How ‘Chip War Puts Nations In Technology Arms Race

How ‘Chip War Puts Nations In Technology Arms Race

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The incredibly complex and risky business of semiconductor manufacturing has always been a battle between the world's giants. Now it is also a race between governments. These critical technological components, known as integrated circuits, or simply microcircuits, may be the smallest yet most complex products ever produced. Because it is so difficult and expensive to produce, there is a global dependence on just a few companies — a dependence that has been dramatically reduced by shortages during the pandemic. At the same time, the US is restricting chip companies' exports to China to limit the growth of its geopolitical and economic rival. Tens of billions of dollars were suddenly diverted from expanding production over the next few years, just as the looming recession began to severely curtail global demand.

1. Why the potato chip war?

Chip manufacturing is an increasingly dangerous business. New facilities cost up to $20 billion, take years to build and must operate around the clock to make a profit. The necessary scale has reduced the number of leading technology companies to three: Taiwan Semiconductor Manufacturing Co. (TSMC), Samsung Electronics Co. and Intel Corp. from the United States. Chipmakers are increasingly controlling what they sell in China, the chip's largest market. Shifts in global supply chains and recent shortages are prompting governments in the United States and Europe, China and Japan to subsidize new plants and equipment.

2. Why are chips so important?

They make electronics smart. Chips made of material deposited on silicon wafers can perform a variety of functions. Memory chips that store data are relatively simple and sold as a commodity. The logic chips that run the programs and act as the brain of the device are more complex and expensive. As the technology that powers devices from spaceships to refrigerators becomes smarter and more connected, semiconductors are becoming more common in today's world. Some analysts of this boom predict that the sector will double in value within this decade and grow into a trillion dollar market.

3. Is there a worldwide shortage of computer chips?

Due to the pandemic and bottlenecks in the supply chain, many types of chips have been in short supply for nearly two years. This event helped usher in this new era with a growing awareness of its strategic importance. Now, with post-pandemic demand for computers and phones cooling off — and much of the world mired in recession — the cycle has reversed. Chipmakers have warned against oversupply in some areas, although some customers, including automakers, are still struggling to get enough. However, for political reasons, chipmakers are still willing to ramp up capacity during periods of low demand, which could give the industry a new boost.

4. How is the competition?

• In October, the US imposed tighter controls on the export of some chips and chip-making equipment to China in an attempt to prevent China from developing capabilities that could pose a military threat, such as supercomputers and artificial intelligence.

• China is trying to catch up, but faces greater moves than the US to limit access. It should be noted that the Chinese company Huawei Technologies Co., once a leader in the mobile infrastructure market, competed with Samsung as one of the largest smartphone manufacturers. The company was cut off from major suppliers. However, China still has a long way to go, and its task is becoming increasingly difficult.

• TSMC introduced bigger budgets and Samsung introduced advanced technology, ahead of its competitors. TSMC's revenue is expected to grow 40% this year. In 2021, Samsung overtook Intel to become the world's largest chipmaker; TSMC is on track to overtake Intel this year.

• American policymakers have decided that they must do more than contain China. The Chip and Science Act, which took effect Aug. 9, will provide $50 billion in federal funding to support semiconductor manufacturing in the United States and develop the skilled workforce the industry needs.

• European Union officials are considering setting up advanced semiconductor manufacturing in Europe with Intel and possibly TSMC as part of a goal to double chip production to 20% of the global market by 2030.

5. How does Taiwan fit into all this?

The island democracy has become a dominant player in offshore chip manufacturing, thanks in part to the government's decision to develop the electronics industry in the 1970s. TSMC has almost single-handedly built a business making chips for others, which has skyrocketed as the cost of building factories has skyrocketed. Large customers like Apple Inc. have provided the scope to create advanced experiences that the world now relies on. Adapting to its size and capabilities will take years and cost a fortune. Politics has fueled the rush more than finance, suggesting the U.S. will continue efforts to limit China's access to American technology used in Taiwan's smelters. China has long declared the island, just 100 miles off the coast, a breakaway province and threatened an invasion to disrupt its independence. Recent Chinese military exercises have reignited concerns about the world's dependence on Taiwan for chips.

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Why global supply chains can never be the same | WSJ documentation

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