Reshaping Our World Through Chips
Abstract — After reading the book “Chip War”, this article seeks to provide a comprehensive summary together with the Author’s thoughts on the world’s most critical resource — Microchip Technology.
Introduction
Microchips are said to be the new oil, which indicates that it is the scarce resource that the world depends on. The entity that controls every aspect, from the design to the manufacturing, of these microchips will wield significant economic, military, and geopolitical influence. Nevertheless, these microchips originated from humble beginnings, initially serving primarily military purposes before transitioning to widespread use in the consumer market. Today, virtually everything relies on these microchips, including our smartphones, vehicles, military drones, stock markets and even influencing political policy decisions, making it a semiconductor chip race for superior power amongst countries. At the same time, it is this very power that fuels some of the conflicts we witness today, such as tensions between China and Taiwan, China and the United States, military confrontations between Ukraine and Russia, and numerous others.
While strategically winning the semiconductor chip race may appear straightforward, it requires a complex grasp of navigating an increasingly intricate globalized supply chain that caters to some of the world’s most critical industries today. From the Cold War Era to the Covid-19 Era, this article delves into some of the key themes outlined in the book.
It is first important to highlight some jargons that are often described in the book.
What are Semiconductor Chips?
A semiconductor chip is a product with some of the properties of both insulators and conductors. Semiconductors chips are usually comprised of silicon. The main use of semiconductors chips described in the book are memory chips, logic chips and analog chips. Memory chips are used to store data temporarily or permanently in electronic devices, examples are Random Access Memory and Dynamic Random Access Memory. Logic chips are digital integrated circuits that are designed to perform logical operations and process digital signals which are the backbone of computing devices and data processing. Lastly, analog chips help to process continuous signals and are used in applications such as amplification, filtering, and signal conditioning (though it is hardly mentioned in the book).
How is the Semiconductor Chip Industry Run?
I used to think that one company runs the whole show, from its design to production of chips, but I was so wrong.
Firstly, we have fabless companies that focus on designing semiconductor chips but do not own their own manufacturing facilities. They outsource the fabrication of their chips to foundries. Think of fabless companies like the designers of the chip where they develop architectures, functionality and specifications, as well as testing and marketing their products. Key examples include Qualcomm and Nvidia.
Secondly, there are the Foundries. Foundries specializes in manufacturing facilities that produce the semiconductor chips on behalf of the other companies. They are basically a neutral player that enables fabless semiconductor companies to access advanced manufacturing processes without owning their fabs. The monopoly foundry we know today is Taiwan Semiconductor Manufacturing Company (TMSC).
A combination of fabless and foundries would be known as Integrated Device Manufacturer (IDM) which designs, manufactures and sells its semiconductor products. These companies include Intel, Samsung Electronics and Texas Instruments where they have their own fabrication facilities (fabs) to produce chips.
Lastly, we have semiconductor equipment manufacturer which produces equipment and machinery that aids the manufacturing process of these chips. The book highlights lithography as a main example, with the key player being ASML.
Note: There are also the design automation tool providers that develop the software tools used in the design and verification process (i.e Microsoft) but it was only lightly touched on, thus it will not be covered in this article.
Is this a Sustainable Industry?
It all started with a company known as “Fairchild Semiconductor” which fabricated the first few products of semiconductor chips. The engineers realized that the number of components that could fit on each chip was doubling annually as engineers learned to fabricate ever smaller transistors. Cofounder Gordon Moore (who cofounded Intel). He prediction a theory, known as Moore’s Law, that the computing power of chips would grow exponentially. To achieve this goal, collaboration between governments, companies, and consumers is essential, requiring ongoing cycles of innovation and funding to sustain Moore’s Law. The pursuit of smallest semiconductor chips capable of accommodating numerous components will determine the leading producer in the industry as smaller chips offer advantages in terms of performance, efficiency and cost-effectiveness. However, a big challenge was that the more transistors shrunk, the narrow length of the conductor channel occasionally cause power to “leak” through the circuit and because of how thin the chips were going to be, quantum effects will begin to seriously impact transistor performance. The layer of chips is too small to keep all the electrons sitting on the slap of silicon. At some point, the laws of physics will make it impossible to shrink transistors further.
