GOOD MORNING FROM LONDON
SEMICONDUCTORS AND US/CHINA TENSIONS
THE WASHINGTON POST
Semiconductors have two key aspects – First, they are a crucial technological component in economic development. Second, they are at the core of US-China tensions.
The issue has been addressed by Dmitri Alperovitch who is chairman of the Silverado Policy Accelerator, a US National Security Think Tank in his new book, “World on the Brink.” The tenor of the article is very anti-China and is summarised below, with comment, because it illustrates the anti-China thrust of US Foreign Policy.
The words of Mr Alperovitch appear in “abbreviated form” both in ordinary print and bold print.
My comments appear in bold form only.
What follows is an abridged summary of Mr Alperovitch’s book as summarised in The Washington Post.
INTRODUCTION
“Understanding the geopolitics of the next half-century requires understanding this simple fact, says Alperovitch, China, as large and economically powerful as it is, does not yet possess the ability or knowledge to build the sophisticated machinery one needs to manufacture the most advanced chips.
GRAHAM PERRY COMMENTS;-
The US believed it had crippled Huawei. They were wrong. Huawei bounced back with PRO 6. It is dangerous to assume setbacks when it comes to China because it has proved its resilience time and again.
CHINA IS STOCKPILING
That’s why China has been stockpiling as much Western equipment for making chips as it can procure. Largely cut off from acquiring the machinery needed for manufacturing advanced chips by the Biden administration’s export controls,[emphasis added by Mr Alperovitch] it has been pumping money into older, more established chip designs while engaging in price-dumping to boost Chinese firms’ global market share. But its ambitions do not stop there. China eventually seeks to follow the lead of chipmaking powerhouse Taiwan Semiconductor Manufacturing Co. and build up its domestic capability to manufacture advanced semiconductors.
GRAHAM PERRY COMMENTS;-
Certainly China seeks to build up its domestic capability. Anyone expecting anything less is guilty of self-deception. China responds best when it is challenged especially by countries which played a leading role in bringing about China’s Century of National Humiliation 1849-1949
THE US WORRY ABOUT CHINA
Warming to his theme, Alperovitch concludes that “Such a technological breakthrough would be a major geopolitical milestone, eliminating the Chinese economy’s reliance on imported semiconductors from the West — irrevocably altering the balance of power in the new cold war that is unfolding between China and the United States”.
GRAHAM PERRY COMMENTS;-
On this point Alperovitch is correct; China’s reliance on domestically produced semiconductors – and not imported semiconductors – would alter the world balance of power in favour of China.
THE IMPORTANCE OF SEMICONDUCTORS
Advanced semiconductor manufacturing tools are the most sophisticated equipment that humankind has ever built — the process of etching out a 300-millimeter silicon wafer is enormously complex. Doing so at scale and with a high success rate — what’s known in the industry as “yield” — is even more challenging.
CHINA FAILS TO PRODUCE THE KEY TECHNOLOGY
So far, says Alperovitch China hasn’t been able to reproduce much of that most sophisticated equipment domestically, despite pouring hundreds of billions of dollars into the industry and enabling rampant economic espionage and intellectual property theft. The systems of these chip-fabrication facilities — “fabs” for short — are among the most delicate manufacturing processes in the world. The chemicals, equipment and clean-room facilities in which semiconductors are made constitute an intricate robotic ballet that will be exquisitely difficult for China to replicate.
GRAHAM PERRY COMMENTS;-
The Jury is still out. China has taken the world aback with its USD1 trillion BRI initiative with 150 countries. Only a brave person would consider that “intricate robotic ballet” is beyond China’s productive imagination and ability.
PREVENT CHINA FROM ACQUIRING TECHNOLOGY
Restricting “global influence and power to China” requires ensuring that China neither achieves a tipping point of domestic independence in the means of production of semiconductors nor seizes Taiwan and its valuable fabs, thereby making the rest of the world dependent on China for chips.
