The Chip Wars

China used more cement between 2011 and 2013 than the U.S. used in the entire 20th Century. Yes, you heard that right! Now, with this knowledge, it’s not unnatural to imagine China importing lots of crude oil, heavy machinery or vehicles. But the fact is that China’s largest category of imports is an entirely unrelated category – Electronics and Electrical equipment. Or to be more specific, semiconductors are the bulk of their imports. China’s import of chips—$260 billion in 2017, was far larger than Saudi Arabia’s export of oil or Germany’s export of cars. China spends more money buying chips each year than the entire global trade in aircraft.

To understand the evolving rivalry between the US and China in the domain of Artificial Intelligence, one needs to grasp the underlying politics over the key components of AI. These are Computing power (Hardware), Data, Talent and Institutions. While the last three can be managed through mass surveillance, dictatorial policies and shrewd regulatory calls, the first (Computing power powered by Semiconductors) is something inextricably linked to global supply chains! And this is China’s Achilles Heel.

Due to a complicated and fascinating history, while most of the semiconductor designs (or chips) are made in America, the manufacturing of some of the worlds most advanced chips takes place in a small island in the South China Sea – Taiwan. Taiwan Semiconductor Manufacturing Company (TSMC) can manufacture chips that are of a billionth of a meter, etching shapes smaller than a coronavirus. Interestingly, the ultra-pure silicon wafers required for the chips come from Japan while the machinery to carve the microscopic designs onto the silicon come mainly from one single Dutch company – ASML. The completed chips are then exported to China, where they are assembled into a smartphone or a LCD.

With the pace with which AI is taking off, the US has woken up to the realities of China catching up. So, we had the CHIPS Act passed by the US with an allocation of $50 billion for spurring domestic semiconductor manufacturing. China’s Huawei, the leading communication equipment manufacturer (think 5G) was banned by the US, Canada, Australia and other countries (see graphic below). The Dutch company ASML has been banned from exporting its extreme ultraviolet (EUV) lithography tools to China – without which no advanced chip can be manufactured. In short, we’re in the midst of a chip war!

India, a South Asian giant with its much touted demographic dividend missed the semiconductor bus in the 60s and 70s, thanks to the License Raj and our deep suspicion of free markets. When Toshiba, Samsung and the rest were emerging from the debris of post WWII destruction, we were happily ‘planning’ our economy, deciding what was best for our citizens, and managing waiting lists for scooters and telephones. India’s announcement of a Production Linked Incentive (PLI) scheme last year with a $10 billion allocation to attract semiconductor fabrication should be seen in the context of this evolving geopolitical war. How much of the market we plan to capture from this ongoing reorganization of supply chain is something worth tracking.

We definitely, are living in an interesting time. And for your information, the expression, ‘May you live in interesting times’ is attributed to a traditional Chinese curse! 😊

For a meticulously researched history of the semiconductor, check out Chris Miller’s hugely popular, Chip Wars.