Book Review: Chip War — Chris Miller
Chris Miller’s biography of semiconductors appears on the bookshelves amid wars in Ukrain and Syria, tensions in South China Sea, and a period of political turmoil with price of bread skyrocketing in Europe. Earlier in 2022, the Biden government committed $52 billion in subsidies to build new chip factories in the U.S. However, by Halloween the momentum had faded. Between the slowdown in consumer demand for electronic gadgets, new U.S. restrictions on sales to China and rising inflation, chip makers were left uncertain about their future production plans.
The timing for this book release couldn’t be any better. Chip war tells the history of the invention without which we might still as well be living in dark ages. It’s relevance in modern warfare. The fragility of its global supply chain. Miller thesis is about the confluence of geopolitics and technology.
Chip war starts at the end of WWII. The world was still recovering from the massive shock and headed into a battle of nations to outcompete with innovation. Miller paints a picture of the early days of semiconductors, which mostly revolved around replacing vaccum tubes with transistors. Shortly after the war ended in 1945, Bell Labs brought a group of scientists to find solid state replacement for the fragile glass vaccum tubes amplifiers. One of them was William Shockley who’d be a key contributor to the discovery of transistors aka semiconductors.
A state-of-the-art computer called ENIAC, built for the U.S. Army at the University of Pennsylvania in 1945 to calculate artillery trajectories, had eighteen thousand vacuum tubes. It took up an entire room
Following Shockley’s invention of the semiconductors at Bell Labs, Texas Instruments, a company focused on seismic industry, purchased the patent license for $25,000. Transistors soon began replacing vaccum tubes in computers. In 1958, Jack Kilby joined TI and figured out a way to string different transistors together to create an integrated circuit. Kilby will be awarded Nobel Prize in Physics.
Meanwhile Shockley’s opened his own laboratory in Palo Alto making it the first silicon focused company in what is now known as Silicon Valley. While Shockley attracted brilliant scientists, his employee retention skills needed improvement. A group of eight former Shockley employees created Fairchild Semiconductor. Among which was Gordon Moore, who’s known for Moore’s law and who’d form Intel along with Robert Noyce, another of the “traitorous eight”.
In 1962, the MIT lab chose Fairchild chips for the Apollo program.
“The computer that eventually took Apollo 11 to the moon weighed seventy pounds and took up about one cubic foot of space, a thousand times less than the University of Pennsylvania’s ENIAC computer that had calculated artillery trajectories during World War II.”
The success of Fairchild chips pushed Texas Instruments to find applications of their semiconductors in defense departments. TI had figured out ways to produce smaller and smaller circuits using photolithography (printing with light).
In the 1960s, as computer sales grew, TI and Fairchild started turning chips into a mass market product.
The USSR meanwhile severely lagged behind the US in semiconductors know how. The Kremlin chose the patch of copying American innovations instead of developing their own technology. This strategy put Russia on a path of failure. They never gained significant expertise in chip designing and manufacturing. Using espionage and KGB they continued to infiltrate American knowledge but their chips could never compete with Fairchild or TI’s products.
America’s lead in semiconductor expertise gave the country a massive leg up over Russia. While US army built precise missiles in 1970s, Russian missiles were missing targets consistently in Syria even in the 2010s. Soviet strategy of copying chips ultimately resulted in American dominance worldwide.
US strategy was to encourage chip fabrication in Japan, Singapore, Taiwan, and Hong Kong. Japan’s Sony saw huge success in building electronics using chips developed in Silicon Valley and Texas. America sold chips to Japan, and Japan sold goods to Americans. To save on labor costs, Fairchild started sending its semiconductors to Hong Kong for final assembly. Within a decade every American semiconductor including TI and Motorola had foreign assembly facilities. American investment pulled these countries away from communism. The millions of dollars of investment transformed economies and bolstered political stability across south-east Asia.
“In Hong Kong, electronics manufacturing created more jobs than any sector except textiles. In Malaysia, semiconductor production boomed in Penang, Kuala Lumpur, and Melaka, with new manufacturing jobs providing work for many of the 15 percent of Malaysian workers who had left farms and moved to cities between 1970 and 1980.”
In 1968, Noyce and Moore left Fairchild and founded Intel. Their first product was DRAM, the first generalized computer chip. Intel made a fortune selling chips for mass market calculators and mainframe computers while mostly ignoring the government. By 1972, Pentagon was pouring money into new weapon systems that capitalized on America’s advantage in microelectronics.
In the early 1960s, it had been possible to claim the Pentagon had created Silicon Valley. In the decade since, the tables had turned. The U.S. military lost the war in Vietnam, but the chip industry won the peace that followed, binding the rest of Asia, from Singapore to Taiwan to Japan, more closely to the U.S. via rapidly expanding investment links and supply chains.
