Review: US-China tech fight leaves global losers

HONG KONG, Sept 30 (Reuters Breakingviews) – No commodity has played such an important role in shaping the global economy and the balance of military power as semiconductors. Yet for years the $556 billion industry has received little attention from governments in Washington, Tokyo and other capitals of 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 struggle.

Few other sectors of the economy are so dependent on so few companies, argues historian Chris Miller in “Chip War: The Fight for the World’s Most Critical Technology.” Taiwan Semiconductor Manufacturing (TSMC) (2330.TW) manufactures 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 needed to manufacture the most sophisticated circuits. Two South Korean giants dominate the memory chip market; three US-based companies control semiconductor software.

These so-called choke points are a hallmark of a hyper-efficient industry that can produce over a trillion units per year. According to Miller, a professor of American and Russian foreign policy, it is no coincidence 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 cemented America’s technological supremacy.

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A subsequent push to outsource American manufacturing overseas coincided with American efforts to deepen trade and investment ties with Japan and the rest of Asia. Cheap and abundant labor allowed companies to reduce costs; Asian leaders touted better-paying jobs and economic growth; and Washington has integrated its allies deeper into the US 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, however, some Asian manufacturers have accumulated enough expertise and scale in the supply chain to challenge US dominance. Japan first overtook the United States in memory chip production in the 1980s, only to be overtaken by South Korea; Taiwan now has not only the world’s largest contract chipmaker, but also the best companies that assemble, test and package chips.

Andy Grove, the former boss of Intel, has foresight warned that abandoning “commodity” manufacturing could exclude manufacturers from future emerging industries. Today, the former US pioneer is struggling to catch up with $356 billion TSMC and South Korea’s Samsung Electronics (005930.KS) in chipmaking. Meanwhile, natural disasters and the Covid-19 pandemic have laid bare a fragile global supply chain that Miller describes as “a picture-perfect picture of globalization gone wrong”.

The combination of weakening chip leadership and heightened awareness of supply chain vulnerabilities underpins US technology 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 grip 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 on telecoms equipment maker Huawei have accelerated those efforts by reminding, Miller writes, that choke points are “not infinitely durable.” In response, Washington has tightened trade and investment restrictions: earlier this month it banned AMD (AMD.O) and Nvidia (NVDA.O) from exporting certain advanced artificial intelligence chips to China.

This escalating rivalry puts Taiwan, South Korea and Japan in an awkward position. All three depend on China as their main trading partner. But if the United States succeeds in relocating advanced chip manufacturing, the market shares of any or all of its allies must decline, Miller argues. Multinational giants exposed to China will also be caught in the middle. Nvidia estimates that some $400 million in sales are at risk. Apple’s (AAPL.O) plans to use chips made in China have caught Washington’s attention.

For the South Koreans Samsung and SK Hynix (000660.KS), the dilemma is even more glaring. The two hope to expand into the United States, but a provision of the CHIPS Act states that in order to receive US subsidies, they will be prohibited from expanding or improving chip capacity in China for 10 years. The two companies currently produce 20% and 40% of their memory chips respectively in the People’s Republic, according to Nikkei.

Miller presents even more aggressive tools that Washington and Beijing have yet to deploy. The former could pressure TSMC to deploy its latest technology simultaneously in the US and Taiwan, or force it to invest more in the US. China could pressure foreign companies to transfer technologies to local peers, or force companies like Apple to buy local components.

The biggest escalation, of course, would be a military conflict between China and Taiwan, over which Beijing claims sovereignty. Failure of the island’s semiconductor production facilities would be “catastrophic” for the global economy, Miller writes, as the world would produce 37% less computing power and it would take at least half a decade to complete. rebuild capacity.

While still an extreme scenario, investors and tech bosses are betting that the high stakes will deter Washington and Beijing from escalating tensions. It sounds like wishful thinking.

Follow @mak_robyn on Twitter

BACKGROUND NEWS

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

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Editing by Peter Thal Larsen and Thomas Shum

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

About Christopher Easley

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