Because, as important as chips are to today’s world, they’re going to be even more important tomorrow.
GRAHAM PERRY COMMENTS;-
Here comes the US powerplay. Deny China the opportunity to achieve “tipping point” production of semiconductors
FOUR CATEGORIES OF ADVANCED SEMICONDUCTORS
Advanced semiconductors are critical to four main categories of products:
(1) advanced weapons systems such as guidance systems for precision munitions;
(2) high-end electronics such as iPhones, laptops and computers;
(3) gaming systems such as Xboxes and
(4) PlayStations; and the massive cloud-computing data centers run by giants such as Amazon Web Services and Google Cloud. This last category is where the entire internet lives and breathes, and where the world’s most sophisticated AI models are being trained on computer systems thousands of times more powerful than a regular desktop.
To maintain leverage over China in the next quarter-century, the United States needs to ensure that China doesn’t achieve its much-desired “chip breakout.” Luckily, the United States has tremendous power here. Preventing China from achieving its chip breakout requires a four-pronged approach:
GRAHAM PERRY COMMMENTS;-
China must be prevented from breaking out of its alleged present chip problems. Hem China in. Restrict China. Prevent China. Deny China – that is the US goal
1.
PREVENTING CHINA FROM BUILDING AND OPERATING DOMESTIC FOBS, AND SUSTAINING EXISTING ONES, VIA ALLIED EXPORT CONTROL POLICIES ON MAUFACTURING EQUIPMENT.
The strategy begins with stopping China from accessing the equipment and tools necessary to operate fabs. This is, in some ways, the easiest step the United States can take because the supply chains for the most advanced chip-manufacturing equipment are so tiny.
GRAHAM PERRY COMMENTS;-
A straightforward uncomplicated policy – “Stop China From Accessing Necessary Equipment and Tools!”
SIX SETS OF COMPANIES
Making any piece of electronics today requires all six sets of companies, Luckily for the West, there are just three countries in the world that produce the sophisticated equipment necessary for a modern fab: the United States, the Netherlands and Japan. A coalition of just these three countries can prevent China from buying the equipment required to build and maintain its own domestic chip fabs.
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The process starts with the U.S. companies that make the electronic design automation software needed to design the chips (Cadence Design Systems and Synopsys).
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Then come those that manufacture critical components and chemicals needed to build the chips (e.g., Japan’s JSR, Shin-Etsu Chemical Co. and Tokyo Ohka Kogyo, or TOK).
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After that are the companies that manufacture equipment needed to make chips (ASML in the Netherlands; U.S.-based Applied Materials, Lam Research and KLA; and Japanese firms Nikon and Tokyo Electron) and those that actually design the chips (Apple, Nvidia, Qualcomm, etc.).
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Then come the companies that manufacture chips (Intel, TSMC, Samsung, Micron, etc.).
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+ 6. Finally, production requires the companies that package chips into final products and assemble them into circuit boards for use in electronics. These are companies such as Foxconn, and others in China, Vietnam, Malaysia and elsewhere, as well as the leading so-called printed circuit boards companies, known as PCBs, which include China’s Zhen Ding Tech Groupand DSBJ, Taiwan’s Unimicron and Compeq Manufacturing, and Japan’s Nippon Mektron.
GRAHAM PERRY COMMENTS;-
These stages below are cited by Alperovitch as the essential steps in the Restrain China approach.
2. DIVERSIFY CHIP MANUFACTURING AWAY FROM TAIWAN AND INVEST IN US, SOUTH KOREAN, JAPANESE AND EUROPEAN OPERATIONS TO REDUCE US ECONOMIC VULNERABILITY IN THE EVENT OF A WAR OVER TAIWAN.
The second component of the strategy involves diversifying chip manufacturing away from Taiwan. The extreme concentration of global chip production on an island roughly the size of Maryland is a critical vulnerability not just for the United States but for the whole world.
