How the US-China Tech Cold War Is Deepening

Article By : George Leopold

Semiconductors are the chokepoint in the coming U.S.-China Technology Cold War, a conflict that’s guaranteed to have unforeseen consequences...

When all is said and done, it may turn out that horseshoe bats dwelling in the caves of China’s Yunnan province helped reboot the U.S. semiconductor industry.

Allow us to explain.

A credible account for the origins of SARS-CoV-2 is here. In short, an enterprising supplier caught the bats in question and sold them at market. Horseshoe bats were the likely carrier of the novel coronavirus that hit Wuhan, China, like a brick, then quickly circled the globe. We know the rest.

In short order, the world’s dependence on Chinese manufacturers exposed the vulnerabilities of global supply chains. The reckoning arrived.

In response, this publication and others launched a dialogue about the need to rethink four decades of technology and manufacturing outsourcing. The situation is all the more galling in light of America’s invention of what has emerged as the key to the kingdom: The semiconductor.

The realization has set in that the west was dangerously dependent on Chinese manufacturers for the technology invented here. The politicians and bureaucrats and lobbyists have taken notice: By the spring, the re-shoring movement was gaining momentum. In fact, it had been building for several years as the bedrock of American silicon technology, Gordon Moore’s Unshakable Law of Scaling, was running on fumes.

What would replace Moore’s Law? When would the point of diminishing returns arrive for chip scaling?

Covid-19, the relentless plague that likely jumped from winged creatures in caves to humans, turned out to be an unlikely catalyst that has awakened North America to the realization that it needs to make stuff—not simply write code for apps or design chips. What is needed is the ability to produce silicon wafers, substrates of the components that could be used to compete with the central planners in Beijing, willing as they are to spend whatever it takes to win a Technological Cold War.

This, it seems, is how we reached the silicon precipice, Andy Grove’s Strategic Inflection Point.

There’s plenty of talk these days about the CHIPS for America Act and throwing money and tax breaks at the problem of reviving U.S. semiconductor manufacturing. For now, the real money resides within the Defense Advanced Research Projects Agency (DARPA) and the Pentagon’s industrial base office, a low-profile yet increasingly important power broker. The industrial base planners aren’t saying much, but they are spreading cash around and looking for more good ideas, industry sources stress.

The defense rationale

By outward appearances, at least, the goal is ensuring a secure supply of chips for weapons, preferably produced by at least several trusted sources. A steady stream of contracts has been let in recent months with that express purpose. The politicians in key electoral states like Florida and Texas, where much of the federal largesse is sent, have been quick to take credit.

The Defense Department efforts pre-date the pandemic, as this prescient October 2019 story documents. In it, the New York Times reports that Pentagon officials worried about overreliance on Chinese manufacturers understood the strategic importance of the world’s largest chip foundry: Taiwan Semiconductor Manufacturing Co. We’ve reported on the recent U.S. overtures to TSMC, and the prospect the foundry giant would consider building a taxpayer-subsidized factory in Arizona.

Whether that happens depends on a several factors, ranging from how strict new U.S. export controls are enforced to the outcome of the 2020 presidential election. The consensus is that TSMC is hedging its bets, playing the long game because it can afford to.

The other focus of DoD efforts to revive U.S. chipmaking is the DARPA’s five-year, $1.5 billion Electronic Resurgence Initiative (ERI) launched in 2017. Earlier agency-sponsored “summits” included executives from familiar U.S. companies like Applied Materials, Intel, Nvidia and Synopsys. Along with senior officials from cloud rivals Amazon Web Service and Microsoft, this year’s ERI summit includes a presentation by Philip Wong, TSMC’s research chief. Wong is also an electrical engineering professor at Stanford University.

Ultimately, the question is whether the U.S. breaks its supply links with China and at last decides to rebuild domestic chip production? This decoupling of the world’s two largest economies would be driven in large measure by national security concerns centered on continuing access to advanced semiconductor technologies.

For the Pentagon and the People’s Liberation Army, semiconductors have indeed become, according to James Lewis of the Center for Strategic and International studies, a “chokepoint,”— the Panama Canal of silicon technology.

Known unknowns

What will proposed federal spending get us, and how much skin will key players like TSMC, GlobalFoundries and others have in the game? The latter emphasizes its 7,000 U.S. employees and $15 billion investment over the last decade in U.S. foundry capacity. Despite throwing in the towel at the 7-nm node, the U.S. foundry claims it is ideally positioned to manufacture DoD-compliant chips while providing a secure second source: foundry partner SkyWater Technology.

The company also notes the current spate of U.S. technology initiatives are not immune to the vagaries of American politics and the tit-for-tat trade war with China.

Trade frictions with Beijing, stiffer export controls aimed at telecommunications giant Huawei, 5G politics and pandemic-exposed supply chain vulnerabilities have combined to increase the odds that some kind of reshoring of chip manufacturing will happen.

“This is a good wake-up call,” said William Hogan, GlobalFoundries’ general manager for aerospace and defense. But “the clock can run out.”

There are signs of progress on the legislative front. A flurry of bipartisan proposalsaimed at reviving the U.S. semiconductor industry have been consolidated under a key congressional budget measure known as the National Defense Authorization Act. The NDAA will almost certainly be enacted by Congress this year. Hence, in an era of legislative gridlock, the spending measure has become a magnet for high-priority programs as well as pet projects.

The merged chip proposals “are working their way now through the NDAA budget process,” according to Stephen Ezell of the Washington-based Information Technology and Innovation Foundation. “I do think they will come to fruition when that package comes through Congress,” perhaps as early as the end of the summer.

Indeed, the U.S. House of Representatives approved its version of the military funding measure on July 21, adding an amendment establishing a U.S. grant program to promote chip manufacturing along with federal R&D investments. The Senate also approved a similar amendment to its version of the NDAA.

The funding mechanism for a massive U.S. chip initiative remains to be worked out. Still, Senate backers of the chip manufacturing legislation said its inclusion in the NDAA establishes a “beachhead” for further negotiations.

Sen. John Cornyn, R-Texas, a chief sponsor of the chip initiative, said funding could be included in the next Covid-19 relief package expected to be approved in the coming weeks.

“This is real money, this was not a study,” Sen. Mark Warner, D-Va., another chief sponsor of the CHIPS Act, told a recent forum on the U.S.-China tech competition.

“The rules that China is playing by are really different than what we expected when we invited China into the [World Trade Organization],” Warner said. “It is not market-driven.”

For semiconductors, 5G, AI and quantum computing, “There may be a series of areas where either America, or America in conjunction with a coalition of the willing, are going to have to have an alternative economic model,” added Warner, “because China has got a plan.”

For now, the known unknowns include: Who’s in for the long haul? What will be the return on a massive U.S. investment measured in terms of jobs and innovation? What’s to stop tax-subsidized IC manufacturers from moving production to Mexico, where labor is cheap?

With both sides unwilling to blink, hardline U.S. and Chinese trade negotiators are playing a game of chicken as they hurdle toward an economic “decoupling.” What unforeseen consequences lay ahead for the global economy as the movement toward technological sovereignty gains momentum?

We are about to find out.

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