Why China is losing the microchip war

In 2012, Zongchang Yu resigned from his engineering position at ASML, the sole producer of the most advanced semiconductor chips in the world. Following his departure, Yu established two new firms in China and the United States, respectively. However, ASML and US attorneys later accused Yu of enlisting other ASML engineers to work for his American company and stealing confidential information related to ASML's technology, purportedly with the support of the Chinese government. This anecdote is just a small part of China's monumental effort to revolutionize the semiconductor industry, which is one of the most global and important industries worldwide. However, China's initiative has pitted it against the United States, and the dispute is not about market share or tariffs but rather about security. So how did the US and China become embroiled in a Cold War over computer chips?

In the 1950s, engineers in the US invented the first semiconductor chip, a small piece of silicon with four transistors. As the number of transistors increased, so did the chip's power. By 1960, engineers had already developed chips with four times the number of transistors, and they continued to find ways to add more each year. This resulted in an exponential improvement in semiconductor technology since the early 1960s. Gordon Moore, the founder of Intel, predicted in 1965 that the computing power of a single chip would double approximately every year, a trend that has held true up to the present day.

Initially, the first companies dedicated to making chips were located in the US, where they had a single main customer: the US government. The semiconductor chip was first invented in the 1950s in the US, with the first use cases being guidance computers in NASA spacecraft and missile systems. The US government recognized the importance of computing in determining a nation's power and established partnerships with chip companies to ensure access to the most advanced chips. Initially, these companies handled the entire supply chain within the US, but by the late 1960s, they moved their manufacturing and assembly to countries with cheaper labor, such as Japan, Taiwan, South Korea, and Hong Kong. These countries became allies and partners of the US, and the government encouraged the transfer of technology to support their economies. However, the US banned the sharing of technology with its rivals, the Soviet Union and China, to keep them behind in chip technology. Despite this, Japan, South Korea, and Taiwan soon began designing and manufacturing chips that rivaled the US. In the 1990s, a Taiwanese company, TSMC, became so good at manufacturing chips that many US companies stopped doing it. Meanwhile, China was lagging behind due to the US export controls and Mao Zedong's policies that drove away many of its scientists and engineers in the 60s and 70s. By the 2000s, China dominated the assembly end of the supply chain but was heavily reliant on importing chips, putting them in a vulnerable position.

The Chinese government recognized that the country's tech industry heavily relied on imported silicon from its geopolitical rivals, such as the United States, Japan, and Taiwan. To address this risk, China invested heavily in its own chip design and manufacturing companies, hoping to create a domestic chip supply chain. However, China's efforts to copy and steal intellectual property from foreign companies, particularly in the chip industry, have angered the US and other governments. These actions have caused the trade tensions between the US and China to become more security-focused rather than just economic. In 2018, the Trump administration imposed a ban on US companies from selling components to ZTE, a Chinese tech company. While China has made progress in designing and manufacturing its own chips, it still relies on foreign companies for cutting-edge technology. In recent years, the Chinese government has invested heavily in developing its own chip industry, recognizing its reliance on imported silicon as a security risk. However, this effort has been met with resistance from the US, which views China's market distortions and intellectual property theft as a security concern. The US has imposed a series of bans and export controls on Chinese tech companies, including Huawei and ZTE, and has invested in its own chip manufacturing industry to maintain its lead in the technological competition.

This has put pressure on the conflict between the US and China over Taiwan, which owns the most important choke point in the chip supply chain. Taiwanese companies manufacture the majority of chips, including advanced ones, making them indispensable to both the US and Chinese chip industries. US export controls have forced Taiwan's companies to choose between selling to China and complying with the US. So far, they have chosen to cut off China from some of its chips, but more choices like these are likely to arise, as the US and China continue to feud over chips in what looks like a new Cold War.