#143 Chip War - Summary
I finished reading Chip War last week. This book is a valuable resource for those seeking insight into the ubiquitous presence of chips, even when unseen, and the emergence of China as a significant threat to the United States. It delves into the reasons behind the divergent visions both countries hold for the future of Taiwan.
Chip War explores the global competition for control over Integrated Circuits (chips) and their impact on the world’s power dynamics. Originating during the Cold War, the race for chip technology began when the U.S. sought to match Russia’s advancements in space technology. Electronics replaced vacuum tubes, leading to smaller circuits that could be fitted into various devices. US found electronics as a means to replace vaccuum tubes and build guided missiles and ammunitions using the power of 0's and 1's.
The advantage was that instead of using vaccuum tubes which used a lot of space, electronics helped them develop small circuits that can be fitted into any device. It started with just one transistor initially but over the course of time different researchers found ways to put hundreds and thousands of transistors on one silicon block. This was actually started by 3 people Bob, Noynce and Spock. They formed a company called Fairchild. Their biggest customer was the US Army as they were trying to develop guided missiles and do a guided space mission using computers. Back then, people realized that chips were going to be really important and hence in order to make money, the folks at Fairchild decided to switch to the commercial market and treat chips like regular products. This led to a challenge of making a lot of chips at affordable price. The three founders of Fairchild went separate ways to start new companies, all concentrating on making chips. Noynce and Gorden Moore created Intel, where they began making DRAM, a type of chip used for storage. But mass manufacturing was becoming a problem in US as wages were high, so they decided to export the assembly to Asian countries. They went to Japan, Korea, and Singapore. After a while, Japan became better than the U.S. in making chips, and their chips were also of higher quality. Intel, which mostly sold DRAMs, found it hard because Japan made better DRAMs at a much lower cost. U.S. companies accused Japan of having an unfair advantage and selling chips too cheaply. Intel also made a general-purpose microprocessor, but not many people wanted it back then. The main business was DRAMs, and Japan was doing well in that. Noynce and Moore decided to change their business completely. They got a contract from IBM to make microprocessors for personal computers, which Bill Gates programmed (the birth of Microsoft). It was a risky move, but it worked.
There were legal battles between companies as well when people moved around, sharing tech secrets. Fairchild sued Intel, and Intel sued another company, but these issues were resolved internally. The primary conflict was against Japan, which improved its chip-making with U.S. assistance. To counter Japan's dominance, the U.S. transferred technology to South Korea, where costs were even lower. Samsung's founder, Lee, who was into fish and vegetable selling business, recognized this opportunity and entered the chip market. Samsung and Intel collaborated to produce chips at lower costs than Japan as wages in South Korea were even lower. Japan had to limit chip exports, raising prices, which also benefited Korea in improving their wages. Amidst all this, Russians too attempted to copy the chips with KGB spies but were unsuccessful.
Morris Chang, who had played a significant role in chip designing at Texas Instruments(which played a big role in the initial years in US at the time of mass manufacture of chips for commercial use) was invited by the Taiwanese government to play a role in establishing a semiconductor manufacturing industry in Taiwan. In the late 1980s, recognizing the strategic importance of semiconductor technology and its potential economic impact, the Taiwanese government sought to develop a domestic semiconductor industry. Morris Chang pioneered the idea of splitting chip designing and chip manufacturing into two separate processes, known as the fabless and foundry model. Traditionally, semiconductor companies were integrated, handling both the design and manufacturing of their chips. Chang’s vision was to separate these functions, allowing companies to specialize in chip design (fabless) while outsourcing the manufacturing process to specialized foundries like TSMC. This innovation proved to be transformative, providing greater flexibility, efficiency, and cost-effectiveness in the semiconductor supply chain. A lot of companies benefitted from this model. One such company that outshines all today is Nvidia who is a frontrunner in the GPU business today. Foundry business requires a huge amount of capital, thus companies such as AMD, Nvidia wouldn’t have survived if they were to manufacture the chips themselves. TSMC’s advantage lies in its commitment to the foundry business model, focusing solely on chip manufacturing and not engaging in chip design. This specialization ensures that TSMC does not compete with its customers, which are typically fabless semiconductor companies specializing in chip design. It was a strategic choice to position itself as a neutral foundry, attracting a wide range of customers without creating conflicts of interest. This commitment has contributed to TSMC’s success in becoming one of the world’s leading semiconductor manufacturing companies. Apple designs its own chip but outsources the production to TSMC. By doing this Apple is not worries about TSMC stealing their technology because they are not into designing business.
Following the Cultural Revolution, China underwent economic reforms, and the government sought to transform the nation into a technological powerhouse. Huawei, founded in 1987 by Ren Zhengfei, emerged as a key player in this transformation. The semiconductor industry played a pivotal role in shaping global power dynamics. Huawei, initially focused on telecommunications equipment, expanded its scope to include various technologies, including smartphones and semiconductor manufacturing through its subsidiary, HiSilicon. The Chinese government’s support for Huawei aligned with its broader strategy to achieve technological self-sufficiency. This included investments in research and development, subsidies, and favorable policies. Huawei’s growth mirrored China’s aspirations to challenge global technology leaders. However, the book also highlights the challenges faced by Chinese companies, particularly in the semiconductor sector, in attaining technological independence. Restrictions and sanctions imposed on Huawei by the U.S. government underscore the geopolitical complexities and global competition explored in “Chip War.”
Taiwan produces over 60% of the world's semiconductors and over 90% of the most advanced ones. Thus, the fear of a chip shortage during the COVID-19 pandemic was indeed a significant concern for companies worldwide. Taiwan, particularly, plays a crucial role in semiconductor manufacturing, with companies like Taiwan Semiconductor Manufacturing Company (TSMC) being major contributors to the global supply chain. As the pandemic disrupted operations and logistics globally, including in Taiwan, it impacted semiconductor production. The dependence on a few key players, such as TSMC, for a significant portion of chip manufacturing intensified concerns about supply chain disruptions. The demand for electronic devices, including laptops, smartphones, and other technology, surged during the pandemic due to increased remote work and lifestyle changes. However, the limitations on production capacity and disruptions in the supply chain led to shortages, affecting various industries, including automotive, consumer electronics, and more. The chip shortage highlighted the vulnerabilities of the global supply chain and prompted discussions about diversifying production sources and securing critical components. The situation underscores the importance of resilience and adaptability in supply chain management, themes that resonate with the broader narrative of global competition and challenges in the semiconductor industry depicted in the book “Chip War.”
No wonder all the nations today are striving to gain control over semiconductor manufacturing. India, too, recognizes the strategic importance of this sector and is actively pursuing plans to establish semiconductor manufacturing capabilities. With initiatives such as the 'Make in India' campaign and the recently announced Production-Linked Incentive (PLI) scheme for the semiconductor industry, India aims to strengthen its position in the global semiconductor market. This strategic move aligns with the country's goal to enhance self-reliance in critical technologies, reduce dependence on imports, and contribute significantly to the ever-evolving landscape of semiconductor innovation.
This is a quick overview of what caught my attention in the book. If you're curious about the specific events and the order they happened, leading to the creation of a supply chain that exists today, I highly suggest reading 'Chip War' for a more in-depth understanding.
See you next weekend, have a wonderful week ahead :)
Cheers!