Why China is losing the microchip war

The development of chips began in the United States with the government believing that they would always have access to the best ones. However, by the late 1960s, many chip companies had moved their manufacturing and assembly to other countries, where labor was cheaper. This led to other countries investing in their own chip industry as well. In 2012, Zongchang Yu.left his job as an engineer at a company called ASML....the only company in the world that can make thismachine. This machine makes the most advanced semiconductor chips or microchips in the world.After he left ASML he started two newcompanies,one in the US and one in China. US and ASML lawyers would later allege that Yu recruited other ASML engineers to his US company... that they brought with them stolen information about AMSL's machine... and that it was all backed by the Chinese government. This story is just one small piece of China's monumental effort to transform one of the world's most global and significant industries: semiconductors. But China's effort has increasingly locked it in a struggle with the United States. This isn't about market share. This isn't about tariffs. This is about security. So how exactly did China and the US enter into a Cold War over computer chips? [pensive, driving electronic music] music fades] This is the first semiconductor chip invented in the 1950s by engineers in the US. It's a piece of silicon with four transistors on it. The more transistors, the more powerful the chip. By 1960 ngineers had already made one with four times the transistors... and each year they figured out ways to add more. So since the early 1960s, semiconductors have improved at an exponential rate. This is Chris Miller, author of Chip WarThe founder of Intel, Gordon Moore predicted in 1965 that the computing power produced by a single chip would double every year or so and that rate has held true roughly up to the present. The first companies dedicated to making chips were in the US where they really just had one main customer: the US government.

The first use cases were actually in guidance computers

that were in NASA's spacecraft

as well as in the missile system.

"The complex guidance equipment..."

"The system's electronic brain..."

Since chip companies were making better and better chips each year

the US government believed a deep partnership with them

would ensure that it always had access to the most advanced ones.

The US government has believed that computing has been a core

determinant of nations' power on the world stage.

You think about the ways that computing

has been used to crack codes in World War II

or to track Soviet submarines during the Cold War.

I think that judgment is correct.

At first, these chip companies handled the entire supply chain.

They designed the chips, manufactured them, and assembled them

into a package for installation into a product.

All within the US.

But by the late 1960s, they realized

they could make a lot more money

designing chips for civilian products

like corporate computers.

They just had to make a lot more of them

and a lot less expensively.

So many chip companies moved their manufacturing and assembly

to factories in Japan, Taiwan, South Korea and Hong Kong

where labor was cheaper.

And the US government encouraged them.

All these countries were US allies or partners

and this was a way to support their economies and deepen ties.

At the same time, it banned these chip companies

from sharing technology with its rivals:

the Soviet Union and China.

It was a way to keep them years behind the US as chips advanced.

Because of Moore's Law, advanced chips are

substantially better than previous generations.

If you're 5 years behind or 10 years behind

you're actually quite far behind the cutting edge.

But it wasn't long before these allied governments

began investing in their own chip companies.

In the 1970s and 80s

Toshiba in Japan and Samsung in South Korea

began designing and manufacturing chips

that rivaled the Americans'.

In the 1990s, a Taiwanese company, TSMC

got so good at manufacturing chips

that many companies in the US stopped doing it.

It meant that U.S. companies were not the only ones

who could make the most advanced chips anymore.

And every country's chip industry

was increasingly reliant on other countries for the materials,

software, and equipment needed to make more complex chips.

But while the US and its allies were pushing the limits

of chip technology...

China was lagging behind.

In addition to the US blocking it from accessing chips

during the Cold War

many of China's brightest scientists and engineers

had been driven out of the country

by the dictator Mao Zedong during the 60s and 70s.

But over the next few decades, new Chinese leaders

pushed to catch up.

By the 1990s, the Cold War was over.

The US had become friendlier with China

and it had lifted most of its export controls.

And so China enticed many chip companies

to move their assembly operations to China.

And by the 2000s, China dominated this end of the supply chain.

But China was importing more and more chips

to feed its assembly industry

and it put them in a tricky position.

The Chinese government had studied the tech supply chain

and they realized the entire Chinese tech ecosystem

relied on a foundation of imported silicon

from China's geopolitical adversaries

and the United States, from Japan, from Taiwan.

