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A researcher wearing cleanroom suit displaying a wafer in the lab of Shanghai Microsemi Semiconductor Co., Ltd. in Shanghai, China.
Who’s winning the war over chips?
When it comes to semiconductor production, there’s just one superpower: Taiwan. The self-governing island produces more than two-thirds of the world’s chips, and almost all of the advanced ones.
But with Taiwan’s geopolitical fate uncertain, both Washington and Beijing are racing to build their own dominance and self-sufficiency in the chip industry.
We sat down with Eurasia Group geo-technology expert Xiaomeng Lu to learn more about where this battle is heading. The interview has been edited for length and clarity.
GZERO: When did this global war over chips really get started, and what’s driving it?
Xiaomeng Lu: Before 2017 and 2018, Beijing generally had this view that China was a big digital economy power. “We're the home to the biggest platform companies in the world” and so on.
But when the US placed severe sanctions on Huawei [in 2019], it kneecapped Huawei's 5G flagship business portfolio. Huawei is one of the poster children of China's highly advanced technology system, and Beijing suddenly realized that it was heavily reliant on just a couple suppliers of semiconductors, some of which are American.
China saw it had basically no near-term leverage against US technology dominance in this area, and that they needed to address the vulnerability. So that's why China started using this term "technology self-reliance.”
That generated a sense of competition in the US and increased the focus on Taiwan [the leading chip producer overall]. Those two things are, I think, the top drivers of the US-China race in semiconductor development.
What are the US and China doing to gain their own advantage in semiconductors?
Xiaomeng Lu: China a few years ago established a national fund to support semiconductor companies [domestically], and I think the clearest number on all of it is somewhere near $50 billion for two rounds of national investment in the domestic semiconductor industry.
The US recently passed the CHIPS Act, which includes broad financial support for science and technology. But the part that's most significant is basically a lot of tax breaks for the domestic high-end manufacturing part of the semiconductor industry. That's somewhere around $52 billion dollars.
So there's definitely a race of government sponsorship in this industry to ensure they get the competitive edge. For the US, their goal is to maintain a large, existing competitive advantage over China. For China, their goal is just to catch up.
So, is China in fact catching up?
Xiaomeng Lu: There's a lot of problems with how they're spending their money. Some factories got a lot of government funding and then didn't produce much technology, and a few years later went bankrupt or were bought by industry players. There's also quite a bit of corruption in the process of allocating those funds to various national champions.
But at the same time, it’s generated some constructive results, including, for example, companies like SMIC, a national champion in manufacturing midrange semiconductors. So there's a handful of successful cases and maybe a dozen failures. It's a mixed outcome so far.
Will the CHIPS Act keep the US ahead in the chip race?
Xiaomeng Lu: It’s too early to tell. There is a detailed implementation guide for companies that want to apply for this $52 billion fund, but that guideline won’t be issued by the Department of Commerce until next February. So we don't even know who is qualified for this funding yet.
The US has recently imposed export controls that prevent American companies from sending key technologies to China. Will those measures be effective in curtailing China's tech sector strategy?
Xiaomeng Lu: In the near term, I think they're quite effective. They focus on the high-end chips used for high-performance computers and super-computers, an area where China has so far done well. So the US restrictions create an upstream crisis for Beijing that will slow down China's supercomputing industry development. Until now, some Chinese supercomputers have outperformed their American and Japanese counterparts, and I think that competitive edge will be, if not eliminated, undermined significantly in the coming years.
Some people say Taiwan’s status as a semiconductor superpower actually protects the island from invasion by China – the idea being that the risk of the Taiwanese chip factories being damaged in a war is something that worries Beijing since its own tech companies rely on Taiwanese chips. Do you believe in this “Silicon Shield”?
Xiaomeng Lu: A lot of mainland Chinese factories still rely on those [Taiwanese] components. That's a big part of China's global electronics trade flows. I think between the technology exposure and the trade element, they will try not to take drastic actions around those chip factories until the political drivers really escalate the conflict.
