The TECHNOLOGICAL COLD WAR MAY TRIGGER THE EXPECTED THIRD WORLD WAR

15 Aug 2022 Special Report
The TECHNOLOGICAL COLD WAR MAY
TRIGGER THE EXPECTED THIRD WORLD WAR
Talal Abu-Ghazaleh

The recent visit of the speaker of the United States House of Representatives Nancy Pelosi to Taiwan was officially supposed to reassure Taiwan of US protection in the event of an invasion from China and to show that the US stands with Taiwan once subject to Chinese threat.
Taiwan has been self-governed by a local government but within the Chinese Republic, since 1949, but Beijing views the island as part of its territory and has the desire to reintegrate Taiwan into China.
The reason that Taiwan is so important to the USA and subsequently the rest of the world, is Taiwan’s dominance in manufacturing processors –semi conductors.
The production of processors is a highly complex affair which Taiwan has been developing for almost forty years; largely monopolized by Taiwanese giant the Taiwan Semiconductor Manufacturing Company (TSMC).
The fragility of the world economy with respect to semiconductors was seen during the corona pandemic where semiconductor supply chains were severely affected, and that sent shockwaves through the world.
Semiconductors processors are used in everything from daily electronic items to airplanes, sophisticated defense systems, modern cars and everything in between. Our modern society is unable to function without this highly important innovation, the significance of which depends on how the semiconductors are going to be used.
The shortage of semiconductors that started during the pandemic rang alarm bells across the world, and that has pushed the prices of goods that require processors to unprecedented levels.
TSMC through years of innovation holds tens of thousands of patents and through world-class research and development facilities, continually innovates processes to produces ever smaller, more advanced processors. TSMC’s facilities are so advanced that even chip manufactures that have their own processor facilities such as Intel choose to use TSMC to produce a large majority of their CPU’s.
TSMC produces 56% of global semiconductor chips and over 90% of the advanced processors used in sophisticated AI applications.
From a business perspective, it is never a good idea to be dependent on one product which is why we are seeing moves from the two global giants China and the USA to boost their onshore production of processors. Both countries have processor manufacturing facilities that need to be modernized if they are to diminish Taiwan’s dominance as the leading supplier. Doing so however is by no means easy, requires specialized expertise, billions of dollars and time to upgrade.
Processors today consist of up to 12 different layers of electronics connected through microscopic circuity, which poses great challenges in terms of both engineering and physics as the scale gets smaller, hence the need to continually innovate better manufacturing techniques.
This is not a comfortable situation for either the USA or China as they compete in the technological cold war. Each one has been implementing illegal and economic instruments such as barriers, investigations, sanctions, and tariffs to target each other’s technologies and strengthen their respective geopolitical positions.
In a major step, the US administration has decided to fully fund the CHIPS act where it has pledged $52 billion to boost onshore US semiconductor manufacturing. The US is the world’s leading processor designer with the bill designed to supercharge US efforts in semiconductors, legislating $200 billion over 10 years to better compete with China.
As a result, Intel is focusing on upgrading its own facilities to boost onshore American production which is estimated to cost it $20 billion to upgrade its Ohio facility, expected to open in late 2025.
Samsung is set to open a similar manufacturing facility in Texas to be operational by the end of 2024. TSMC has also caught wind of this and is planning to open a $12 billion facility in the Phoenix, Arizona, with advanced processor manufacturing facilities. Eight of the fifteen largest semiconductor companies in the world are in the US with Intel leading the pack in terms of global sales.
President Xi JinPing has repeatedly called for China to prioritize self-reliance and wants it to meet 70% of its domestic processor needs under the ‘Made in China 2025’ policy. However, China was only able to meet 16% of it needs in 2019 and remains a net importer of processors, being subject to the tightening of export controls by the US.
While China has been recruiting international talent in this space to bolster its semiconductor expertise, it has faced difficulty in dealing with overseas companies that are critical in the semiconductor supply chain. The Dutch company ASML (Advanced Semiconductor Materials Lithography) is the sole supplier of critical lithographic chip making machines used to etch silicon wafers to produce more efficient designs.
Through US intervention, exports from ASML to China have been blocked and export restrictions have been tightened by the US globally on Chinese technology companies such as Huawei and others, to the extent that even TSMC has severely restricted its dealings with Chinese entities.
The US is ahead of China in the semiconductor sector in terms of both research, development and manufacturing. The US has international allies in this field and is highly influential on the international stage, attracting talent and adopting a pro US - anti China stance when it comes to processors.
I see that China’s progression will be dependent on how its relations proceed with the US and the level of diplomacy it can muster in its negotiations with Uncle Sam.
Having said this, we should not rule out China as it is a highly resourceful country and could  play well on its experience in developing internal capacity, foster better relations with the international semiconductor community, purchase foreign firms that can fill the gaps they have as well as well as put more resources into research and development activities.
Both the US and China need time to develop their semiconductors infrastructures as this is both expensive and time consuming. It costs billions to build such facilities and years for them to come fully online. This means that for the short term at least, Taiwan will continue to be an important role in the global semiconductor sector, and in the expected “Sino-American War”.