And China's leaders concluded

quite understandably, that this was a risk

they were unwilling to continue to take.

So the Chinese government poured money

into its own chip design and manufacturing companies...

which increasingly partnered with non-Chinese firms.

All on the hopes of creating a chip supply chain

that existed entirely within China.

Soon, China could design, manufacture and assemble

some older generations of chips, mostly on its own.

But it was still years away from making the most cutting edge chips.

This is one of those chips.

It's got around 114 billion transistors on it.

Remember in 1960, chips had 4.

Computing capabilities in the future

just like the capabilities of the past

will be deployed to military uses.

The problem is, only a few companies in the world

are involved in making them and none are in China.

To start, only 3 American companies

make the software needed to design advanced chips.

Then turning those designs into real chips

requires a machine that's only made by one company: ASML.

But this machine requires equipment that's only made in the US.

Finally, only companies in Taiwan and South Korea

can put it all together and manufacture the most advanced processor chips.

These companies are chokepoints in the supply chain...

and China was totally reliant on them for advanced chips.

In 2019, police in the US went to arrest Zongchang Yu

but couldn't find him.

Until he appeared later in China as the CEO of his company

that successfully made software like ASML's.

Thanks to help from the Chinese government

his company was flourishing.

And his story was just one of several instances

of IP theft in the chip industry.

The Chinese government has been

at the very least, passively supportive

but in some cases, actively supportive of IP theft

because the Chinese government realizes

is that its companies are in a position of relative weakness.

In order to eventually decrease its reliance on this foreign supply chain

China was identifying choke points like ASML and copying them.

But the plan backfired.

And this has really angered

the US government, other governments,

and caused them to take China's

subsidies as a more security focused issue

rather than just an economic issue.

This was happening at the same time

that the relationship between the US and China

was becoming less cordial and more competitive.

"China's market distortions

and the way they deal cannot be tolerated..."

"...a tremendous intellectual property theft situation..."

"...game on here..."

"...a trade war between the United States and China..."

"Trump says he plans to impose

a 10% tariff increase on China..."

"...if they don't want to trade with us any more

that would be fine with me."

In 2018, the Trump administration banned US companies

from selling components to ZTE, a Chinese tech company.

Then in 2019

it banned US companies from doing business with China's

biggest tech company: Huawei and its affiliates.

These bans nearly bankrupted ZTE

and dealt a significant blow to Huawei.

In 2022, the next president, Joe Biden, targeted

China's chip industry more broadly.

First, it banned all US companies from selling advanced chips to China

but it also blocked Chinese design companies

from using US made design software

and US made manufacturing equipment.

Plus, it banned global companies who use US semiconductor technology

from selling advanced chips to China as well.

The U.S was exploiting these choke points

to stop China's chip industry in its tracks.

These export controls represented

a really clear shift away from the view

that ultimately trade and tax exchanges with China

were fundamentally positive sum to a much more

zero sum view of the technological competition.

Next, the US passed a law that would invest billions of dollars

into its own chip manufacturing companies...

and finalized a deal with Taiwan's biggest manufacturer

TSMC, to build manufacturing plants in the US.

All to enable the U.S. to keep racing ahead.

China and the US have a pretty similar view of the political stakes

when it comes to semiconductors.

That's why the US government

has made it a priority to defend the US lead.

[pensive electronic music]

But this has also put extraordinary pressure on another conflict

between the two countries.

Since 1949, China has viewed Taiwan as a breakaway province

and has vowed to reunite with it, even threatening invasion.

The US has vowed to protect Taiwan.

But Taiwan also happens to own the most important choke point

in the chip supply chain.

Taiwanese companies manufacture 63% of all chips...

and about 92% of all advanced chips.

With companies that are indispensable

to both the US and Chinese chip industries

Taiwan has built itself some protection.

But the US export controls forced Taiwan's companies

to make a choice:

defy the US and keep selling to China...

or comply and cut off China from some of its chips.

So far, they've signaled they'll cut off China.

But as China and the US feud over chips

more and more choices like these are going to be imposed

on countries and companies around the world.

Asking them to pick sides in what looks a lot like

a new Cold War. ENJOY AND THANKS