Promises and perils of the tech war

As part of the Biden administration's industrial strategy to revitalise domestic manufacturing, create jobs, strengthen US supply chains, and accelerate future industries, the CHIPS and Science Act of 2022 was launched last year, which is a $280 billion package to be utilised over the next decade to support the US semiconductor chip industry.

Goodbye free markets, hello industrial policy. This is also interesting because the outcome of the US-China rivalry hinges on the technology edge and how to use such technology.

In 2018, the Trump administration's ban on Chinese tech giant ZTE buying sensitive components and software from US companies signalled the start of a tech war. The same year, Huawei was put on the "entity list", requiring US government approval for it to buy US technology. This story is rivetingly told in Chip War: The Fight for the World's Most Critical Technology, written last year by historian Chris Miller.

In a recent interview, Miller cited three reasons why the US invoked the Chip War. First, the US concern over Chinese intentions about Taiwan, as Taiwan Semiconductors Manufacturing Corporation (TSMC) is the leading producer of cutting-edge semiconductor chips. Nano chips are essential for next-generation military and intelligence capabilities. Second, China has certain advantages in narrowing the US-China tech gap. Third, as export controls and sanctions have limited effects, such as those against Russia proved, there was no point in waiting to restrict Chinese access to foreign technology.

With Taiwan as a "choke point" in US-China competition, the Biden administration is adopting a two-prong strategy to compete or contain China in terms of technology. The first part would shift production partly out of Taiwan to "onshoring" or "friend-shoring" allies willing to de-risk dependence on Chinese production. The second part would bring US semiconductor production back home, which has fallen from 37 percent in 1990 to about 12 percent of global output. Moving TSMC and Samsung chip production to US soil are efforts in that direction.

The real killer is the "choke point" strategy, which means that you strangle your rival at their most vulnerable supply chain points. China has always been vulnerable to energy imports, hence the strategic importance of the Malacca Straits. Avoiding this explains China's remarkable shift to home-based solar energy, installing 413 gigawatts of solar capacity (or 44 percent of its own electricity usage) – electricity being the key driver of the digital economy. As Miller shrewdly points out, "China now spends more money each year importing chips than it spends on oil".

Why are semiconductors so critical in the new Great Power rivalry? As Miller points out, "Last year, the chip industry produced more transistors than the combined quantity of all goods produced by all other companies, in all other industries, in all human history. Nothing else comes close."

Semiconductors have become so small and so fast, with so much computing power, that they are the foundations of anything "smart". My iPhone has 10 million times the processing capacity of the three-tonne IBM 360 mainframe business computer that I used to use in the early 1970s.

We have also moved from hardware to software, because it is the software applications that ultimately create the Artificial Intelligence (AI) computations beyond the capacity of mere human beings. The Chinese are great with hardware. But on the software side, there is still a huge gap with the US, partly because China has not yet created anything like the tech start-up ecosystem that exists in Silicon Valley.

It is illuminating to see that, even though China has its own versions of ChatGPT and a NASDAQ equivalent in the Shenzhen stock market, ChatGPT sparked the equity revival of the US' Magnificent Seven tech stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) with a combined market cap of over $11 trillion. Nothing like this has happened in China this year.

While Chinese regulators worry about stock market bubbles, the Nasdaq tech bubble has taught US-Americans that tech bubbles are not systemically fatal, but their wealth creation, if ploughed into the next generation of start-ups, creates new commercial (and military) technologies. Funding market tech innovators is key to enhancing next-generation technology.

However, the real choke holds over the Chinese are extreme ultraviolet (EUV) lithographic equipment, which are so precise that they can etch nano chips into highly compact integrated circuits that are free of bugs and technical flaws. These need such a clean contamination-free manufacturing environment that all workers have to wear space suits and diapers. Unfortunately for the Chinese, only the Dutch ASML can manufacture the high-quality EUV lithography machines that TSMC and Samsung need to fabricate the most advanced logic chips. In essence, the US has a "weaponised interdependence" hold on the Chinese, who are at least a decade or more away from creating their own EUV machines.

Make no mistake, the Chinese can manufacture or buy less advanced chips that are the workhorse of consumer Internet of Things products. But as AI exponentially demands more computing power, China will be stunted in producing cutting-edge technology without access to nano chips that are specifically designed and fabricated for dedicated usage. If quantum computing becomes commercially viable, the demand for high-end chips will be even more critical.

The Chip War is really about scale and imagination in industrial policy, with gorilla-sized resources and talent used for trying to wrestle the opponent to the ground, targeting key choke points. Techno-nationalism means that whoever has the best ecosystem of innovation, talent, funding, and production dexterity will have the edge over the others. This is not a 100-meter sprint, but a bruising, brutal, and ugly long march towards techno superiority. So far, the US and its allies have the edge, but China has the market scale. If, by 2030, China accounts for one-quarter of the market, versus 10 percent for the US (as the Semiconductor Industry Association has estimated), who knows who will really have a decisive edge in the Chip War?

Andrew Sheng is a distinguished fellow of Asia Global Institute, University of Hong Kong, and chief adviser to the China Banking Regulatory Commission.

Copyright: Asia News Network