US vs China: The fierce battle for precious resource

For more than a century, the oil rush has sparked wars, forced unexpected alliances and sparked diplomatic disputes.

Now, the world’s two largest economies are battling it out over another precious resource: semiconductors – the chips that power our daily lives. These tiny bits of silicon are at the heart of a $500 billion industry that is expected to double in size by 2030.

And whoever controls the supply chains – the intricate network of chip-making companies and countries – will hold the key to becoming an unstoppable superpower.

China wants chip production technology. That’s why the United States, the source of much of this technology, is constraining Beijing’s actions.

The two countries are clearly fighting an arms race in the Asia-Pacific region, according to Professor Chris Miller, from Tufts University, in the United States, and author of the book Chip Wars (“Chip Wars”, in free translation). But he adds that there are other factors involved in this race.

“[Ela] It happens both in traditional spheres, such as the number of ships or missiles produced, but increasingly in terms of the quality of Artificial Intelligence (AI) algorithms that can be employed in military systems”, he explains.

At the moment, the United States is winning, but the chip wars being waged against China are reshaping the global economy.

Semiconductor manufacturing is complex, specialized and deeply integrated.

An iPhone contains chips designed in the United States, manufactured in Taiwan, Japan or South Korea, and the devices are assembled in China. India is also investing more in this industry and could increase its share in the future.

Semiconductors were invented in the United States, but over time, East Asia emerged as a manufacturing hub, largely due to government incentives, including subsidies.

This allowed Washington to develop commercial ties and strategic alliances in a region vulnerable to Soviet influence during the Cold War. And these alliances are as useful today as they were then, given Beijing’s growing influence in the Asia-Pacific region.

The race to manufacture better, more efficient chips at scale is on – and the smaller the chips, the better. The challenge is: how many transistors – the tiny electronic switches that can turn a current on and off – can you fit into the smallest silicon wafer?

“It’s what the semiconductor industry calls Moore’s law. Essentially, the density of transistors doubles over time. It’s a difficult goal to achieve,” according to Jue Wang, a partner at Bain & Company in Silicon Valley.

“It’s what allows our phones to get faster, our digital photo files to get bigger, our smart home devices to get smarter over time, and our social media content to get richer,” she explains.

Getting there isn’t easy, even for major chip makers.

In mid-2022, Samsung became the first company to start scale production of three-nanometer chips. Then followed by Taiwan Semiconductor Manufacturing Company (TSMC) – the world’s largest chipmaker and Apple’s main supplier.

Three nanometers is much less than the thickness of a human hair, which ranges from about 50,000 to 100,000 nanometers.

These smaller, “edge” chips are more powerful, which means they can be used in more valuable devices like supercomputers and AI, the internet of things.

The market for older chips, used in the most common appliances of our lives, such as microwaves, washing machines and refrigerators, is also lucrative, but its demand is likely to decline in the future.

Most of the chips used in the world today are manufactured in Taiwan, forming what the island’s president calls a “silicon shield” – in other words, a protection against China, which claims its territory.

Beijing has also made chip production a national priority, with aggressive investments in supercomputers and AI. The country is still far from being a global leader, but it has been advancing rapidly over the past decade, especially in its chip design capabilities, according to Miller.

“What you find historically is that whenever powerful countries advance their computing technology, they apply it to military and intelligence systems,” he adds.

This point and its dependence on Taiwan and other Asian countries for supplies has been troubling the United States.

The US government of President Joe Biden is trying to block China’s access to chip manufacturing technology.

In October 2022, Washington announced extensive export controls, making it virtually impossible for companies to sell chips, chip-making equipment and software containing American technology to China, no matter where in the world they are located.

The country has also banned American citizens and people with permanent residence in the United States from supporting the “development or production” of chips in certain Chinese factories.

These measures hit China hard, which imports both the hardware and the talented people who fuel its nascent chip-making industry.

Dutch company ASML faces the loss of about a quarter of the revenue it used to earn in China. It is the only company that manufactures the most advanced lithography machines – the tools that make the “high end” chips.

“Talented professionals are very important in this area,” says Linghao Bao, an analyst at policy research firm Trivium China.

“If you look at the executives of Chinese semiconductor companies, many of them have American passports, were trained in the United States and have green cards“, according to him. “So it is a very big problem for China.”

You green cards grant their holders permanent residence in the United States and the right to work in the country.

The United States also wants to manufacture more chips. The Science and Chips Act offers US$ 53 billion (about R$ 269 billion) in subsidies and financing for companies that manufacture semiconductors in the United States.

Major airlines are already taking advantage of this offer. TSMC is investing in two factories worth US$ 40 billion (about R$ 203 billion) in the United States – its only units outside Taiwan.

Micron Technology is the largest manufacturer of memory chips in the United States. These chips are essential for use in supercomputers, military equipment, and any other device that includes a processor.

The company announced investment plans of up to US$ 100 billion (about R$ 508 billion) over the next 20 years, in a computer chip factory in New York State.

“The Chips Act manages to eliminate the existing cost difference between production in the United States and Asia,” according to Micron’s chief executive, Sanjay Mehrotra. “Micron will continue to invest in our factories in Asia. The important thing is that there will be a level playing field across the world.”

US restrictions are hitting China hard.

Reports indicate that, following the US restrictions, Apple has shelved a deal to purchase memory chips from one of China’s most successful chip companies, Yangtze Memory Technologies Group (YMTC).

The experience with Huawei demonstrates how this is likely to develop, according to Bao. He points out that the communications giant is no longer the second largest smartphone maker in the world (after Samsung) and is “essentially dead”.

“It was with this ease that Washington paralyzed the activities of a Chinese technology company”, continues Bao. “China really doesn’t have good options to react. Before, the United States was hitting individual Chinese companies. But now the target has expanded to the entire country.”

Can China take any action in response? After all, abandoning products or services or imposing your own export controls can bring more harm than good, at this time of strong retraction of the Chinese economy.

Beijing has filed a complaint with the World Trade Organization (WTO), but a possible resolution could take years. And experts say that in the meantime, China will double down on investment and support for its domestic chip manufacturing industry.

“We will focus on national strategic needs, join forces to conduct important scientific and technological research in the country, and decisively win the battle in key technologies,” said Chinese President Xi Jinping during the 20th Congress of the Chinese Communist Party in October 2022 .

In the short term, industries must weather the global downturn caused by the war in Ukraine, rising inflation and the turbulent reopening of the Chinese economy.

Beijing will want to tread carefully as its economy has been hit hard by the Covid-19 pandemic.

“There will still be a lot of back and forth between US, Taiwanese, Chinese and foreign companies,” says Miller.

“Really, it is only in the cutting-edge technology of logic and memory chips that we will see concerted efforts by the United States to exclude China from innovation networks and efforts by China to establish its own free supply chain from the United States,” according to him.

Miller adds that this could mean a partial split of the ecosystem into two – one concentrated in China and the other in the rest of the world.

This development will have immense ramifications for the global economy. It will force its participants to choose sides, possibly blocking access to the Chinese market for many of them.