Soon, the company’s global expansion ground to a halt. Entire production line became impossible to produce. Revenue slumped. A corporate giant faced technological asphyxiation. Huawei discovered that, like all other Chinese companies, it was fatally dependent on foreigners to make the chips upon which all modern electronics depend.
China now spends more money each year importing chips than it spends on oil.
Today, Apple’s most advanced processors can only be produced by a single company in a single building, the most expensive factory in human factory.
Other countries have found it impossible to keep up on their own but have succeeded when they’ve deeply integrated themselves into SV’s supply chains.
America’s vast reserve of scientific expertise, nurtured by government research funding and strengthened by the ability to poach the best scientists from other countries, has provided the core knowledge driving technological advances forward. The country’s network of VC firms and its stock markets have provided the startup capital new firms need to grow — and have ruthlessly forced out failing companies. Meanwhile, the world’s largest consumer market in the US has driven the growth that’s funded decades of R&D on new types of chips.
Big carmakers from Toyota to GM had to shut factories for weeks because they couldn’t acquire the semiconductors they needed. Shortages of even the simplest chips caused factory closures on the opposite side of the world. It seemed like a perfect image of globalization gone wrong.
Chips from Taiwan provide 37% of the world’s new computing power each year. Two Korean companies produce 44% of the world’s memory chips. The Dutch company ASML builds 100% of the world’s extreme UV lithography machines, without which cutting-edge chips are simply impossible to make. OPEC’s 40% share of the world oil production looks unimpressive by comparison.
The US built more tanks than all the Axis powers combined, more ships, more planes, and twice the Axis production of artillery and machine guns. Convoys of industrial goods streamed from American ports across the Atlantic and Pacific Oceans, supplying Britain, the Soviet Union, China, and other allies with key materiel.
These living, breathing computers could tabulate payrolls, track sales, collect census results, and sift through the data on fires and droughts that were needed to price insurance policies.
Because vacuum tubes glowed like lightbulbs, they attracted insects, requiring regular “debugging” by their engineers. Also like lightbulbs, vacuum tubes often burned out. ENIAC computer had 18K vacuum tubes. On average, 1 tube malfunctioned every 2 days, bringing the entire machine to a halt and sending technicians scrambling to find and replace the broken part.
All his colleagues found Shockley obnoxious, but they also admitted he was a brilliant theoretical physicist. His intuition was so accurate that one of Shockley’s coworkers said it was as if he could actually see electrons as they zipped across metals or bonded atoms together.
Rather than use a separate piece of silicon or germanium to build each transistor, he thought of assembling multiple components on the same piece of semiconductor material. Kilby called his invention an “integrated circuit,” but it became known colloquially as a “chip,” because each IC was made from a piece of silicon “chipped” off a circular silicon wafer.
NASA’s trust in IC to guide astronauts to the moon was an important stamp of approval. Fairchild’s Micrologic chips were no longer an untested technology; they were used in the most unforgiving and rugged environment: outer space.
Winning the Minuteman II contract transformed TI’s chip business. AI’s IC sales had previously been measured in the dozens, but the firm was soon selling them by the thousands amid fear of an American “missile gap” with the USSR.
Mass production works when everything is standardized. GM plugged many of the same car parts into all the Chevrolets that rolled off its assembly lines. When it came to semiconductors, companies like TI lacked the tools to know whether all the components of their ICs were the same. Chemicals had impurities that at the time were impossible to test. Variation in temperature and pressure caused unexpected chemical reactions. A single impurity could ruin an entire production run. The only method of improvement was trial and error, with TI organizing thousands of experiments to assess the impact of different temperatures, chemical combinations, and production processes.
There were Chinese-American laundry people, there were Chinese-American restaurant people. The only really serious middle class profession that a Chinese American could pursue in the early 50s was technical.
A master bridge player, Chang approached manufacturing as methodically as he played his favorite card game. Upon arriving at TI, he began systematically tweaking the temperature and pressure at which different chemicals were combined, to determine which combinations worked best, applying his intuition to the data in a way that amazed and intimidated his colleagues.