But I think it's a temporary shield. If a real war starts, then the Silicon Shield is not going to do anything. Right now it's kind of a very thin layer of protection when the political environment is not that dire.
If TSMC [the main Taiwanese semiconductor company] were not on the island, do you believe China would have already invaded?
Xiaomeng Lu: It's not a driving factor, it's a secondary element. The red line is always sovereignty. If Taiwan publicly declares independence, then it doesn't matter if TSMC is there or not.
Would warnings of an impending invasion lead to a brain drain that could threaten Taiwan’s semiconductor industry?
Xiaomeng Lu: I think if the tension escalates further, you will see China try to poach talent from Taiwan by offering them jobs and careers and generous financial packages, and the US would probably do the same. If those engineers are concerned about their own safety, their families’ safety, there is a scenario for at least some of them to move away from the island. And that's one of the worst-case scenarios for the Taiwanese government. They want to keep their Silicon Shield, they want to keep their high-end technology, they want to keep their talent on the ground.
House Speaker Nancy Pelosi has encouraged TSMC to move some of its production to the US, to take advantage of CHIPs act money. Is that likely to happen?
Xiaomeng Lu: I think they're considering it but if you’re TSMC, it depends on how high you think the geopolitical risk is. If [an attack] is going to happen in five years, they probably want to move. But the risk of moving the most advanced technology and their people over to the US is that if the conflict doesn't happen or doesn't escalate to a very severe level, you are wasting your resources and irking the Taiwanese government.This comes to you from the Signal newsletter team of GZERO Media. Sign up today.
Turkish President Tayyip Erdogan meets with Ukraine's President Volodymyr Zelenskiy and U.N. Secretary-General Antonio Guterres in Lviv, Ukraine.
What We're Watching: Erdogan's diplomacy, carnage at Kabul mosque, US-Taiwan trade talks
Erdogan is everywhere
Recep Tayyip Erdogan has been very busy this week. On Thursday, he flew to Lviv to meet with Ukrainian President Volodymyr Zelensky and UN Secretary-General António Guterres, the Turkish president’s first visit to Ukraine since Russia’s war began six months ago. Erdogan, who has tried to position himself as an elder statesman and mediator between Kyiv and Moscow, vowed to help rebuild Ukrainian infrastructure just weeks after brokering a deal with Russia to resume Ukrainian grain exports from Black Sea ports amid a global food crisis. The trio also discussed efforts to secure a contested nuclear power plant in southern Ukraine. This comes a week after Erdogan held a face-to-face with Vladimir Putin in Sochi, Russia, where they pledged to boost energy cooperation. What’s more, Erdogan’s Ukraine trip came just one day after Ankara announced it was restoring full diplomatic ties with Israel. Indeed, Erdogan is looking to get wins wherever he can as he tries to divert attention from Ankara’s deepening economic woes. In a move that made many economists shudder, Turkey’s central bank on Thursday further slashed interest rates to 13% despite the fact that inflation has topped a whopping 80%. Loosening monetary policy to boost growth has long been Erdogan’s shtick, but as a cost of living crisis continues to hurt Turks, his ruling party is falling in the polls less than a year out from elections.
Worshippers killed in Kabul
At least 21 Afghans were killed, and scores more injured, in a blast on Wednesday night at a mosque in Kabul while worshippers were engaged in evening prayers. Though no group has taken responsibility for the carnage, it is thought to be the work of ISIS-K, an offshoot of the broader Islamic State movement that expanded to Central Asia in 2015 and was responsible for a deadly attack on American troops amid the US withdrawal from Afghanistan last summer. Over the past year, ISIS-K has been intent on antagonizing the Taliban, which it says insufficiently enforces Sharia law (the two groups have also clashed over territory in the past). This attack also comes weeks after the Taliban labeled ISIS-K “a false sect,” banning Afghans from interacting with the group. Some analysts say that Afghanistan has recorded fewer violent incidents over the past year, in part because US forces are no longer targeting Taliban strongholds. But it's unlikely that many Afghans caught in the crossfires of this deadly battle for influence — in addition to a growing humanitarian crisis — feel the same way.