Even before we face the physical challenges, economic challenges will take precedence. It will be increasingly difficult to make as it requires even more precision in deposition, etching and lithography. Each part of the lithography process — from the chemicals to the lenses to the lasers that perfectly aligned the silicon wafers with the light source — is not going to be economically feasible. These machines are not as cheap as it used to be as they become more advanced. The rate of cost declines has significantly slowed down and the tools needed to make ever-smaller chip are just too expensive for governments and companies to continue funding (i.e EUV lithography machines cost more than $100 million each).
The shift towards artificial intelligence (AI) and our demand for computing power is unlikely to ever diminish. We are more likely to face the issue of supply. It takes one chokepoint to fail for the whole supply chain to be disrupted. Take a disaster in Taiwan for example, TMSC fabricates 37% of the world’s logic chips which is the fundamental building block for data centers and electronic devices. If a disaster ever strikes, it is going to be worse than the disruption caused by Covid 19 (and that was already bad enough). The impact of the world economy would be catastrophic! It is also not helping that the two big powers of semiconductor chips — USA and China — are facing political tensions over Taiwan.
A Not Very Brief History
So how did America become the leading superpower in semiconductor chips before China? Surprisingly, chips were not used in electronic device during the 1960s, rather, they were used in weaponization and developing more advanced military systems (NASA included). The Cold War undoubtedly served as the backdrop for the semiconductor race, yet you might ponder whether Russia could have emerged victorious in this technological battle during the arms race. While the Soviet Union had the opportunity to invest in innovation and recruit top engineers to develop advanced semiconductor technology, their strategy predominantly relied on espionage to obtain insights from American advancements. Although successful in acquiring the latest semiconductor chips from the US, the chip’s design and fabrication was too difficult for Russian engineers to comprehend fully. As a result, despite access to cutting-edge technology, the Soviet Union found themselves unable to capitalize on their acquisitions effectively.
“The recipe for chips was already extraordinarily complicated. Every step of the process of making chips involved specialized knowledge that was rarely shared outside of a specific company. This type of know-how was often not even written down. Soviet spies were among the best in the business, but the semiconductor production process required more details and knowledge than even the most capable agent could steal.”
Furthermore, America was constantly innovating, thus by the time the Russians acquired the latest technology, America had probably created a new one. America started to create lethal weapons (i.e drones and guided missiles) which proved to revolutionize warfare. Prominent instances of successful technological weaponization include the conclusion of the Vietnam War and the Gulf War, both of which underscore the impact and effectiveness of advanced technology in warfare.
Despite Fairfield success in the Pentagon, “I WANT TO GET RICH!” mindset prompted the employers of Fairfield Semiconductor to establish their own firms, driven by the realization of a bigger consumer market out there for semiconductor chips. The employees, famously dubbed the “Traitorous Eight”, went on to found pivotal companies in the semiconductor industry, including Intel and AMD. The narrative further delves into the new advancements that propelled the semiconductor industry forward, fostering groundbreaking innovations that continue to benefit consumers with some of today’s most remarkable technological advancements.
Next comes Asia. Following America’s pledge to support and rebuild Japan to counter the spread of Communism in Asia, Japan’s semiconductor industry experienced a significant rise under the leadership of businessman Akio Morita, who co-founded Sony. This period coincided with the evolution of globalization, where offshoring for cheaper production became a primary strategy for companies seeking to reduce unit costs and increase profits. Asia, particularly Japan, excelled in efficiently producing chips at lower costs, posing a challenge for American competitiveness. The America that funded Japan soon became their biggest weakness where America was struggling to compete against. However, the eventual decline of Japan’s semiconductor industry loomed — a development that is later explored in the book. Then came Taiwan, Kwoh-Ting Li, Taiwan’s economy minister in 1968 hated the idea of intellectual property when he met the Americans, he thought it was something that “imperialists used to bully less-advanced countries” However, with the intensity of China rises, and America lost the Vietnam war, he started to change his mind. He figured maybe semiconductor is a good way to foster a real relationship with America. Back then, because of Vietnam, most Asian countries start to lean toward communism. However, with the bloom of the semiconductor industry, people have access to greater job opportunities that can stabilize their livelihood, while the semiconductor supply chain forms a protection net from communism. Morris Chang, founder of TMSC, was in charge of promoting industrial and technological development in Taiwan which is an integral foundry for the production of our semiconductor chips.
