Understanding the geopolitics of the microchip
The global tug-of-war is measured in nanometers. Economic and military might increasingly depend on high-end semiconductors, 90% of which are produced in Taiwan. The U.S., China and the EU are making moves to avoid losing the battle
The struggle between the great powers of the 21st century is being played out on a battlefield measuring nanometers. This minuscule and almost unimaginable unit of length, which is equivalent to one billionth of a meter, is the reference in the development of microchips, a fundamental sector in the modern technology race. The world’s governments know that advances in areas such as artificial intelligence or supercomputing will be decisive in shaping the future global balance of power, as the source from which economic and military strength will flow.
Microchips are essential for all electronic technological progress. And they are at the center of a geopolitical tug-of-war whose importance is difficult to overestimate. The decision made in October by the Joe Biden administration to activate restrictive measures to prevent China from having or being able to produce high-end microchips — alleging the desire not to contribute U.S. technology to the advances of an adversary considered a threat — has taken this battle to a level of extremely high tension.
Microchips are electronic circuitry embedded in small, flat pieces of silicon about the size of a human fingernail. The most sophisticated ones can accommodate tens of billions of tiny transistors on that surface. The Encyclopedia Britannica states that most viruses have a diameter of between 20 and 400 nanometers. IBM announced in 2021 that it is developing transistors that measure two nanometers. The transistors work like switches connected in hyper-complex patterns inside silicon chips that, in the most advanced models, can make up over 200 superimposed infinitesimal layers. Silicon is essential for its quality as a semiconductor: depending on the circumstances, they can be conductors or insulators. These devices can have various roles, the two main ones being logic — information processing to carry out tasks — and memory — information storage. They are necessary for practically everything in modern life, from the simplest household appliances to the most sophisticated supercomputing activities, artificial intelligence and military applications.
Monopolies and bottlenecks
The geopolitical struggle is mainly being waged around the latter. To understand it, one must first understand the extraordinary complexity of the ecosystem involved in the design and manufacturing of these products. Silicon is abundant in nature, but after that, the process from design to production is a chain that requires impressive technological capabilities and in which there are multiple bottlenecks with companies in a dominant — or even monopolistic — position in key segments.
This industrial reality determines political actions. A standard way to manufacture a high-end microchip involves the design and software offered by just a handful of companies, among which there are a few American firms as well as Arm, a U.K.-based, Japanese-owned company. In the manufacturing phase, ultra-sophisticated machinery is essential and this is where the Dutch company ASML stands out, functioning as a monopoly in certain types of devices that develop photolithography, one of the processes necessary to form high-end microchips; Japan’s Tokyo Electron and the U.S. companies KLA and LAM Applied Materials produce other types of relevant equipment. After that, manufacturing plants with ultra-clean conditions are necessary, much higher than those of operating rooms, since any tiny particle could spoil the product. It is estimated that starting a plant costs around $20 billion. This sector is led by Taiwan’s TSMC, followed by South Korea’s Samsung.
This simplified description shows an international production chain, but not a global one. No country has or is even close to being able to autonomously feed the entire production chain. But the U.S. has several decisive capacities in the high-end process, with a group of large companies active in different areas of the sector — such as Apple, Nvidia, Intel, Qualcomm and others — and close alliances with countries that are home to key operators in this market.
It is by emphasizing these strengths that the U.S. is trying, through export control measures launched in October and subsequent diplomatic efforts, to stop China from accessing the most advanced microchips — not those that are used for refrigerators, televisions, cars or normal computers. Washington alleges that Beijing is moving towards increasingly repressive attitudes at home and assertive ones abroad, and that it does not want to allow China to use its technology to fine-tune systems that will reinforce these actions by giving greater capabilities to its military and security apparatuses. The U.S. argues that in China, the public and private military sectors are indistinguishable and therefore, these restrictions must be applied across the board. China sees these arguments as excuses that camouflage the intention of containing the Asian giant.