US-Taiwan trade talks
The US and Taiwan will hold formal trade talks in the fall, Washington announced two weeks after US House Speaker Nancy Pelosi's uber-controversial trip to the self-governing island sparked a furious response from China. Details are vague, but so far the discussions will focus on boosting digital and agriculture trade, anti-corruption standards, and a range of other issues. Taiwan sold almost $66 billion worth of goods in 2021 to the US, which is Taipei’s second-biggest market after China. But the island is far more dependent on trade with the mainland, which along with Hong Kong accounts for more than 40% of Taiwanese exports. The US, for its part, is keen to deepen economic ties with Taiwan as it tries to expand its influence in the Asia Pacific. Additionally, Washington is very hungry for one thing that Taiwan makes a lot of: semiconductors. Although the CHIPS Act recently signed into law by President Joe Biden aims to boost domestic manufacturing of the tech, the US will still need lots of Taiwanese-made semiconductors in the near term. China, for its part, blasted the talks, warning the US not to undermine Beijing’s “core interests.” While the US maintains robust ties with Taiwan, it does not formally recognize its independence from the mainland.
What We're Watching: Truckers wanted & not-so-cheap chips
Where are all the truck drivers?
The global truck driver shortage has been disrupting already-out-of-whack supply chains, particularly in the US, the European Union, and Britain – further complicating their post-pandemic economic recoveries. Last year, the American Truckers Association said it was around 80,000 drivers short, while in Europe, a deficit of 40,000 truckers has contributed to long waits and empty shelves.
What’s going on? The pandemic has upended the way we work. Trucking is an arduous and ungratifying gig: Drivers often spend days or weeks far away from home, and they don’t get paid for hours spent waiting for goods to be loaded and unloaded. The road can be grueling, the compensation is underwhelming, and the benefits are often … nonexistent. In the US, trucking salaries have plunged in recent decades. Median wages for truck drivers in 1980 were about $110,000 annually (adjusted for inflation); in 2020, they were just $47,130. Unsurprisingly, many truckers are opting for jobs with better conditions and pay, so trucking firms in Europe and the US are struggling to lure drivers back to work and recruit new staff. It’s particularly grim in the UK, where supply side frictions have been exacerbated by Brexit. In the US, meanwhile, companies like Walmart are fighting back by offering massive salary hikes to attract truck drivers. Will it get the wheels turning?
Chipping away at supply chains
The US Congress this week passed the behemoth CHIPS and Science Act, which ponies up $52 billion in subsidies and incentives to boost domestic production of semiconductors, the invisibly thin microchips that are essential for everything from phones, cars, and factories, to fighter jets, cruise missiles, and artificial intelligence. With the bill, Congress is making a big move in a new global “Chips race” for dominance of the industry: the EU is now spending close to $50 billion on the same thing, and China, which still depends on the US and its allies for inputs into its home-grown chips, has poured hundreds of billions into some day becoming a semiconductor superpower itself. For all three of the world’s largest economies the concern is the same: the semiconductor market is highly concentrated, particularly in Taiwan, which produces more than 60% of the world’s chips. That’s a problem commercially – in 2021, there was a global shortage after tech firms gobbled up the entire supply, leaving automakers scrambling for chips. But it’s also a problem geopolitically. China doesn’t want to be dependent on chips from a Taiwan that’s allied with the US, while the US and EU don’t want to rely on a Taiwan that could be taken over by China any year now. Critics of the US CHIPs act say its a sop to powerful tech companies that can well afford to build their own factories, and there are questions about whether the money will be spent on the right things: making the chips is one thing, cutting edge R&D is a whole other bowl of chips, and the supply chain for a single chip can pass through many countries before final assembly. As a cautionary tale: the EU aimed in 2013 to double its share of global semiconductor production to 20% by 2020. It didn’t work.