GRAHAM PERRY COMMENTS;-
The US is encountering considerable production problems in the US. Taiwanese experts – in the US to assist in the construction of new US production capacity – have met with considerable work culture problems which is making difficult the US attempts to make and produce the most modern semiconductors.
US FEAR OF BLOCKADE OR INVASION OF TAIWAN
The potential that China might blockade or invade Taiwan and hold the United States and the rest of the world hostage by blocking access to TSMC-produced semiconductors is a mortal economic threat that we cannot risk. The answer here — as with reducing U.S. economic reliance on the Chinese chip industry — is greater domestic and allied investment.
GRAHAM PERRY COMMENTS;-
China has no need to invade Taiwan. It does not want to invade Taiwan. War is something to be avoided. The setback to all participants would be enormous. The US knows that the slightest tremor of confrontation with the US over Taiwan will bring Taiwan exports to an overnight halt with the same knock on effect on US factories. The US can be brought to a standstill without a shot being fired.
INCREASE US MARKET SHARE OF CHIP PRODUCTION
The primary goal behind the 2022 Chips Act was to increase the market share of U.S. chips production after it fell from 37 percent in the 1990s to just 12 percent in 2022. By providing government incentives for American and allied companies, such as Samsung and TSMC, to build fabs in the United States, we secure the supply chain in two ways, at both the top and bottom of the process. While we won’t be completely independent of Taiwanese chips anytime soon, the Chips Act helps ensure that our supply of semiconductors is slowly diversified away from vulnerable Taiwan, while providing American chipmaking tool companies a larger domestic market that can offset any loss of access in China caused by U.S. export controls.
GRAHAM PERRY COMMENTS;-
Diversifying chip production is a lengthy and complicated process. Alperovitch makes it sound like a seamless transition – from Taiwan to the US. It Isn’t. The Taiwanese will not accept it. The US cannot rely on generating new US productive capacity to take up the slack created by a curbing of Taiwanese production. Further, any attempt to switch semiconductor production from Taiwan to the US serves only to encourage Taiwan’s TSMC to enter into closer semiconductor links with China.
“LEGACY – MATURE – AND ADVANCED CHIPS
Chips in industry parlance fall into three categories: “legacy,” “mature” and “advanced,” the latter being the preferred term for the ever-evolving cutting edge. While there’s no standard definition, the industry generally considers any chips smaller than 20 nanometers to be “advanced” and anything larger than 40 nanometers to be “legacy.” Everything in between is considered “mature.”
But the terms “mature” and “legacy” underplay how vital even those technologies are to our modern world, making it sound like they are yesterday’s news whereas they remain central to just about every device in our lives. “Foundational” is a better term because these chips will remain as important to our daily digital life as aluminum is a century into the construction of airplanes.
Given China’s propensity both to engage in massive industrial subsidies and to dump products at lower cost on advanced economies to capture market share and decimate competitors — a playbook the country has used repeatedly with rare earth metals, solar panels, steel, textiles and other sectors — it is not surprising that the Chinese are now apparently trying to do the same with foundational chips, attempting to capture the bulk of the market.
If it succeeds, it would be as if we had blocked China from producing advanced carbon-fiber materials but allowed it to corner the world’s market on aluminum — still a disastrous outcome in terms of providing Beijing with enormous leverage over the United States and the global economy.
To prevent this scenario, export controls must be expanded to cover all semiconductor manufacturing equipment to enjoin China from building, operating and maintaining fabs at any scale, a move that would further increase China’s dependence on the West and provide us with the leverage over its economy to, say, deter hostile action in the East China Sea.
GRAHAM PERRY COMMENTS;-
“Export Controls must be expanded to cover all semiconductor manufacturing equipment.”
More “musts” from the US. But the story of China from 1949 has been about “Bounce Back”. The greater the challenge to China the greater the determination of China to respond.
