at MIT and Stanford, developed Taiwan’s chip fabrication plants (“fabs”), focusing on mass production for the world’s biggest chip designers. The success of the Taiwanese fab model came also with substantial governmental support and impressive technological leaps, allowing TSMC to surpass its U.S. counterparts. Moreover, as the size of the chips shrank, their production costs skyrocketed, shifting most leading chipmakers towards the “fabless” option where they outsourced manufacturing rather than making them internally. This resulted in an unprecedented geographic concentration in terms of chip production worldwide, especially for the high-end spectrum of the chip market.

Meanwhile, China was a market leader in the assembly of electronic equipment, it was falling behind the curve in the semiconductor race. The business model of TSMC was recognised by China as a possible model for success leading to the creation of Semiconductor Manufacturing International Corporation (SMIC) in 2000. Driven by business imperatives, centred around the huge market in China, a large number of technology transfers occurred in the 2010s. Companies such as IBM, Qualcomm, and AMD found astute ways to partner with China. Soon the U.S saw China’s emergence in the Chip industry as a major security threat. During this period, Huawei led China’s mission towards self-reliance and started to attract attention for its improper business dealings. The supposed march towards selfreliance continued to depend on the chips manufactured by TSCMC, early inroads made Huawei a force to reckon with. Nevertheless, China was always behind the curve technologically. Playing catch up, it adopted measures such as stealing trade and technological secrets and relying on spyware. Despite Chinese machinations, U.S held the reins of the semiconductor supply chain, almost choking China at will. China could not have built the entire supply chain in-house so it relied on identifying specific markets it could dominate and gradually increase its influence worldwide.5 Meanwhile, the U.S. met the China challenge headlong with export and technology restrictions described by the author in the part titled, “Chip Choke”.

Miller argues that Taiwan and TMSC as the most critical elements today in the whole chip chain, especially for the most advanced chips. In the last chapter titled “The Taiwan Dilemma” he runs past various scenarios of Taiwan falling to Chinese military might and if TSMC would fall under Chinese control. He postulates that the consequences for the world economy would be catastrophic. However, today, the making of a chip is a triumph of globalisation and involves many actors from many countries and their industries. TSMC for one is also diversifying to other countries.

However, the China challenge is being met by the U.S. by clamping down on exports from and technology transfer to China. For the U.S., it is also a signal to the

5 According to Miller, China’s current market share in chip production remains small (about 15 percent) despite massive public investments, behind Japan (17%) and Taiwan (41%) world that it wants to maintain a clear leadership in semiconductors. But the U.S. action would not be without pushback, so maybe sooner or later, a new equilibrium may be attained at the political, economic, and technological levels, with its associated new trade policies and new supply chains.

Miller’s account of the growth of the semiconductor industry and the web of interconnected dependencies in the world is a tale well told. His description of the key players and their personalities is engrossing and entertaining. The depth and quality of his examination of the economic and geopolitical undercurrents in the globalisation of the chip industry are worthy of recognition by scholars and policymakers. Although not directly linked to the book as I read through I wondered why as a nation we seem to have missed the bus on developing and manufacturing chips.

Miller’s book leads to an informed assessment that China’s determination to reduce its dependency and build global dependency on its chips isn’t fading away anytime soon. The battle for chips will only intensify and Taiwan will continue to remain a global vulnerability. However, I thought the choice of the word, “War” for the title of the book was a bit of a hyperbole. Nevertheless, the book deserves a place in the library of anyone who seeks an understanding of the chip industry and how it continues to affect the political and economic world order.