On a scorching hot day in late August, representatives of the government and industry crowded into the clinical cool of a state-of-the-art semiconductor facility in Tainan for a symbolic moment in the global tech conflict.
They were attending the opening ceremony of a training center built by Dutch ASML Holding at a cost of about US$16 million, small change for an industry used to spending US$10 billion or more on a single advanced manufacturing plant.
The real value of the site is strategic: It is one of just two such facilities outside the Netherlands capable of training semiconductor engineers to fabricate cutting-edge chips on ASML machines. Fellow US ally South Korea hosts the other — and Washington is working hard to ensure that China never acquires the same technology.
Illustration: Yusha
As the US-China confrontation takes root, the ability to craft chips for everything from artificial intelligence and data centers to autonomous vehicles and smartphones has become an issue of national security, injecting governments into business decisions over where to manufacture chips and to whom to sell them.
Those tensions could kick into overdrive as Chinese Communist Party (CCP) leaders set a five-year plan that includes developing the Chinese technology industry, notably its chip capabilities.
Semiconductors made from silicon wafers mounted with billions of microscopic transistors are the basic component of modern digital life and the building blocks of innovation.
Chipmaking is arguably one of the world’s most important industries, with sales of US$412 billion last year; scale that up to the electronics industry that depends on chips, and it is worth about US$5.2 trillion globally, German manufacturers said.
Politics is roiling that business model, sparking a drive for more autonomy from the US to China, Europe and Japan.
“We’re in a new world where governments are more concerned about the security of their digital infrastructure and the resiliency of their supply chains,” Washington-based Semiconductor Industry Association vice president for global policy Jimmy Goodrich said. “The techno-nationalist trends gaining traction in multiple capitals around the world are a challenge to the semiconductor industry.”
At once highly globalized and yet concentrated in the hands of a few countries, the industry has choke points that the US has sought to exploit to thwart China’s plans to become a world leader in chip production.
US President Donald Trump’s administration says that Beijing could only achieve that goal through state subvention at the expense of the US industry, while furthering CCP access to high-tech tools for surveillance and repression. China rejects the allegations, accusing the US of hypocrisy and acting out of political motivation.
For both sides, Taiwan, which is responsible for about 70 percent of chips manufactured to order, is the new front line.
Beijing is increasingly hostile toward Taiwan, which it regards as a renegade province. Taiwan Semiconductor Manufacturing Co’s (TSMC) status as the world’s largest contract chipmaker — a trend taking over the industry — the main supplier for Apple Inc and the focus of next-generation chipmaking, adds another dimension to China’s enmity and to its standoff with the US.
The manufacturer has become “turf that all geopolitical players want to secure,” TSMC founder Morris Chang (張忠謀) said in November last year.
Just a couple of kilometers from the new training center, cranes dot a massive construction site where TSMC is building fabs in which it plans to manufacture the most advanced chips in the world — chips that are no longer available to China’s Huawei Technologies Co due to US export controls.
Huawei used to be TSMC’s second-largest customer, accounting for 14 percent of sales; those shipments stopped last month.
The White House has also imposed export restrictions on China’s largest chipmaker, Semiconductor Manufacturing International Corp (SMIC), having already squashed Fujian Jinhua Integrated Circuit Co, once among Beijing’s biggest hopes to climb the chip ladder.
The US is also reaching out to key players at home and abroad to ask them to reconsider their relations with China.
Beijing’s intentions are so alarming to Washington because chips can be dual-use items with military applications, a former official familiar with the US administration’s efforts said.
“They are the fundamental basis of our qualitative military advantage, from missiles to radars to submarines,” the former official added.
After decades when the industry was encouraged to go global, Trump is attempting to reel it back home. A draft act, coined the US Creating Helpful Incentives to Produce Semiconductors for America Act, which was introduced to the US Congress in June, aims to strengthen support for semiconductor manufacturing and research in the US.
An executive at a Chinese semiconductor company, asking not to be named due to commercial and political sensitivities, said that three of the firm’s deals had been aborted because of concerns raised by the Committee on Foreign Investment in the US, which reviews national security implications of transactions.
Germany has also been effectively cut off, making any deals very difficult, the person said.
“China firmly opposes the unjustified suppression [of its companies by the US] under the weakest pretext of national security,” Chinese Ministry of Foreign Affairs spokesman Wang Wenbin (汪文斌) told reporters late last month, adding that Beijing would continue to defend the firms.
China — the world’s biggest semiconductor market, accounting for more than 50 percent of all chips sold — is not standing by as its high-tech ambitions are kneecapped.
That outsized demand means that many major deals need Beijing’s sign-off: US chipmaker Qualcomm in 2018 gave up its pursuit of NXP Semiconductors of the Netherlands after failing to win approval from China.
Beijing’s five-year plan for the chip industry would lend it the same strategic importance China gave to its atomic bomb program.
A law passed on Oct. 17 might allow China to hit back at the US, with speculation that it could prompt export controls on rare earths used in chip production.
Still, the rolling restrictions imposed by Trump have not just hit China’s chip capabilities, but are upending the entire industry.
However, there is scant sign of a climbdown, no matter who wins the US presidential election on Nov. 3.
Citing the need to promote “digital sovereignty,” the European Commission is exploring a 30 billion euro (US$35.58 billion) drive to raise Europe’s share of the world chip market to 20 percent, from less than 10 percent today.