Behind the tobacco smoke was a brain second to none. “He knew enough about solid-state physics to lord it over anyone.” He had a reputation for being a tough boss. “If you hadn’t ever been chewed out by Morris, you hadn’t been at TI.”
These inventions were crucial, but science alone wasn’t enough to build the chip industry. The spread of semiconductors was enabled as much by clever manufacturing techniques as academic physics.
“The direction of the research was being determined by people less competent,” Noyce recalled, complaining about the time he wasted writing progress report for the military.
The military paid top dollar, but consumers were price sensitive. What remained tantalizing, though, was that the civilian market was far larger than even the bloated budgets of the Cold War Pentagon. “Selling R&D to the government was like taking your venture capital and putting it into a saving account. Venturing is venturing; you want to take the risk.”
He predicted that every year for at least the next decade, Fairchild would double the number of components that could fit on a silicon chip.
Noyce slashed prices, too, gambling that this would drastically expand the civilian market for chips. In the mid-1960s, Fairchild chips that previously sold for $20 were cut to $2. At times Fairchild even sold products below manufacturing cost, hoping to convince more customers to try them.
Alongside new scientific discoveries and new manufacturing processes, this ability to make a financial killing was the fundamental force driving forward Moore’s Law.
Spying could only get Shokin and his engineers so far. Simply stealing a chip didn’t explain how it was made. The recipe for chips was already extraordinarily complicated. Foreign exchange students could become smart physicists, but it was engineers like Andy Grove who knew at what temperature certain chemicals needed to be heated, or how long photoresists should be exposed to light. Every step of the process of making chips involved specialized knowledge that was rarely shared outside of a specific company. This type of know-how was often not even written down.
De Gaulle was formalistic and ceremonious, a tradition-minded military man who saw himself as the incarnation of French grandeur. Ikeda, by contrast, thought his country’s voters were straightforwardly materialistic, and promised to double their incomes within a decade. Japan was nothing but an “economic power,” de Gaulle declared, huffing to an aide after the meeting that Ikeda behaved like a “transistor salesman.” But it wouldn’t be long before all the world was looking enviously at Japan, because the country’s success selling semiconductors would make it far wealthier and more powerful than de Gaulle ever imagined.
Morita understood what de Gaulle did not: electronics were the future of the world economy, and transistors would make possible unimaginable new devices.
US chipmakers were happy to transfer their technology because Japanese firms appeared to be years behind.
Replicating Sony’s product innovation and marketing expertise, however, proved just as hard as replicating America’s semiconductor expertise.
But letting Japan build an electronics industry was part of US Cold War strategy, so, during the 1960s, Washington never put much pressure on Tokyo over the issue. “Japan is a keystone in America’s Pacific policy. If she cannot enter into healthy commercial intercourse with the Western hemisphere and Europe, she will seek economic sustenance elsewhere, like Communist China or the USSR. US strategy required letting Japan acquire advanced technology and build cutting-edge businesses. A people with their history won’t be content to make transistor radios.”
He believed his new technique would improve productivity, but the labor union that controlled GE’s assembly line workers saw him as threatening their control over the production process. The union revolted, staging a rally against Sporck and burning him in effigy. The factory’s management timidly backed down, promising the union that Sporck’s changes would never be implemented.
Sporck was proud of giving most employees stock options, a practice that was virtually unknown in the old East Coast electronics firms. But he’d ruthlessly insist, in exchange, that these same employees commit to maximizing their productivity.
Even in the poorest parts of America, however, labor costs were substantial.
Production quality was excellent, because low labor costs meant Fairchild could hire trained engineers to run assembly lines, which would have been prohibitively expensive in California.
Sporck began looking beyond Hong Kong. The city’s 25-cent hourly wages were only a tenth of American wages but were among the highest in Asia. In the mid-1960s, Taiwanese workers made 19 cents an hour, Malaysians 15 cents, Singaporeans 11 cent, and South Koreans only a dime.
Sporck’s next stop was Singapore whose leader, LKY, had “pretty much outlawed” unions.