Offshoring chip fabrication helped Japanese and Taiwanese companies develop crucial expertise. By 1986, Japan had overtaken America in the number of chips produced. Japan was also supplying 70 percent of the world’s lithography equipment. American companies started becoming increasingly dependent on overseas manufacturers. As Japanese firms grabbed market share, CEOs of America’s biggest chip firms spent more and more time in Washington, lobbying Congress and the Pentagon. Most American companies fled the DRAM market by the late 70s.
After a decade of pain, Micron outcompeted Japanese Toshiba and Fujitsu by aggressively cutting costs and improving manufacturing practices. Intel meanwhile abandoned the DRAM business and established a stronghold on the market for IBM PC chips. None of the Japanese chip giants could replicate Intel’s pivot to microprocessors or its mastery of the PC ecosystem. Only one Japanese firm, NEC, really tried, but it never won more than a tiny share of the microprocessor market.
The brutal DRAM competition provided an opening for Samsung. With strong financial support from the South Korean government and banks, Samsung bet its future on semiconductors. US chipmakers hoped the Koreans would undercut Japanese, who were dumping chips in the US. The Americans didn’t intend for the deal to benefit Korean firms, but they were happy to see anyone but Japan producing the chips they needed.
In 1998 South Korean firms had overtaken Japan as the world’s largest producers of DRAM, while Japan’s market share fell from 90 percent in the late 1980s to 20 percent by 1998.
The late 80s brought a new revolution to chip manufacturing. Taiwanese government provided funds for the founding of TSMC, which will go on to become the most valuable semiconductor company. It served fabless chip companies like NVIDIA, AMD, and later Apple. Its customers designed chip that TSMC manufactured.
Miller writes that initially, the Chinese chip industry suffered from the lack of engineers and China’s lack of participation in the global economy. China’s new leader Deng Xiaoping put semiconductors at the center of his agenda, hoping that China could use advances in semiconductors to help develop new weapons systems, consumer electronics, and computers. In 2000, China replicated TSMC model and founded SMIC attracting $1.5 Billion from Motorola, Goldman Sachs, and Toshiba. Chinas leadership wanted to be the ones developing core technologies.
China’s problem isn’t only in chip fabrication. In nearly every step of the process of producing semiconductors, China is staggeringly dependent on foreign technology, almost all of which is controlled by China’s geopolitical rivals — Taiwan, Japan, South Korea, or the United States.
In spite of millions of dollars SIMC was a distant competitor to TSMC. Huawei gave China government their first success story. Huawei followed Samsung strategy of producing quality versions at lower cost, and selling them to the world, grabbing international market share from international rivals.
A Wall Street Journal review of total subsidies provided by the Chinese government reached a figure of $75 billion, in the form of subsidized land, state-backed credit, and tax deductions at a scale far above what most Western companies get from their governments.
Huawei started as a phone company and later added telecom equipments to its portfolio. The company spread rapidly across the world. As it grew, incumbent Western firms selling telecom equipment were forced to merge or pushed out of the market. Canada’s Nortel went bankrupt. Alcatel-Lucent sold its operations to Finland’s Nokia.
Huawei was poised for success with the emergence of 5G, even though it heavily relied on US-made chips.
With Huawei’s design arm proving itself world-class, it wasn’t hard to imagine a future in which Chinese chip design firms were as important customers of TSMC as Silicon Valley giants. If the trends of the late 2010s were projected forward, by 2030 China’s chip industry might rival Silicon Valley for influence. This wouldn’t simply disrupt tech firms and trade flows. It would also reset the balance of military power.
Miller’s excellent analysis shows the great strides China has made towards gaining technical equivalency with the US. Major players like IBM have had to please the Chinese government to have access to a billion customers. In 2018, the Wall Steet Journal reported that Intel first disclosed the Spectre and Meltdown flaws to customers, including Chinese tech companies, before notifying the U.S. government, a fact that only intensified Pentagon officials’ concern about their declining influence over the chip industry. While China is pouring billions of dollars into its chip industry, many believe that America has fallen decisively behind.
The US government has tried to slow down the worldwide deployment of telecom equipment produced by Huawei and ZTE using sanctions as a weapon. The US, it turns out, has escalation dominance when it comes to severing supply chains.
Thanks to TSMC, Samsung, and other companies willing to produce their chips, companies like Qualcomm, NVIDIA, Apple, and others could focus on their core strengths in managing spectrum and in semiconductor design.
NVIDIA found a huge market in artificial intelligence and machine learning as cloud computing gained ground. Intel, who had dominated the PC and server market until then, suffered massive setbacks when it lost the opportunity to put an Intel chip on Apple devices and cloud companies began creating chips based on Arm architecture. Intel’s 7nm and 10nm manufacturing process is now delayed by at least half a decade, even as Samsung and TSMC have charged ahead.