Then comes China. Primarily driven by Mao Zedong’s cultural revolution, China was really far behind the semiconductor race amongst US and her Asia counterparts. China then decided for semiconductor chips to be its number one priority to overhaul the nation’s underdeveloped telecommunications infrastructure. I mean just look at China’s funding; approximately “$46 billion in loans and other support, coupled with $25 billion in tax cuts”. There came Ren Zhengfei — founder of Huawei in Shenzhen. During its first several years the company’s business model consisted mainly of reselling private branch exchange (PBX) switches imported from Hong Kong. Meanwhile, it reverse-engineered imported switches and investing heavily in research and development to manufacture its own technologies. With the help of Beijing’s explicit policy of supporting domestic telecommunications manufacturers and restricting access to foreign competitors, China caught up to its competitors — Sony and Samsung. At the same time, it marked the start of the China-US tensions. America’s position was eroding to due to its staggering reliance on Taiwan and South Korea. Amidst its rise, Huawei has been accused of intellectual property infringement and security issues. The company has faced difficulties in some countries arising from concerns that its equipment may enable surveillance by the Chinese government due to perceived connections with the country’s military and intelligence agencies. In the midst of a trade war between China and the United States, the US government alleged that Huawei had violated sanctions against Iran and restricted it from doing business with American companies. However, China still imports US products to fabricate their own chips. China drives the profits for the US, yet at the sane time, they pose a serious threat.
The book summarizes the US-China tensions in a single quote:
“Our fundamental problem is that our number one customer is our number one competitor.”
The book also provides a comprehensive historic background on the rise of Silicon Valley, Samsung (Korea), Sony (Japan) and the semiconductor supply chain that is not talked about here.
It Starts to get Messy with Taiwan
“Globalization of chip fabrication hadn’t occurred; Taiwanization had. Technology hadn’t diffused. It was monopolized by a handful of irreplaceable companies. American tech policy was held hostage to banalities about globalization that were seen to be false.”
TSMC is the monopoly governing the foundry realm today but it faces a big geopolitical risk, China. “Is NVIDIA’s and TSMC’s stock valuation justified after such a huge rally?” is such a common question I get from my peers. I would then reply, “Well yeah, the fundamental shift in AI that requires multi-layer processing supports the rally and is likely to be sustained in the long term as AI becomes even more advance, as long as China does not evade Taiwan with US stepping in, resulting in war.” We have to bear in mind our tail risk of our analysis — Taiwan’s geopolitical stability. But invading Taiwan is not that easy due to the implications and consequences (but then again, the same could be said about Russia and Ukraine).
Firstly, the idea that China would destroy TMSC’s fabs out of spite does not make sense, because China would suffer just as much as anyone, especially since the US and Asia counterparts have access to Intel’s and Samsung’s chip fabs. Nor has it ever been realistic for China to outright invade and seize TSMC’s facilities as the software and machines used is too advance for China.
Secondly, how would US response? An act of war might happen and obviously such a series of moves would be too risky for Beijing. Furthermore, US will probably place new sanctions on China, making it even more difficult with the ongoing trade war. But I will leave this to the historians to argue about the probability of such an event happening.
A whole chapter is dedicated to this!
Conclusion
The recent Russian invasion of Ukraine serves as a stark reminder of the significant power wielded by countries with advanced semiconductor capabilities. In this conflict, Ukraine’s ability to effectively resist Russian forces has been bolstered by technological support from the US, including crucial equipment such as Javelin anti-tank missiles and drone fighting systems, which have disrupted Russian military efforts. Furthermore, Russia’s position has been further weakened by US sanctions and the depletion of semiconductor resources during the conflict, resulting in a diminished chipmaking capacity. Could the same be said if China invades Taiwan?
After diving into this book, if someone were to ask me which stock to invest in, I’d be tempted to reply, “long ASML, TMSC and NVIDIA”. It seems like they’re the real game-changers shaping the future. Please take this with a pinch of salt (not really).
Acknowledgements
I extend my gratitude to the book “Chip Wars”, which served as the inspiration for this article. Chris’s meticulous research and insightful analysis have shed light on the complex dynamics of the semiconductor industry, offering invaluable insights into its strong impact on global affairs. His contributions have undoubtedly enriched my understanding and fueled my passion for exploring this subject further. If you have not read the book yet, do so now!
References
[1] Chip War: The Fight for The World’s Most Critical Technology — Chris Miller