Foreign policy strategists in Washington saw ethnic Chinese workers in cities like HK, Singapore, and Penang as ripe for Communist subversion. Sporck saw them as a capitalist’s dream. “We had union problems in SV. We never had any union problems in the Orient.”
This firepower had only a marginal impact on North Vietnam’s military, however, because most of the bombs missed their targets.
Only 9.2% of Sparrows fired in Vietnam hit their target, while 66% malfunctioned, and the rest simply missed.
His first meeting with Taiwan’s powerful and savvy economy minister, K. T. Li, ended acrimoniously when the minister declared that IP was something “imperialists used to bully less-advanced countries.”
Taiwan and the US had been treaty allies since 1955, but amid the defeat in Vietnam, America’s security promises were looking shaky. From South Korea to Taiwan, Malaysia to Singapore, anti-Communist governments were seeking assurance that America’s retreat from Vietnam wouldn’t leave them standing alone. They were also seeking jobs and investment that could address the economic dissatisfaction that drove some of their populations toward Communism.
Facing a nuclear China, Taiwan needed American security guarantees more than ever. Yet as the war in Vietnam dragged on, the US cut economic aid for its friends in Asia, including in Taiwan, an ominous sign for a country so dependent on American support.
As Americans grew skeptical of military commitments in Asia, Taiwan desperately needed to diversify its connections with the US. Americans who weren’t interested in defending Taiwan might be willing to defend TI. The more semiconductor plants on the island, and the more economic ties with the US, the safer Taiwan would be.
In their vision, transistors would become the cheapest product ever produced, but the world would consume trillions and trillions of them. Humans would be empowered by semiconductors while becoming fundamentally dependent on them.
Intel planned to dominate the business of DRAM chips. Memory chips don’t need to be specialized, so chips with the same design can be used in many different types of devices. This makes it possible to produce them in large volumes. By contrast, the other main type of chips — those tasked with “computing” rather than “remembering” — were specially designed for each device, because every computing problem was different. This specialization drove up cost, so Intel decided to focus on memory chips, where mass produciton would produce economies of scale.
Computers face a tradeoff between customized logic circuits and customized software. Because chipmaking was a custom business, delivering specialized circuits for each device, customers didn’t think hard about software.
In the past 200 years we have improved our ability to manufacture goods and move people by a factor of 100. But in the last 20 years there has been an increase of 1M to 10M in the rate at which we process and retrieve information.
“We are really the revolutionaries in the world today,” Gordon Moore declared in 1973, “not the kids with the long hair and beards who were wrecking the schools a few years ago.”
A new generation of guided missiles that used ICs, not vacuum tubes; a constellation of satellites that could beam location coordinates to any point on earth; and — most important — a new program to jump-start the next generation of chips, to ensure that the US kept its technological edge.
At first Japanese firms succeeded by replicating US rivals’ products, manufacturing them at higher quality and lower price. Some Japanese played up the idea that they excelled at implementation, whereas America was better at innovation. Sony’s research director told an American journalist that Japan had fewer geniuses than America, a country with “outstanding elites.” But America also had “a long tail” of people “with less than normal intelligence,” he argued, explaining why Japan was better at mass manufacturing.
Morita knew that replication was a recipe for 2nd-class status and 2nd-rate profits. He drove his engineers not only to build the best radios and TVs, but to imagine new types of products entirely.
The US had supported Japan’s postwar transformation into a transistor salesman. US occupation authorities transferred knowledge about the invention of the transistor to Japanese physicists, while policymakers in Washington ensured Japanese firms could easily sell into US markets. The aim of turning Japan into a country of democratic capitalists had worked. Now some Americans were asking whether it had worked too well. The strategy of empowering Japanese businesses seemed to be undermining Ameria’s economic and technological edge.
Ultra-efficient Japanese competition seemed certain to put him out of business. Sporck had a hard-earned reputation for his ability to squeeze efficiency out of assembly line workers, but Japan’s productivity levels were far ahead of anything his workers could accomplish.
Sporck saw SV’s internal battles as fair fights, but thought Japan’s DRAM firms benefited from IP theft, protected markets, government subsidies, and cheap capital.
