Microchips: The new decisive theater of war

Many may not be aware that the cold war between China and the United States is being fought in a realm not often talked about: Microchips. Let me explain.

Microchips, also referred to as semiconductors or integrated circuits, is the new currency of geopolitical power. Not only does it translate to economic leverage (as most manufactured goods require microchips), more significantly, it translates to military power. The armed forces require microchips for intelligent weaponry and intelligence equipment. They need it to stay ahead.

Backtrack to 1959 and the microchip was invented by two Americans, Jack Kilby and Robert Noyce. They used silicone to take the place of transistors. Silicone, by itself, is not a good conductor of electricity (hence, the name “semiconductor”). But combined with other elements like phosphate, it conducts electricity faster and more efficiently.

Microchip technology advanced by quantum leaps. By the 1970’s, a silicone chip the size of a fingernail could contain the equivalent of one thousand transistors. By 2017, its capacity increased to 20 billion transistors. This translates to enormous computing and memory power.

From the 60’s to the mid-80’s, the Americans manufactured their own microchips in facilities called FABS. The Japanese began manufacturing microchips too and could do so cheaper than the Americans could. Since American manufacturers were losing market share to the Japanese, they slapped a 100 percent tax on Japanese microchips in 1987. (So much for free trade). This cancelled out Japanese dominance in microchips fabrication.

Operating FABS is a tedious and expensive process, given the constant need to re-tool with every evolution of the microchip. This is where Taiwan found a niche.

Knowing how the Americans abhorred operating FABS, Morris Cheng, a brilliant Taiwanese engineer, proposed that instead of competing with the US, Taiwan would assume the role of operating its FABS. America immediately bought into the idea, as this meant being relieved from re-capitalizing, re-tooling and managing FABS.

The understanding between the US and Taiwan gave rise to the Taiwan Semiconductor Manufacturing Corporation  Ltd. (TSMC), the company that manufacturers 92 percent of all advanced microchips globally. America even contributed equity to build the first TSMC plant.

Since then, America’s role has been confined to designing the chip, software and the manufacturing equipment needed by FABS. Taiwan became the manufacturing arm of the US.

For Taiwan, it was a two-fold win. It enabled the country to cash in on the microchip gold rush which earns hundreds of billions in export revenues per year. And while doing so, it made the United States reliant on Taiwan. This is why America is so committed to defending Taiwan from China’s annexation.

In fact, when Speaker Nancy Pelosi visited Taiwan last year, not only did she meet with Taiwanese President Tsai Ing-wen, she also visited the TSMC factory.

One other players in the microchip ecosystem is South Korea, which produces 8 percent of the world supply. Japan now produces the wafers and chemicals needed in the manufacturing process. The Netherlands produces the laser machines. All are allies of the United States.

Enter, China

China wants to control the microchips supply chain for four reasons. Because it already purchases 40 percent of all microchips produced. Because it needs stability in supply to support its manufacturing industries. Because it needs access to the latest generation of microchips to build modern weapons and to get ahead of its enemies. And because it needs to remove American and Taiwanese leverage on them.

For years, anonymous Chinese commercial entities have been buying advance microchips, microchip designs and manufacturing equipment of FABS from American companies. The Americans assumed that the purchases were made purely for commercial purposes. Unbeknownst to them, these Chinese entities were fronts of the Chinese Communist Party. With it, the Chinese began building their own FABS and microchips, albeit using relatively dated technologies. The microchips produced by Chinese FABS were used to manufacture modern weapons, including nuclear missiles.

So in effect, the Chinese used American technology, sold to them by Americans, to beat the Americans in the arms race. It was a brilliant strategy on the Chinese’s part.

The Americans got a wake-up call when the Chinese tested their hypersonic missile system in 2020. The missile is capable of flying at five times the speed of sound below radar range. This missile allows China to hit its enemies faster than anyone else. It is nearly impossible to track, much less intercept. Adding insult to injury is that the system was made possible using American technology.

In quick succession, the Biden administration mobilized two courses of action. The first was to block Chinese access to advanced microchips as well as the hardware and software needed to manufacture them. Biden did this by imposing export controls on microchips; by blocking microchip design, software and FABS equipment sales to China; by banning American nationals from working for Chinese microchip companies and by blocking any company outside the US from selling microchips to China if they utilize American technology and/or equipment.

The second course of action was to reclaim microchip manufacturing and FABS for America. Last August, the US legislature passed the CHIPS and Science Act. With a massive $280-billion budget, the law catalyzes investments in the domestic microchip manufacturing industry.

At least $50 billion in subsidies were meted out to microchip manufacturers like Intel, Texas Instruments and Nvidia to build FABS in the US mainland. As I write this, new FABS facilities are being built in Ohio and Arizona.

It is still unclear how China will retaliate. But make no mistake, they will retaliate.

The cold war continues to escalate and microchips have become a new decisive theater.

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Email: [email protected]. Follow him on Twitter @aj_masigan