The Chip War might just be what China needs right now
“The Chip War cannot be rushed, but the War of AI cannot be delayed”
Today, we are presenting an interesting article on China-US tech rivalry, because in our eyes it reflects how many of the Chinese elite look at the US technology ban on China. These are the main ideas of the article:
One important consequence of the US embargo is that it helps create a huge market demand for China’s semiconductor industry, so the market mechanism replaces government subsidies as the main driving force.
Building a domestic semiconductor industry is hard, and will take very long time, but China is no stranger to this type of development. It’s only a matter of when and how fast.
However, the revolution in artificial intelligence adds a new variable to the game, something China must seize on as quickly as possible (you may read here on how Chinese government is responding with the final version of AIGC regulation).
The original article is written by Boss Dai 戴老板, a famous technology and business influencer in China. Our translation is not reviewed by the author.
关于芯片战争的二三事 A few things about the Chip War
By Boss Dai
Recently, Janet Yellen visited China with reportedly many "tasks" to accomplish. Foreign media summarized one of her tasks as "convincing Chinese officials that the series of measures taken by the US to prevent China from accessing sensitive technologies such as semiconductors in the name of national security is not intended to harm the Chinese economy."
It is already 2023, and the US has launched more than ten rounds of bans on China's chip industry. The number of mainland enterprises and individuals on the entity list has exceeded 2,000. It is heartwarming that they can still come up with such a noble reason.
It is estimated that even the Americans cannot stand it anymore. This statement was soon refuted by another article on the New York Times.
Four days after Yellen left China, Alex Palmer, a well-known China reporter for foreign media, published an article in the NYT that explained the essence of the US chip blockade in the title: "This is an Act of War."
Alex Palmer graduated from Harvard and was among the first Yenching Scholar at Peking University. He has been reporting on China for a long time, covering topics such as Xu Xiang, fentanyl, and TikTok. He is a familiar figure who has been “hurting the feelings of the Chinese people”. However, in the matter of chip technology, he managed to extract the truth from the Americans.
In the article, one interviewee bluntly stated, "Not only will we not allow China to make any technological progress, but we will also actively reverse their current technological level." The chip ban is essentially aimed at eradicating China's entire advanced technology ecosystem.
The Americans used the word "eradicate," which carries the meanings of "exterminate" and "uproot," often associated with diseases like smallpox or Mexican drug cartels. Now, this word is being used to describe China's high-tech industry. The author predicts in the article that if these measures succeed, it could impact the progress of an entire generation in China.
Anyone who wants to understand the severity of this war only needs to repeatedly ponder the word "eradicate."
An upgraded war
The rules of competition and the rules of war are two completely different things. Business competition is a contest under legal framework, but war is different. The opponent will almost never consider any rules or restrictions and will do whatever it takes to achieve their strategic objectives. Especially in the chip industry, the United States can even keep changing the rules - as soon as you adapt to one set, it will immediately switch to a new one to deal with you.
For example, in 2018, the US Department of Commerce sanctioned Fujian Jinhua by using the "Entity List," directly leading to the latter's shutdown (which has since resumed operations); after this kind of small success, [The US Government] also included Huawei in the Entity List in 2019, restricting US companies from providing products and services to it, such as EDA software and Google's GMS.
After discovering that these methods were not enough to completely "eradicate" Huawei, the US changed the rules: starting in May 2020, all companies using US technology could not supply Huawei, such as TSMC's foundry. This directly led to the stagnation of HiSilicon and the significant decline of Huawei's smartphones, bringing more than 100 billion yuan in losses to the Chinese industrial chain every year.
Afterward, the Biden administration escalated its targets from "companies" to "industries," and a large number of Chinese companies, universities, and research institutions were subsequently included in the ban list. On October 7, 2022, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce issued new export control regulations, effectively imposing a "ceiling" on Chinese semiconductors. Logic chips below 16nm or 14nm, NAND storage with 128 layers or more, and integrated circuits (DRAM) below 18nm are restricted from export. Additionally, computing chips with a performance exceeding 4800 TOPS and interconnection bandwidth exceeding 600GB/s are also restricted from supply, whether through manufacturing or direct sales.
Using the words of a Washington think tank: Trump targeted companies, while Biden is targeting industries.
When reading the novel "The Three-Body Problem," ordinary readers can easily understand the plot of the Trisolarans to lock down Earth's technology [Baiguan note: This novel is a widely-read and widely-cited Chinese sci-fi series, in which the aliens, called the Trisolorans, used a super technology to keep a lid on basic science research on Earth]. However, in real life, many non-industry individuals tend to have a certain perception when observing the chip ban: as long as you comply with U.S. rules, you won't be targeted; if you are targeted, it means you did something wrong.
Having such a perception is normal because many people's thinking is still within the framework of "competition." However, in a “war”, this perception may be just an illusion. In recent years, many semiconductor executives have expressed that when a company ventures into advanced fields in R&D (even just in preliminary research), they will encounter an invisible barrier.
The development of high-end chips is based on a global technology supply chain. For example, to make a 5nm SoC chip, one needs to license from ARM, software from Cadence or Synopsys, patents from Qualcomm, and coordinate production capacity with TSMC. By doing these actions, one will come under the purview of the BIS’s regulations.