The US has a mindset re China – Control, Apply the Screws, Prevent, Restrict.
China has a mindset re the US – Respond, Struggle, Compete, Challenge
It makes for an unstable world.
2. Diversify chip manufacturing away from Taiwan and invest in U.S., South Korean, Japanese and European operations to reduce U.S. economic vulnerability in the event of a war over Taiwan.
3. MAKE CLEAR TO CHINA THAT IF IT ATTEMPTS TO SEIZE TAIWAN, IT WILL NEVER GAIN ACCESS TO TSMC’S TEACHNOLOGY AND KNOW-HOW.
The third part of the strategy is making sure the Chinese government understands that Taiwan is not the answer to China’s chip breakout plan. While both the Chinese Communist Party in general and President Xi Jinping personally have numerous historical, political and economic reasons for wanting to invade Taiwan — reasons that predate the age of computers entirely, let alone the rise of TSMC — we need to make sure that the attractiveness of TSMC’s plants, know-how, equipment and people does not become a tipping point that Xi uses to justify an invasion.
It is essential for U.S. and allied diplomats to make clear to Xi quietly that under no circumstance will China be allowed to control TSMC fabs should it use force to invade the island. Regardless of whether the United States chooses to fight China over Taiwan, it would have numerous ways to cripple the fabs in the event of Chinese takeover — from working with the Taiwanese to destroy on-site equipment to working with Western manufacturers to disable TSMC operations remotely or impose an embargo that would prevent Chinese-occupied labs from getting their hands on chemicals and other essential components.
GRAHAM PERRY COMMENTS;-
The last thing China wants is to invade Taiwan. It does not need to invade Taiwan. It is not in China’s interest to attack Taiwan. It will not mount a military campaign. The one “unless” is if Taiwan makes any moves towards secession or independence. That is an absolute No-Go for China and will lead to War. That apart China will avoid war.
The US fundamental weakness is its almost total dependence on Taiwanese produced semiconductors. China merely has to interrupt the flow of semiconductors from Taiwan to the US for the US motor industry to come to an overnight halt. The US knows its weakest spot – its point of greatest vulnerability and that is the slightest interruption to the flow of semiconductors from Taiwan to the US.
4. SPELL OUT THAT, MUCH AS THE UNITED STATES AND THE REST OF THE WORLD BANDED TOGETHER QUICKLY AND DECISIVELY AFTER RUSSIA’S INVASION OF UKRAINE, ANY MOVE BY CHINA AGAINST TAIWAN WOULD LAUNCH A WESTERN BLOCKADE OF SEMICONDUCTORS TO CHINA THAT WOULD CRIPPLE ITS ECONOMY.
Finally, as an additional deterrent, China must be made aware of the consequences to its economy should it decide to invade Taiwan.
This is where the various threads of this strategy combine to deliver even greater force: The United States can communicate that any move against Taiwan will be met with similarly crippling sanctions to those instituted against Russia after its attack on Ukraine. It would be an even more powerful threat if our export control measures were successful in preventing China from building its own chip fabs and China were separately convinced that it could not take Taiwanese fabs by force.
GRAHAM PERRY COMMENTS;-
It is good to read the articles and hear the views of US experts on semiconductors and that is the reason why the words of Mr Alperovitch have been set out in full. As the build up to a major war between the US and China takes place it is important for us all to be aware of the likely flashpoints. Semiconductors is just such a flashpoint. This Column has maintained a focus on this topic in the last 18 months. The focus will continue.
War is not inevitable. The momentum is there in each and every move by the two countries and there will come a moment in time when the parties are at the point of absolute confrontation – when both sides can see the whites of each other’s eyes, when momentous decisions have to be made. In the build up the emphasis is on the talk as well as the action but there comes a moment in time – as it did during the 1962 Cuban Crisis – when each party is faced with the ultimate decision and the ultimate action. We live in dangerous times.
GRAHAM PERRY
