Review: US-China tech battle leaves global losers

HONG KONG, Sept 30 (Reuters Breakingviews) – No product has played a greater role in shaping the balance of global economic and military power than semiconductors. Yet over the years, the $556 billion industry has attracted the attention of governments in Washington, Tokyo and other capitals of the developed world. Recently, chips have become a battleground in the competition between the US and China. Big companies and other countries suffer from the struggle.

Few other parts of the economy depend on very few companies, asserts historian Chris Miller in “The Chip War: The Battle for the World’s Most Critical Technology.” Taiwan Semiconductor Manufacturing (TSMC) (2330.TW) makes almost all of the world’s most advanced microprocessors. In the Netherlands, ASML ( ASML.AS ) has a monopoly on the ultraviolet lithography machines needed to make the most sophisticated circuits. Two South Korean giants dominate the memory chips market; Three US companies dominate semiconductor software.

These so-called bottlenecks are characteristic of a highly efficient industry that can produce more than a trillion units per year. According to Miller, professor of American and Russian foreign policy, it is no accident that the United States and its allies control most of them. After World War II, pioneering companies like Fairchild Semiconductor, Intel ( INTC.O ) and others in Silicon Valley asserted America’s technological dominance.

The push to export American products coincided with American efforts to strengthen trade and investment ties with Japan and the rest of Asia. Cheap and abundant labor has allowed companies to cut costs; Asian leaders herald better-paying jobs and economic growth; And Washington has integrated its allies deeper into the US economy. In the late 1970s, companies such as Intel and Texas Instruments ( TXN.O ) employed tens of thousands of workers in South Korea, Taiwan and Southeast Asia.

Over time, however, some Asian manufacturers amassed enough know-how and scale in the supply chain to challenge American dominance. Japan overtook the US in memory chip production in the 1980s, second only to South Korea; Taiwan today boasts not only the world’s top contract chip maker, but also top companies that assemble, test and package chips.

Former Intel boss Andy Grove has already warned that abandoning “commodity” manufacturing could keep manufacturers out of future industries. Now the former U.S. pioneer is battling $356 billion TSMC and South Korea’s Samsung Electronics ( 005930.KS ) for the chip market. Meanwhile, natural disasters and the Covid-19 pandemic have exposed fragile global supply chains, which Miller described as “the perfect picture of globalisation.”

Weakening chip leadership and increasing awareness of supply chain vulnerabilities underpins US technology policies. The recent CHIPS and SCIENCE Act provided $53 billion to bring semiconductor development and manufacturing back to the United States. The People’s Republic, for its part, is spending hundreds of billions of dollars to rid itself of foreign technology, citing the disruption of the US supply chain as a national security threat. Sanctions against US telecoms equipment maker Huawei have accelerated these efforts, Miller wrote, adding that bottlenecks are not “permanently permanent”. In response, Washington has raised 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 competition has put Taiwan, South Korea and Japan at a disadvantage. All three depend on China as their largest trading partner. But if the U.S. succeeds in reviving advanced chip manufacturing, one or all of its partners will have to lose market share, Miller contends. Giants facing China are also caught in the middle. Nvidia has roughly $400 million in sales at stake. Apple’s ( AAPL.O ) plan to use Chinese-made chips has drawn scrutiny from Washington.

For South Korea’s Samsung and SK Hynix ( 000660.KS ), the crisis is even worse. Both hope to expand in the United States, but the provision in the CHIPS Act prevents them from expanding or increasing chip capacity in China for 10 years in order to receive US subsidies. Niki said the two companies currently produce 20% and 40% of memory chips in the People’s Republic.

Miller deployed more aggressive weapons that Washington and Beijing have yet to deploy. The former could pressure TSMC to roll out its new technologies simultaneously in the United States and Taiwan, or force it to make more government investments. China can pressure foreign companies to transfer technologies to domestic peers, or require companies like Apple to buy local parts.

Of course, the biggest escalation is the military conflict between China and Taiwan, which Beijing claims is its sovereignty. Debilitating the island’s semiconductor manufacturing facilities would be “catastrophic” for the global economy, Miller wrote, because the world would produce 37% less computing power as a result and it would take at least half a decade to rebuild capacity.

Although this is still an extremely difficult situation, most investors and tech executives believe it will prevent Washington and Beijing from escalating tensions. That sounds like wishful thinking.

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“The Chip War: The Fight for the World’s Most Critical Technology” will be published by Simon & Schuster on October 4.

Edited by Peter Tal Larsen and Thomas Schum

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