U.S and China: Battle of the Titans for Global Chip Dominance

The gloves have come off in the global war between the world’s two largest economies regarding the all-important production of semiconductor chips.

The days when Intel Corp. was the innovator and big dog on the street have come and gone the same way as IBM has in the past. They have been replaced by names like TSMC of Taiwan, the world’s largest chip maker possessing some 56% of the global market, and South Korean SK Hynix maintaining 21% of global chip sales. Japan rounds out the Asian powerhouses as perhaps the world’s most important supplier of silicon.

The importance of the semiconductor battle cannot be understated. It goes well beyond corporate sales and profit margins and into the realm of national defense, in a manner that testing nuclear weapons and computer guided missiles was during the previous cold war. While Rome was burning with social nonsense and liberal rhetoric, China apparently has leapfrogged the U.S. in its ability to manufacturer the world’s smallest semiconductor, which is 10,000 times thinner than a hair on your head.

In an effort to stem the tide, the Biden administration recently passed a $280 billion CHIPS and Science Act in an attempt to restore the balance of power in our direction. The hope here is that the U.S. can replicate its chip dominance of the 1990’s when we manufactured roughly 37% of the global market, according to JP Morgan. The federal subsidies will allow corporations to leverage their growth by pulling in private sector capital. Unlike China, our government should ultimately step out of the way and leave manufacturing to those who know it best. 

One has to wonder whether the elephant in the room here is chip manufacturing in Taiwan, whereas mentioned, TSMC maintains a majority of the world’s market share. Many believe that the chip dominance in the future might very well tip the scales of both economic and geopolitical power. China will be particularly concerned and interested with the moves of such Taiwanese companies.

It isn’t just a coincidence that Nancy Pelosi et al have visited Taiwan and the region of late in spite of the diplomatic rhetoric from Beijing. This new legislative funding is luring companies like TSMC, who is now building a $12 billion chip facility in Arizona. This will surely not sit well with the Chinese. Communist China and its inferior entrepreneurial structure are likely reasons why the U.S. should gain back control of chip technology and manufacturing in the future.

According to Scott Kennedy, a China specialist and senior adviser at the Center for Strategic and International Studies, “It should surprise no one that China’s push into semiconductors has been slowed by cash going to unqualified companies that dumped money into real estate projects as well as massive corruption in the firm managing the national semiconductor fund.” As opposed to the CHIPS funding, which will allow U.S. private sector firms to leverage government funding to support the growth of the industry. 

In addition to the recent domestic legislation, the U.S. has proposed a “Chip 4 Alliance” project in another attempt to counter Chinese growth. As depicted in the illustration above, the alliance would include South Korea, Japan, and Taiwan.

South Korea-based Samsung started mass-producing 3-nm chips on 30 June, a significant chip design advancement, which drew the evil eye from China. “At a time when the global economy is deeply integrated, such a move by the US goes against the current. It is unpopular and will eventually fail,” said China’s deputy director of foreign affairs Zhao Lijian.

While some believe that war between China and Taiwan is inevitable, the semiconductor chip war has already begun. Like any industry, finding the best and brightest help tends to give a company a leg up on its competition, and in the chip business, Taiwan maintains a robust workforce, which hasn’t gone unnoticed by the Chinese.

As such, Taiwan’s Investigation Bureau launched a task force in December 2020 and is currently investigating 100 Chinese companies for allegedly poaching Taiwanese talents. The Chinese will ultimately get what they want from Taiwan, be it engineers or more is yet to be seen.

The chip war has created a classic environment for industrial policy in the U.S., where conservatives loathe the idea of government involvement in the private sector, and where progressives shudder at the idea of giving big tech direct support and tax credits. Bipartisanship has given the U.S. semiconductor industry a breath of hope if we are to stay competitive with China and its “Made in China 2025” chip manufacturing and growth platform.

Perhaps, however, it could be too little too late. The American semiconductor industry is a shadow of its former self, and has sunk to a point where none of the most advanced chips are made here anymore, despite the genesis of the fundamental technology being born in Silicon Valley.