The cutthroat race to build cutting-edge chips | Live with Lizzi Lee

In this episode of Live with Lizzi Lee:

Chris Miller, associate professor of international history at the Fletcher School and author of a new book on the historical account of the birth and development of semiconductors, talks about whether China’s ambitious chip-building initiative can catch up with the United States’s dominance.

Below is a transcript of the video:

Lizzi: Joining me today is Professor Chris Miller, author of a new book, Chip War: The Fight for the World’s Most Critical Technology. The book provides a fascinating historical account of the birth and development of semiconductors. The book has also been short-listed by the Financial Times as one of the top business books of the year. Make sure to check it out.

Congratulations, Professor Miller, and thank you so much for joining me today.

Miller: Thank you for having me.

Lizzi: So, Professor Miller, first thing first, can you give me a short overview of how computer chips have shaped the landscape of international politics since your invention? And why is the semiconductor called the new oil?

Miller: Well, if you look at the origins of computer chips, they emerged out of defense industrial needs during the Cold War. The first order for computer chips was the guidance computer in the Apollo spacecraft in the United States.

The second major order for computer chips was for the guidance computer and an intercontinental ballistic missile that was designed to deliver warheads to the Soviet Union.

So there’s been a really deep interconnection between the rise of the semiconductor industry and military systems from the earliest origins of the industry all the way up to the present.

But in addition to the ties to military goods, there’s also geopolitical influence that countries have tried to wield by taking advantage of their position in selected supply chains. Because the chip industry is very concentrated in several key firms and in a small number of countries.

And so those countries have often sought to use that concentration as a means of applying political pressure on their rivals. And so, in addition to the military uses, we also see countries trying to cut off rivals from accessing certain types of technology.

Lizzi: Right. And in one chapter of your book, you document the semiconductor trade war between the United States and Japan in the 1970s and ‘80s. What are the main takeaways from that episode for U.S. policymakers for today?

What worked in terms of policy and what didn’t?

Miller: Well, the Japanese case is interesting in terms of thinking about the present for a couple of reasons.

One is that although it’s true in the 1970s and 1980s that japan dramatically increased its market share when it came to producing chips, a lot of the production in Japan actually ended up being non-profitable.

And in 1990, Japan’s market share fell off almost as fast as it had risen a decade previously.

So it’s worth remembering, I think, that with massive capital investment programs, the chip industry can always win market share, but they can’t always produce advanced technology or profitable firms.

And I think when you look at the investment underway in China right now, which is state-backed and which is causing such controversy with China’s trading partners, a real open question is whether this investment will actually improve capabilities in China or not and whether it will create profitable companies or not.

The example of Japan suggests some reason for caution and skepticism.

But on the U.S. response to the Japanese rise in the 1970s and ‘80s, there are also lessons, I think, to be learned.

The U.S. tried to respond to Japan by threatening to impose tariffs on Japanese exports, and this had no appreciable effect on Japanese chipmakers. And if anything, it made the U.S. tech sector worse off. So, it doesn’t seem like tariffs were an effective response to that at the time.

And what worked was having U.S. firms invent better and more useful types of technology. And one of the key takeaways from the 1980s was that the Japanese were dramatically expanding their market share in semiconductors.

They’re doing so with every chip that was set to become less important, whereas a small number of startups in the United States invested in new types of technology that eventually set the stage for the personal computer revolution which let the U.S. again jump ahead of Japan.

So the key lesson here, I think, is that innovation is always really more important than any sort of restrictive strategy or trade strategy and something which companies, which countries are at the top of the industry.

Lizzi: And thinking of contemporary politics, you know, the CHIPS act encourages domestic production, but whether domestic production equals domestic innovation, that’s a different matter. I want to turn to Taiwan, which is at the center of the geopolitical tensions surrounding the semiconductor industry.

Can you talk a little more about Taiwan’s chip industry development? What is Taiwan’s secret sauce? Why is TSMC so successful?

Miller: Well, I think you’re right to focus on TSMC. And I would say that Taiwan doesn’t really have a special sauce. TSMC has a special sauce because TSMC really towers above the rest of the Taiwanese chip industry.

And it’s one of the most valuable publicly traded companies in the world, precisely because it’s got unique capabilities that no one else in Taiwan and hardly anyone else in the world can match.

Since TSMC was founded in 1987, it has focused relentlessly on improving its technology, and it’s also focused on deeply integrating itself with the rest of the semiconductor supply chain.

It has served customers that want to manufacture their chips from the earliest days and attracted some very large customers predominantly, but not exclusively in the United States, from the founding of TSMC up to the present.

And as a result of its expansion over time and growing scale, TSMC has established itself as really the center of the processor chip ecosystem, such that today anyone producing a machine tool for chip making or driving software for chip making must consider what is it that TSMC wants, because TSMC is for many companies, their biggest customer.

And that has provided an extraordinary platform for TSMC to grow and to further develop its technology, pouring money into our R&D, pouring money into expansions and chipmaking capacities such that today’s technology is unparalleled, and it’s got unparalleled capacity to produce as well.

That makes it, I think, the most important company in the entire world.

Lizzi: So you briefly alluded to China’s industrial policy. I wonder if you can elaborate a little more. Have those massive subsidies been successful in helping China develop its domestic chip industry? If not, what are the reasons?

Miller: It depends, I think, on how you define success.

There’s no doubt that there are more Chinese companies working at more parts of the supply chain, producing more capacity in part because of subsidies.

That’s, I think, pretty clear. What’s less clear is whether the subsidies have made an appreciable difference in terms of the level of technology at the cutting edge.

And here, I think that track record is mixed, I would say. There are certain Chinese tech firms that have gotten close to the cutting edge. SMIC, for example, the biggest Chinese foundry is relatively close to the cutting edge. Huawei’s chip designer, before the export controls were imposed on it, was fairly cutting edge.

And then YMTC, the biggest Chinese NAND memory company is getting quite close, it seems, to be cutting edge. There are some success stories and also a lot of data points that’s just waste and misspending of the subsidy funds, whether it’s outright scams or just companies that failed to produce the technology that they promised.

So, in terms of technological development, I think there are questions to be asked about the efficacy of subsidies. In terms of expanding capacity, though, there’s no doubt that subsidies work if capacity expansion is your goal.

And as a result of that, China is going to play a much larger role in the chip industry globally in ten years’ time compared with us today, simply because it’s going to have a lot more chipmaking capacity, especially when we’re talking about low end, lower technology chips.

Lizzi: In the book, you have a chapter illustrating Huawei’s example and how American tech dominance can be leveraged against a geopolitical rival in this case China.

So in practical terms, can China realistically wean itself off core American technology in the future?

And how long will that process take for China to diversify away or produce away from U.S. choke holes in semiconductors?

Miller: Well, China is certainly trying to reduce its dependence on U.S. technology, but it’s very, very difficult to completely wean itself off U.S. technology.

It depends on where exactly you look in the chip industry. Certain parts of the chip industry are more dependent than others on U.S. technology. But I’d say in aggregate, the U.S. role in the chip industry is quite large and the U.S. has control of a number of really important choke points that give the U.S. a lot of power to really obstruct advances in China if it wants to.

The fact that China’s got one of the world’s largest markets for semiconductors is an important advantage that China has.

And the fact that the government’s pouring money into the chip industry does provide the conditions for China to make some leaps forward in terms of technological capabilities.

But I would say from the perspective of today, it’s difficult to see any country, China included, being successful at making self-sufficient chips or non-American chips in the foreseeable future.

In the longer run, of course, you know, is. But right now, it’s just basically very difficult to make a match about U.S. technology.

This interview is republished from The China Project.