How ‘Chip War’ plunges nations into a technology arms race
1. Why the war over chips?
Chip manufacturing has become an increasingly precarious business. New facilities cost up to $20 billion, take years to build and need to run at full capacity 24 hours a day to generate profits. The required scale has reduced the number of cutting-edge companies to just three — Taiwan Semiconductor Manufacturing Co. (TSMC), South Korea’s Samsung Electronics Co., and Intel Corp. from the USA. Chipmakers are increasingly being scrutinized about what they’re selling to China, the largest market for chips. Shifts in the global supply chain and recent shortages have prompted governments to subsidize new factories and equipment, from the US and Europe to China and Japan.
2. Why are chips so important?
They are what make electronic devices smart. Chips are made of materials deposited on silicon wafers and can perform a variety of functions. Memory chips that store data are relatively simple and traded like commodities. Logic chips, which run programs and act as the brains of a device, are more complex and expensive. And as the technology that powers devices—from space hardware to refrigerators—becomes smarter and more connected, semiconductors are becoming more ubiquitous in the modern world. Because of this explosion, some analysts are predicting that the industry will double in value within this decade and grow into a trillion-dollar market.
3. Is the world short of computer chips?
Pandemic lockdowns and supply chain bottlenecks left many types of chips in short supply for a period of about two years. This event helped usher in this new era with a growing realization of its strategic importance. Now, with post-pandemic demand for PCs and phones cooling — and much of the world slipping into recession — the cycle has turned. Chipmakers warn of oversupply in certain areas, though some customers, including automakers, are still struggling to get enough. But for political reasons, chipmakers are still willing to expand capacity during periods of weak demand – which could further turn the industry upside down.
4. How is the competition going?
• TSMC unveils bigger budgets, while Samsung introduces cutting-edge technology ahead of its competitors. TSMC revenue is expected to grow 40% this year. In 2021, Samsung overtook Intel to become the world’s largest chipmaker; This year, TSMC is on track to overtake Intel.
• China is struggling to catch up, but faces further US measures to restrict access to US equipment for chip design and manufacture. The US is also targeting technology it has determined could be misused for military purposes. In particular, China’s Huawei Technologies Co., which once led the cellphone infrastructure market and competed with Samsung as one of the largest smartphone makers, has been cut off from its main suppliers. In any case, China has a long way to go and its task is becoming increasingly difficult.
• US politicians have decided they must do more than just hold China back. The Chips and Science Act, signed into law Aug. 9, will provide $50 billion in federal funding to support U.S. semiconductor production and promote a skilled workforce that the industry needs.
• European Union officials are exploring ways to build an advanced semiconductor fab in Europe, possibly with support from TSMC and Samsung, as part of their goal to double chip production to 20% of the world market by 2030.
5. How does Taiwan fit into all of this?
The island democracy emerged as the dominant player in outsourced chip manufacturing, in part due to a government decision in the 1970s to boost the electronics industry. TSMC almost single-handedly created the business of building chips for others, a business that was embraced as the cost of building facilities skyrocketed. Major accounts like Apple Inc. gave him the massive volume to build industry-leading expertise and now the world relies on it. It would take years and a fortune to adjust its size and capabilities. Politics won the race for more than money, however, with the US signaling it will continue efforts to restrict China’s access to American technology used in Taiwan’s foundries. China has long claimed the island, just 100 miles off its coast, as a breakaway province and has threatened invasion to thwart its independence. Recent military drills by China have reignited concerns about the world’s reliance on Taiwan for chips.
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