Huawei’s Mate 60 phone containing Kirin 9000s chip — 7 nanometers (nm) chip made in China by the SMIC—questions the future of the USA’s Chip war winning strategy. Retaining semiconductor edge has been at the core of the USA’s national agenda for retaining its 150 years of technology supremacy—sharpening its economic and military edge. To develop and maintain an edge in all of the 19 critical and emerging technologies, a list prepared by USA’s National Science and Technology Council, winning chip war will play a pivotal role.
It has become clear to Washington that Chinese leadership aims to displace the United States as the world’s technological and economic superpower. Although some pundits believe it has no historical precedent, the rise of the USA has been due to success in pursuing reinvention waves, causing creative destruction to the success of UK-led Europe’s first industrial revolution. As the threat is credible, the USA has an urgency to destroy it. It happens that semiconductor is the target technology core for China to outperform the USA in the incremental and reinvention race of all kinds of products, succeeding in migrating Innovation epicenter.
The ultimate goal of the USA’s chip-war-winning strategy has been that China will remain dependent on the technology supply from the USA and its allies. In the worst case, the USA would like to succeed in creating barriers to access certain technologies and components so that China cannot pursue high-end innovation. Notably, the USA wants to ensure that China cannot outperform American companies in Incremental innovation and reinvention race, both in products and processes. As a result, Chinese companies will not succeed in taking away America’s competitiveness in the international trade of essential products like telecom gears, automobiles, intelligent machines and others.
USA’s Chip War Winning Strategy
The strategy of the USA’s winning chip war has multiple dimensions. It begins with creating a barrier to China in importing high-end microchips and preventing Chinese companies like Huawei from accessing such microchip production capacity from Taiwan. The next one has been to restrict the import of high-end chip-making machines, software tools, and chemicals from the USA and its allies. For example, Chinese companies are not allowed to import EUV lithography machines from Dutch company ASML for producing sub-10 nm chips.
The 3rd dimension of the strategy has been expanding high-end chip production capacity on U.S. soil through subsidies and restricting such subsidy-receiving companies from setting up similar facilities in China. The 4th element of the USA’s winning chip war strategy has been increasing investment in education and R&D to sharpen U.S. companies’ innovation edge. Its 5th component encompasses barriers to China’s access to human capital carrying U.S. passports and helping alliances like India to connect to the U.S.-led blue semiconductor supply chain.
USA’s History in Winning and Losing Microchip Supremacy
Upon the invention of the Transistor in 1947, the U.S. semiconductor industry started growing, primarily by serving the defense market. Due to weight and power advantage, defense contractors found semiconductors a better alternative to reinventing onboard computer and signal processing modules. Furthermore, the invention of the integrated circuit in 1959 accelerated the weight and energy consumption requirement. Hence, the U.S. semiconductor industry sharply grew in the 1960s. However, it lost its edge to Japan due to the success of Japanese companies in reinventing consumer electronics products like Radio, Television, and Music Players.
Although SEMATECH-led U.S. Government interventions coincided with the regaining of the semiconductor edge in the late 1980s, there are no clear examples that it happened due to the U.S. Government’s subsidies and trade restrictions applied against Japan. Likely, the USA’s semiconductor industry retained the global edge due to IBM’s adoption of Intel’s Microprocessor in making IBM PC. Subsequently, the rise of the PC wave led to the rise of Intel-led U.S. semiconductor industry. Unfortunately, Intel’s home, Silicon Valley, could not retain it, particularly in wafer processing.
The U.S. lost the edge to Taiwan due to the failure of leveraging the smartphone wave. Unlike in the past, U.S. military is no longer the client for microchips produced using sub-ten nanometer process nodes. Like the iPhone maker Apple, smartphone makers are the lead customers of the latest process node. The U.S. chip industry has also lost GPU-based AI machine wave, demanding the latest process node. Hence, instead of choosing Intel’s foundry, Nvidia has been getting high-end chips processed by TSMC’s latest node.
In retrospect, sharpening semiconductor edge demands riding a new wave, fueled by the early-stage radical innovation candidate. As history tells us, subsidies and trade restrictions are not good enough.