Washington’s strategy envisions four interconnected steps, outlined in a report by Gregory C. Allen published by the Center for Strategic and International Studies: 1) strangle China’s artificial intelligence industry by restricting access to high-end microchips ; 2) prevent China from designing high-end chips autonomously by cutting off its access to U.S. design software for those models; 3) prevent China from manufacturing high-end chips by preventing access to U.S.-built equipment; and 4) hinder the creation of Chinese machinery to manufacture these types of chips by vetoing access to U.S. components.
The U.S. is trying to make its policy more effective by getting foreign countries and companies to join its efforts, partly through regulations that require the application of Washington’s restrictions to foreign companies that, at some point in their production processes, have used U.S. technology. Elsewhere, through political dialogue with the governments of countries where key companies are established. The initiative is extremely complex because, of course, China is a reference customer in this sector, and restrictions mean loss of revenue. Things are further complicated by the fact that some foreign companies have factories in China, while some Chinese-owned companies have plants abroad. This sets up a very complex execution scenario. In any case, the move is of tremendous significance.
The microchip sector is sizable in terms of turnover, but not immense. Industry data suggests that turnover in 2022 was about $570 billion, roughly equivalent to the GDP of countries such as Thailand or Norway, but lower than what Walmart made that same year. Rather, the relevance of the sector resides in the fact that it is the irreplaceable pillar of the entire modern economy, and especially of all strategic technologies. For this reason, although they do not stand out as much in terms of their earnings, two companies in the sector, TSMC and Nvidia, are among the largest in the world by market capitalization.
The geopolitical struggle around microchips goes far beyond the restrictive measures enacted by the U.S. against China. The Covid pandemic and growing geostrategic tensions have developed a strong awareness of the risks of depending on others in matters of high strategic relevance. Thus, the main global players have been making moves to reinforce their autonomy in this sector. Acquiring full independence — that is, having all the necessary elements to make these products — would require unimaginable investments and the results would be far from guaranteed. A more modest, realistic objective is therefore to strengthen one’s position in parts of the process to reduce dependence, even if it is not possible to eliminate it altogether.
The race in numbers
China is promoting a major industrial development plan, Made in China 2025, which was launched in 2015 and has earmarked a significant chunk of investments for this sector. The Asian country has undoubtedly taken steps forward, but its technological capabilities are still many years behind the leading companies in advanced democracies. The U.S. and the European Union, which until recently had opted for laissez-faire policies, have made a sharp turn towards interventionism in recent years. The President of the European Commission, Ursula von der Leyen, launched the vision for a EU initiative on this matter in the 2021 State of the Union address. The EU has begun to take the first real steps towards improving its manufacturing capacity. The Biden administration promoted an investment package and got it approved by Congress in the summer of 2022. The plan foresees around $50 billion in public support, most of it in incentives for the start-up of manufacturing centers, and to stimulate R&D. The overall figure is similar to what the EU wants to mobilize.
Other leading countries such as Japan and India are also taking steps in a similar direction. These movements are unleashing a competition between democratic countries seeking to attract relevant business projects. Companies are analyzing where they can get the greatest subsidies or tax breaks before launching new initiatives. But, at the same time, there are cooperative movements. The U.S. is promoting an alliance with Taiwan, Japan and South Korea to improve the efficiency of production chains. The circle of advanced democracies has a clear advantage in this area over the authoritarian regimes with which it is in competition or confrontation, such as China, Russia, Iran and North Korea.
Taiwan is the epicenter of this enormous geopolitical tension. Concerns about the possibility of Beijing taking action to bring the island under its control is of course largely linked to its capacity to produce these tiny pieces. It is estimated that more than 90% of the most sophisticated microchips are currently produced by TSMC. For this, Taiwan depends on designs, software and machinery produced in other countries. But its manufacturing capacity is extraordinary, and replicating it elsewhere would be expensive and arduous. When, decades ago, the island’s leaders decided to focus on this sector, one of the calculations was to reinforce its strategic position as a producer of an essential good, consolidating the interests of the United States in defending it against a possible attack. The evolution of technology and the economy proved them right, and the island has become a key player in the microscopic battlefield of the great powers: nanometer-sized transistors packed into chips that build the power of the future.
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