Global battle for microchip domination

The story: Nations of the world are all set for a battle over semiconductors, mostly between the US and China. The U.S. will have to weigh its strateg

Global battle for microchip domination

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• The story: Nations of the world are all set for a battle over semiconductors, mostly between the US and China. The U.S. will have to weigh its strategy carefully and learn the lessons of the past. The right balance of support for both production and innovation will distinguish the winners.
• Reasons for its importance: Of all modern industries, semiconductors (computer chips) are the most jealously guarded and sought-after by national governments, for many reasons. They’re militarily important — all weapons are computerized now, and in a war a country needs to be able to make your own chips. Then, semiconductor manufacturing is a very high-value activity that generates a lot of revenue and a lot of good-paying jobs. Since computer chips are key inputs into a huge variety of other high-tech industries, having semiconductors located in one's own country supports an entire ecosystem of high-value economic activity.
• Funding in US: The US government's embrace of industrial policy would focus first and foremost on semiconductors. Of the $250 billion allocated in the competitiveness bill passed by the Senate, $52 billion is to boost domestic semiconductor production. President Joe Biden’s new review of U.S. supply chains singles out computer chips as a key area in need of reshoring.
• US versus China: The US is up against China, which has rolled out a huge program aimed at boosting its own semiconductor industry to world-beating position. Japan and Europe are trying to claw back some of the market share they’ve lost. South Korea, whose companies have taken some market share from the U.S. in recent years, is also making its own big push. And Taiwan is home to Taiwan Semiconductor Manufacturing Co., TSMC, which is now regarded as the global technological leader in chip manufacturing after leaving U.S. champion Intel Corp. in the dust.
• Fabulous fabs: So many nations will finance the construction of giant fabricator plants (called “fabs”), doing more research and development. If the U.S. is able to simply preserve its market share — currently still the world’s biggest at around 47% — it should be counted as a victory. And if the U.S. can persuade TSMC to locate more of its factories in the U.S., that will count as a major strategic success, even though TSMC is a Taiwanese company.
• History's lesson: In the 1980s, Japan’s memory chip industry caught up with America’s technologically and started taking away market share. The US, which was much more protectionist then than now, started a trade war. In the 80s, America used high tariffs to force Japan to agree to set aside a portion of its domestic market for U.S.-made memory chips, and to share some of its technology. Meanwhile, the U.S. set up Sematech, a government-organized consortium of private semiconductor companies dedicated to maintaining the U.S.’ technological edge. None of this saved domestic producers of memory chips. Japan retained its lead for a few years, then was outcompeted by Korea, which spent big to dominate what by then was an increasingly commoditized and low-margin market. The U.S. did recover its pole position in the global semiconductor market overall. Because while the world was fighting over memory chips, U.S. companies like Intel switched to making something much more valuable — microprocessors. American CPUs raked in the cash while Asian countries fought over the scraps in the memory industry.
• Intel inside: US giant Intel is suffering now, but its multi-decade dominance came not via cheap government financing or dogged competition, but by focusing on innovative new types of products. Similarly, later shifts came via novel products: GPUs, low-power chips, mobile chips and TSMC’s foundry model.