USA’s Chip War Winning Strategy Leaves Behind Legacy Chips
To reduce dependence on imports and to impede China’s rise in the semiconductor, the USA’s chip war strategy has been incentivizing high-end chip production and banning China from making advanced chips—sub-ten nanometers. But does such an approach leave legacy chip-making to China? If it does, how will the USA succeed in reducing dependence? It’s not only high-end chips that the USA needs to produce either on its soil or on the soil of friendly countries to minimize dependency. In reality, if a single chip is missing, your most sophisticated products having high-end chips will not be able to function. Products like the iPhones, autonomous vehicles, or fighter jets require legacy and advanced chips to function as a system.
The iPhone 15 Pro’s A17 bionic chip is produced with the most advanced process, the 4 nm node. But this product also requires other microchips for various functions like power management, made with older technologies. As reported in a publication by Fortune (August 18, 2023), as high as 66% of chips manufactured in 2023 are using technologies rolled out before 2005. A majority of approximately 500 foundries operating in 2023 worldwide were built in the last century. Most of the microchip products depend on legacy and advanced microchip production technologies. In some cases, legacy chips are good enough. For example, according to the 2022 RAND report, most military technologies like space technology, radio frequency communication, laser-based sensing, edge computing, and integrated silicon photonics require largely legacy chips.
Risking Legacy Chips in the Hand of China Risks Chip War Winning
According to the Center for Strategic and International Studies, the USA’s Chips Act has not targeted to keep China out of mature chips (16nm and above). Such a decision justifies the massive loss of American firms exporting legacy chips and chip-making equipment to China. As mentioned in a commentary, U.S. chip efforts have focused on advanced semiconductors. Consequentially, low-tech legacy chips could give China an unexpected edge.
As explained, legacy chips are as crucial as high-end ones. As high as 95% of the chips used in the automotive industry are legacy chips. They power innovations in critical industries like medical devices, consumer electronics, infrastructure, industrial automation, and defense applications also rely heavily on legacy chips.
Legacy chips are commodity products. On average, they cost $0.5 apiece. Due to razor-thin profit, investing in legacy chip manufacturing is not economically attractive. They still exist today because they also made advanced ones in the early days. Within a few years of their establishment, they recovered capital expenditure and made a profit by producing then-advanced chips. Hence, it is unlikely that profit-making competition in the Western world would set up legacy chip manufacturing plants. Besides, as high as 75 percent of legacy chip manufacturing capacity is in Taiwan and China.
Furthermore, China may offer subsidies for further attracting private investment in expanding legacy chip manufacturing capacity. As a result, U.S. legacy chip manufacturing plants may find it increasingly difficult to remain afloat. Hence, leaving legacy chips in the hands of the market will likely accelerate the retirement of U.S.-based older chip-making plants. On the other hand, China will likely be expanding its capacities. Consequentially, the USA’s dependency on China for semiconductors runs the risk of getting worse.
Silicon Edge Grows from Leveraging Innovation Waves
So far, the semiconductor industry’s success has been due to the amenability of making devices increasingly smaller, better, and cheaper. It has been happening due to the progression of process technologies, design tools, and production process optimization. Besides, it demands an innovation life cycle, which will be producing profitable returns. For example, the reduction of weight and power footprints of onboard computers generated profitable returns for semiconductor progression in the 1960s. As a result, the U.S. semiconductor industry attained the edge in increasing microchip density in the form of IC and component count. However, by the end of the 1970s, this wave of profiting from increasing chip density for improving onboard computers of aircraft, satellites, and space vehicles got saturated.
In the 1980s, the PC wave opened the profit-making opportunity by increasing chip density and frequency and lowering power consumption. Due to leveraging this opportunity, Intel’s revenue and profit kept growing with the release of increasingly complex and better-performing processors, from 8088 to the Xeon series. Consequentially, Intel’s home, Silicon Valley, attained the global edge. However, by 2010, this wave started to show signs of maturity.