Unlike in the US, where antitrust law discouraged chip firms from collaborating, the Japanese government pushed companies to work together, launching a research consortium called the VLSI Program in 1976 with the government funding around half the budget.
Yet with practically unlimited bank loans available, they could sustain losses as they waited for competitors to go bankrupt. In the early 1980s, Japanese firms invested 60% more than their US rivals in production equipment, even though everyone in the industry faced the same cutthroat competition, with hardly anyone making much profit. Japanese chipmakers kept investing and producing, grabbing more and more market share.
GCA employees admitted that, though their technology was world class, the company struggled with mass production. Precision manufacturing was essential, since lithography was now so exact that a thunderstorm rolling through could change air pressure — and thus the angle at which light refracted — enough to distort the images carved on chips.
“Semiconductors are the crude oil of the 1980s, and the people who control the crude oil will control the electronics industry.” AMD CEO described his main product as strategically crucial.
Sanders wasn’t asking for the US to send the Navy halfway across the world to secure supplies of silicon. But shouldn’t the government find a way to help its struggling semiconductor firms? In the 1970s, SV firms had forgotten about the government as they replaced defense contracts with civilian computer and calculator markets. In the 1980s, they crawled sheepishly back to Washington.
Lithography is simply something we can’t lose, or we will find ourselves completely dependent on overseas manufacturers to make our most sensitive stuff.
Suddenly Japan’s subsidies for its chip industry, widely blamed for undermining American firms like Intel and GCA, seemed like a national security issue.
Congress tried one final way to help. One of SV’s complaints was that Japan’s government helped firms coordinate their R&D efforts and provided funds for this purpose. Many people in America’s high-tech industry thought Washington should replicate these tactics.
Chipmakers, meanwhile, grumbled about the reliability of the machines they depended on. In the late 1980s, Intel’s equipment was running about 30% of the time due to maintenance and repairs, one employee estimated.
There was no point in a chipmaker preparing a new generation of chip-making technology if the lithography or deposition equipment wasn’t ready. Equipment firms didn’t want to launch a new piece of machinery unless chipmakers were prepared to use it. Sematech helped them agree on production schedules. This wasn’t exactly the free market, but Japan’s biggest firms had excelled with this type of coordination. Anyway, what other choice did SV have?
But GCA still didn’t have a viable business model. Being “ahead of your time” is good for scientists but not necessarily for manufacturing firms seeking sales. Customers had already gotten comfortable with equipment from competitors like Nikon, Canon, and ASML, and didn’t want to take a risk on new and unfamiliar tools from a company whose future was uncertain.
Three decades later, however, everything had changed. NY had seemed “glamorous” on Morita’s first visit in the 1950s. Now it was dirty, crime-ridden, and bankrupt.
As commercial tension between the US and Japan increased, Morita served as informal ambassador, explaining Japan to American powerbrokers. David Rockefeller was a personal friend. Morita dined with Henry Kissinger whenever the former Secretary of State visited Japan. When private equity titan Pete Peterson took Morita to Augusta National, a golf club popular with CEOs, he was shocked to discovered that “Akio had met them all.”
By the 1980s, Morita perceived deep problems in America’s economy and society. America had long seen itself as Japan’s teacher, but Morita thought America had lessons to learn as it struggled with a growing trade deficit and the crisis in its high-tech industries. “The US has been busy creating lawyers while Japan has been busier creating engineers.” Moreover, American executives were too focused on “this year’s profit,” in contrast to Japanese management, which was “long range.”
Chapter titles such as “America, you had better give up certain arrogance” had a harsher tone than Morita usually expressed at NY dinner parties. Even the always gracious Morita found it difficult to mask his view that Japan’s technological prowess had earned it a position among the world’s great powers. “Militarily we could never defeat the US, but economically we can overcome the US and become number one in the world.”
The US strategy since 1945 had been to bind Japan to the US via exchanges of trade and technology. Akio Morita was arguably the greatest beneficiary of America’s tech transfers and its market openness. If even he was questioning America’s leading role, Washington needed to rethink its game plan.