A case in point is a chip company under a certain smartphone manufacturer, which set up a R&D subsidiary in Taiwan to attract local talent for consumer-grade chips. However, it soon encountered an "investigation" by relevant Taiwanese authorities. Helpless, this subsidiary was separated from its parent company and became an independent supplier, but still had to proceed with caution.
In the end, after a raid and seizure of servers by Taiwanese "inspecting authorities" (where no violations were found), this Taiwanese subsidiary was forced to shut down. A few months later, its parent company voluntarily dissolved as well - senior management realized that under constantly changing restrictions, any high-end chip project carried the risk of being "reset with a single button”.
This ability to "reset with a single button" essentially turns the previously practiced "global division of labor based on free trade" into a weapon for attacking enemies. To whitewash this behavior, American scholars have even coined a term: weaponized interdependence.
Once these facts are clear, many previously disputed matters no longer need to be discussed. For example, it is pointless to mock Huawei for violating the Iran sanctions because they have already stated clearly that "Iran is just an excuse." Likewise, criticizing China's industrial policies seems ridiculous, as the US promptly allocated $53 billion to subsidize chip manufacturing and promote re-shoring.
As Carl von Clausewitz once said, "War is the continuation of politics." The same can be said for the Chip War.
How the blockade can backfire
Some may ask: Is there really no way to respond to the US's "all-out war"?
If you're looking for a miraculous move that can defeat the enemy in one stroke, there really isn't one. Computer technology itself, including the integrated circuit industry, was born in the US. By using war tactics to exert dominance over the industrial chain, China can only take longer to conquer the upstream and downstream bit by bit. This is a long process.
However, if one is to think this "war behavior" doesn't have any side effects and can be used continuously, it is not true. The biggest side effect of this all-industry blockade by the United States is that it has given China the opportunity to rely on market mechanisms – rather than pure planning power – to solve the problem of “卡脖子 technology stranglehold”.
This sentence may seem difficult to understand at first. We can first understand what “pure planning power” means. For example, in the semiconductor industry, there is a project that specifically supports major technological breakthroughs called the "Manufacturing Technology and Complete Set of Processes for Ultra-Large-Scale Integrated Circuits," commonly known as the “02 Special Project”, which is funded purely by government finances.
Many companies have received funding from the 02 Special Project. When I was researching semiconductor companies, I saw many prototypes left over from this project. After seeing them, I had mixed feelings. Although the 02 Special Project provided valuable funding for companies during the economic downturn, the efficiency of using these funds was not high. Even if the funds were given to the companies in the form of subsidies, it was difficult to produce technologies and products that could enter the market. People who have done scientific research probably understand this.
Before the chip war, China had many struggling equipment, material, and small chip companies that were difficult to compete with foreign counterparts. Companies like SMIC, JCET, and even Huawei did not pay much attention to them because they could buy more mature and cost-effective foreign products. However, the US blockade of the Chinese chip industry has brought a rare opportunity for these companies.
Under the blockade, domestic companies that were previously ignored by wafer fabs or test and packaging factories were pushed to the forefront. A large number of equipment and materials were sent to production lines for validation. Domestic small factories suddenly saw hope, and no one dared to waste this precious opportunity. Therefore, they burnt the midnight oil to improve their products.
Although this is a forced market mechanism, an internal circulation market mechanism, its efficiency is much higher than pure planning: one party is determined to replace imports, while the other is desperately holding onto a lifeline. Under the inspirations of wealth creation effects of the Shanghai STAR Board, almost every vertical segment of the semiconductor upstream has many companies involved.
I asked my colleagues to compile the profit trends of Chinese semiconductor listed companies over the past decade (only selecting companies with ten years of continuous performance). There is an obvious growth trend: ten years ago, the total profits of these domestic companies was only more than 3 billion, and by 2022, their total profits exceeded 33.4 billion, nearly ten times that of ten years ago.
Alex Palmer commented in his article: When Chinese companies can access Western chip suppliers, domestic manufacturers do not have much business. But now, if Chinese companies do not unite, the outcome will be collective destruction. "Previously, they could choose between national resilience and business development, but now this choice no longer exists."
Of course, some people may question: "These domestic alternatives are all in the mid-to-low-end field. We still cannot break through in the high-end chip market." This questioning is not unfounded from a factual perspective. However, chips are not like the internet, where a few programmers can come up with something in a few months. It is an industry that requires years of investment and development, and it cannot be rushed.
In the past decade, the domestic semiconductor industry has made significant progress. However, public opinion often has a tendency to focus on lithography, to the extent that the belief "if China cannot produce EUV lithography machines, its semiconductor industry is not capable" has become very popular. This viewpoint is neither objective nor correct, and it obscures the efforts and hard work of many people, but it is widely embraced.
Of course, the success of an industry ultimately depends on whether it possesses the necessary conditions for success, such as funding, talent, and market. This is not greatly influenced by public opinion. Moreover, many extremely pessimistic remarks have appeared not only recently, but also many years ago in fields such as high-speed rail, wind power, solar power, and new energy vehicles.
It may be fate, or it may be a coincidence, but at a time when the Chip War is in full swing, the fourth industrial revolution driven by AI has begun.
Keep reading with a 7-day free trial
Subscribe to Baiguan - China Insights, Data, Context to keep reading this post and get 7 days of free access to the full post archives.