Chip Wars Aim to Halt China's Tech Rise

Juan Vázquez Rojo

5 mins - 1 de Diciembre de 2022, 07:00

The United States is deploying an unprecedented strategy to reshape global value chains and halt China's rapid technological rise. The Asian country seeks to adopt a production model with high value added and greater domestic consumption, in order to become less dependent on exports and investment in construction and infrastructure. 

Washington perceives this transformation as a threat to its hegemony, since Beijing is beginning to compete for the development of technologies which will shape the future of the global economy, such as 5G or artificial intelligence. Hence, the start of the technological war of 2018 and the latest attack on the Chinese chip industry. The Biden Administration will intervene swiftly and mercilessly in the chip supply chain, taking advantage of its own strengths and China’s weaknesses. 

Chips, or semiconductors, are key components in contemporary economies, as they are used in virtually every electronic device that surrounds us. Furthermore, the most advanced chips are indispensable for the research and development of future technologies. Within this complex production chain, there are companies that specialise in the design, manufacturing, or assembly, although there are some that integrate all three of the processes in the same facility. Other companies focus on the supply of materials, the components and equipment, or the processing of raw materials used throughout the process. Additionally, there are different types of chips, and only very few companies can manufacture the most advanced type of chips

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The US dominates 50% of this market, with leading companies in design, component manufacturing, and multifaceted production. However, production is mainly based in Asia, with Taiwan and Taiwanese company TSMC playing a significant role, dominating the development of the most advanced chips, conferring a crucial strategic importance. South Korea likewise is an important manufacturer (with companies such as Samsung), and Japan, a powerful producer of materials and technological components. The European Union, while undertaking a more discrete role in production and design, has the Dutch company ASML, a manufacturer of lithography systems producing some of the most advanced semiconductors. 

China, on the other hand, only controls 7% of the global chip market. Its industry is centred around the production of low-end and mid-range components, assembly, and the mining of rare earth metals, which stand out as indispensable raw materials in the manufacturing of these components. Although in recent years there have been announcements of progress in design and production, Beijing relies on foreign actors for access to the most cutting-edge and advanced designs, machinery, components, and chips. In total, China spends more on importing chips than oil, and half of its market lies in the hands of US companies. 

US technologies permeate the supply chain in its entirety, provided that there is no advanced chip plant in the world that is not critically dependent on US designs, components, or equipment, including key third-country companies such as TSMC or ASML. This provides Washington the basis to launch one of the largest technological attacks in recent history. 

Specifically, this new regulation prevents China from gaining access to the most advanced chips, the software to design them along with the US equipment and components needed to produce them. In addition, China will not be able to work with companies in other countries that utilise such technology. The aim is to prevent Beijing from producing or manufacturing advanced chips or components and to strangle Chinese advances in artificial intelligence. 

These measures are reminiscent of those launched against Huawei and its chip design subsidiary, HiSilicon, which proved devastating. In 2019, Huawei surpassed Apple in global smartphone sales and was the leader of the Chinese market. After this embargo, the Asian company’s sales fell globally, and its share in China dropped from 29% to 7% in two years. Meanwhile, Apple’s share rose from 9% to 17%. 

The new Chip Act further adds a more acute element to these attacks. Proposed by the Biden Administration, the Chip Act appropriates $52.7 billion to research, development, and manufacturing of semiconductors on US soil. The condition of this grant is that the companies receiving these subsidies must commit to not increasing production of advanced chips in China. Through these measures, the government seeks to boost domestic industry and to attract potential manufacturing plants led by strategic companies such as TSMC or Samsung, while leaving Beijing isolated. 

Taking these factors into account, China faces an enormous challenge. For more than a decade, Beijing has been trying to gain technological autonomy and seeks to be one of the leading powers in the Fourth Industrial Revolution. In recent years, China has launched a robust industrial policy through plans such as ‘Made in China 2025’, ‘the New Generation Artificial Intelligence Development Plan’, and Standards 2035

Through this strategy, the Asian juggernaut has made undeniable progress, but dependence on foreign actors still remains critical, especially in the chip sector, making attacks from the US particularly damaging. In response, Beijing will accelerate its plans to bolster national technological development and gain autonomy, an objective that has been reflected during the most recent Chinese Communist Party Congress

The chip war is just the beginning and a reflection of the direction the international order is taking. The US could accommodate China’s role as the world’s factory but not Beijing’s role as a technological superpower. This signifies that the greatest proponent of globalisation is now seeking to reshape it, building a supply chain in which security is prioritised over efficiency or profitability. 

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