Japan is also looking to bolster its domestic capacity. At least one Japanese delegation traveled to Taiwan in May and June this year in the hope of convincing TSMC to invest in Japan, a person with knowledge of the visit said.
However, TSMC in May announced that it was to build a US$12 billion facility in Arizona, and the company declined to receive any foreign visitors seeking to woo it, another person familiar with the company said.
Both asked not to be named discussing corporate strategy.
Meanwhile South Korea, home to Samsung, the world’s largest memory chipmaker, is striving for more self-reliance after Japan last year imposed export curbs on chemicals used in semiconductor manufacture during a flare-up in the countries’ tensions over Japan’s wartime past.
While the US remains dominant with giants like Intel and Qualcomm, and a virtual monopoly on the software essential to chip design, “there’s no region in the world that can proclaim strategic autonomy in semiconductors,” said Jan-Peter Kleinhans, director of the Information Technology Security in the Internet of Things project at Berlin-based think tank Stiftung Neue Verantwortung. “Take out any of these players and the value chain falls down.”
In January, days before Trump signed an initial trade deal with China, US Secretary of State Mike Pompeo sat down for dinner with around 30 Silicon Valley executives. He was the guest of US Undersecretary of State for Economic Growth, Energy and the Environment Keith Krach, a 30-year veteran of the tech scene.
Pompeo had a message for the technology sector: The CCP “is a threat to your companies because they don’t want to compete, they want to put you out of business,” Krach quoted Pompeo as saying.
Trump might have weaponized the semiconductor value chain, but it was the administration of former US president Barack Obama that first acted on the threat posed by China, unveiling a semiconductor strategy in January 2017 as one of its last acts.
Trump picked up the baton, but the nature of the supply chain means that others are in the US line of sight.
Israel — a high-tech research and development hub where Intel is the largest private employer — exported semiconductors worth about US$2.1 billion last year, with about half going to China, data compiled by UN Comtrade shows.
That closeness to China risks becoming a liability.
Zvika Orron, a partner at Israel’s Viola Ventures who leads semiconductor investing, said that there is a hesitancy on the Israeli side to look to China because of worry that its funding could imperil future US deals.
Carice Witte, founder of non-profit organization SIGNAL focused on Israel-China ties, said that the US is bound to “start asking more questions.”
The UK is another pinch point thanks to Arm Holdings, whose instruction set — the basic code that allows chips to communicate with software — underlies everything from smartphones to the world’s fastest supercomputer.
Arm currently sells to China, but the company’s planned takeover by US technology firm Nvidia puts that business in doubt. If the US$40 billion deal wins regulatory approval, Arm would fall under US jurisdiction and become even more subject to export controls.
While the British government has yet to show its hand, it allowed the sale of Arm to Softbank of Japan in 2016, so it would normally not be expected to intervene now. However, the newly strategic nature of the industry has prompted British lawmakers to call for a review of the deal’s implications.
Here too, there are concerns of being caught between the US and China.
Losing a world-class technology company for the US Department of Justice to “weaponize” is not a good place to be, a person with knowledge of British national security considerations said.
The risk is that a British strategic asset becomes “recognized as part of the US arsenal” in its campaign against China, the person added.
The mood at this year’s World Semiconductor Conference in Nanjing in late August was gloomy. Chinese executives worried what the Trump administration might do next to hobble Beijing’s progress.
“The conflict remains very fluid, which makes it impossible to predict what next moves both sides are going to take,” said Huang Yan (黃岩), application and sales director at Senodia Technology, a Shanghai-based company that develops sensor chips for smartphones.
China is on course to import US$300 billion of semiconductors for the third straight year, underscoring its dependence on US technology.
That is something that Chinese President Xi Jinping (習近平) is determined to end. Xi has pledged an estimated US$1.4 trillion through 2025 for technologies from artificial intelligence to wireless networks.
Beijing focuses on accelerating research into so-called third-generation semiconductors — circuits made of materials such as silicon carbide and gallium nitride, a fledgling technology where no country dominates.
Yet without silicon capabilities, it would be difficult for China to build a proper semiconductor industry, a senior TSMC official said.
Another person from a firm involved in third-generation chip production said that designing them is an art and even poaching a team of designers would not necessarily guarantee success.
The consensus is it that it would not be easy for China to catch up, especially at the cutting-edge where TSMC and Samsung are producing chips whose circuits are measured in single-digit nanometers, or billionths of a meter.
SMIC would have to double annual research spending in the next two to three years just to prevent its technology gap with those companies widening, Bloomberg Intelligence analyst Charles Shum said.
The tussle raises the prospect of a broader decoupling of the global industry with two distinct supply chains.
As with 5G, the question becomes one of the extent of each system: Does China’s high-tech gravity pull in Southeast Asia and parts of Europe, or is it confined to its immediate neighborhood? How many allies will side with the US?
To be sure, the chip industry is still thriving, with the benchmark Philadelphia Semiconductor Index up about 30 percent this year. Geopolitics is now a feature of boardrooms, but 5G and artificial intelligence are likely to cause more market upheaval, Goodrich said.
The direction of travel still worries key players. Shares of Micron Technology, the largest US chipmaker, last month fell after it was forced to halt shipments to Huawei, its biggest customer.
Complete decoupling would harm US competitiveness and hurt China, raising the prospect of less money and slower innovation, Goodrich said.
“A world in which the US and China are independent from one another is a negative outcome for everyone,” he added.
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