At the maturity of the PC wave, there was a need for the U.S. microchip industry to ride on the next wave. Ironically, it knocked on the door of Intel. Unfortunately, in 2006, Intel rejected Apple’s request to produce its maiden A series core processor for the iPhone. Intel did it because its profit-making scope from making Apple’s chip was far less than 60% of the gross profit PC and server processors were generating. Hence, Apple was compelled to get it done from Samsung’s 90nm process node, two generations behind Intel’s 65nm node. Subsequently, Apple moved to TSMC, and the rise of the iPhone led to a Smartphone wave that migrated silicon edge.
Subsidies Run the Risk of Fueling Vicious Cycle
To address eroding profitability, the subsidy is an immediate help. Although it helps remain afloat, it does not necessarily sharpen the edge in improving the quality and reducing the cost through ideas. Furthermore, if competitors keep outperforming in quality and cost through innovation, a growing supply of subsidies will be required, creating a vicious cycle.
In retrospect, subsidies did neither create, nor retain America’s semiconductor edge. It could not also reverse the erosion into an uprising. For example, despite getting subsidies in the 1980s, decaying USA’s lithography firms could not survive—let alone grow as global leaders.
Fueling China’s Passion and Patriotism
Irrespective of complexities and trade restrictions, technologies that have already been invented could be absorbed and improved. If it becomes a core national issue and the nation proceeds to do its best, it will likely succeed. It’s just a matter of time.
USA’s chip war is an open message to China—America will prevent from rising at the edge. America has been preventing Chinese firms from accessing ASML EUV machines and other high-end machines, chemicals, gas, and wafers produced by the USA and its allies. However, underlying know-how in the form of publications, patent filing, and exposure to older versions is already known to China. Therefore, due to desperation and resource mobilization from the top, it’s likely that China will accelerate its progress in assimilating and imitating what exists today. They may even acquire the capacity to advance them further, making Chinese equipment, EDSA tools, gases, chemicals, and others more advanced than what the USA and its allies could deliver. China has already demonstrated such a possibility through its superior performance in 5G, bullet trains, and lithium-ion batteries.
Instead of decoupling China, the focus could have been on accelerating US firms’ incremental and reinvention progress, resulting in maintaining the gap. The strategy could have incentivized China to buying instead of making, as that is cheaper than the alternative.
Covering up Weakness of Work Culture with Subsidies:
In setting up a plant in Arizona, TSMC has suffered from a 9 to 5 pay cheque-driven work culture and lack of urgency in Getting jobs done of American workers. The habit of frequently talking over the phone is also counterproductive.
Over the last 70 years, America’s work culture has substantially eroded. Getting a pay cheque has gathered far more momentum than the sense of accomplishment for sharpening technology edge. Long-term dedication, Passion for Perfection, attention to detail, commitment, patriotism, and loyalty are becoming increasingly scarce resources in America. But they are essential for sharpening the technology edge in the civilian market. Besides, as the military’s semiconductor technology need could mostly be met with legacy chips, America can no longer use military requirements to sharpen the edge. Hence, subsidies could be the last resort for America to win the chip war. Unfortunately, its ability to fight the war is little.
Huawei Unveils 5G Mobile Handset having 7nm Chips–dents Chip War Winning Progress
Mate 60 Pro mobile phone signals a weak foundation of America’s chip war-winning capability. Despite the restrictions preventing Huawei from getting the latest node foundry services from TSMC and creating a barrier to SMIC to access sub 10 nm process technologies, Huawei has done it. SMIC successfully processed silicon at a 7nm node to produce a new Kirin 9000s chip.
So far, there is no evidence that SMIC did it by getting the critical EUV lithography equipment from ASML through the backdoor. It’s the outcome of China’s urgency to overcome the barriers to reach the goal. The continuation of this mission runs the risk of losing the Chip War. Furthermore, in addition to gaining an edge in a couple of equipment like EUV lithography, China may succeed in developing the edge in every segment of the value chain, making the Chinese domestic semiconductor value chain fully independent from the rest of the world. If China succeeds, it would seriously undermine the ability of America and its allies.
It’s well understood that the USA urgently needs to keep China a few process nodes behind in the semiconductor edge-sharpening race. However, the subsidy and trade restriction approach face a severe risk of failing. Instead, the USA could have focused on accelerating edge sharpening, leaving China always in catch-up mode.