One senior Foreign Ministry official was quoted as arguing that “Americans simply don’t want to recognize that Japan has won the economic race against the West.” Soon-to-be-PM Kiichi Miyazawa publicly noted that cutting off Japanese electronics exports would cause “problems in the US economy,” and predicted that “the Asian economic zone will outdo the North America zone.”
“High tech is foreign policy,” Brown titled the article. If America’s high-tech position was deteriorating, its foreign policy position was at risk, too.
Would Japan, a 1st-class technological power, be satisfied with 2nd-class military status? If Japan’s success in DRAM chips was any guide, it was set to overtake the US in almost every industry that mattered. Why wouldn’t it seek military dominance too?
SV’s resurgence was driven by scrappy startups and by wrenching corporate transformations. The US overtook Japan’s DRAM behemoths not by replicating them but by innovating around them. Rather than cutting itself off from trade, SV offshored even more production to Taiwan and Kora to regain its competitive advantage.
A potato farmer like him saw clearly that Japanese competition had turned DRAM chips into a commodity market. He’d been through enough harvests to know that the best time to buy a commodity business was when prices were depressed and everyone else was in liquidation. Simply decided to back Micron with $1M. He’d later pour in millions more.
Next, Parkinson and his lieutenants simplified the manufacturing processes. The more steps in manufacturing, the more time each chip took to make and the more room for errors. By the mid-1980s, Micron used far fewer production steps than its competitors, letting the company use less equipment, cutting costs further. They tweaked the lithography machines they bought from Perkin Elmer and ASML to make them more accurate than the manufacturers themselves thought possible.
Micron focused ruthlessly on costs because it had no choice. There was simply no other way for a small Idaho startup to win customers.
The microprocessor market seemed almost certain to grow. But the prospect that microprocessor sales could overtake DRAMs, which constituted the bulk of chip sales, seemed mind-boggling.
“Disruptive innovation” sounded attractive in Chistensen’s theory, but it was gut-wrenching in practice, a time of “gnashing of teeth,” Grove remembered, and “bickering and arguments.” The disruption was obvious. The innovation would take years to pay off, if it ever did.
As Lee pondered Samsung’s future, he traveled to California in spring 1982, visiting HP’s facilities and marveling at the company’s technology. If HP could grow from a Palo Alto garage to a tech behemoth, surely a fish-and-vegetables shop like Samsung could, too.
He also toured an IBM computer factory and was shocked he was allowed to take photographs. “There must be many secrets in your factory,” he told the IBM employee giving him the tour. “They can’t be replicated by mere observation,” the employee confidently responded.
With the Koreans around, Japan’s strategy of “dump no matter what the costs” wouldn’t succeed in monopolizing the world’s DRAM production, because the Koreans would undercut Japanese producers. The result would be “deadly” to Japanese chipmakers, Noyce predicted.
The US didn’t simply provide a market for South Korean DRAM chips; it provided technology, too. With SV’s DRAM producers mostly near collapse, there was little hesitation about transferring top-notch technology to Korea.
SV’s testosterone and stock option-fueled competition often felt less like the sterile economics described in textbook and more like a Darwinian struggle for the survival of the fittest. Many firms failed, fortunes were lost, and tens of thousands of employees were laid off. The companies like Intel and Micro that survived did so less thanks to their engineering skills — though these were important — than their ability to capitalize on technical aptitude to make money in a hyper-competitive, unforgiving industry.
Despite its reputation for funding futuristic weapons systems, when it came to semiconductors DARPA focused as much on building educational infrastructure so that America had an ample supply of chip designers. DARPa also helped universities acquire advanced computers and convened workshops with industry officials and academics to discuss research problems over fine wine. Helping companies and professors keep Moore’s Law alive, DARPA reasoned, was crucial to America’s military edge.
The USSR had kept up with the Americans in the race to develop the crucial technologies of the early Cold War, building powerful rockets and a formidable nuclear stockpile. Now brawn was being replaced by computerized brains. When it came to the silicon chips undergirding this new driver of military power, the USSR had fallen hopelessly behind.
The most pessimistic Soviet estimates suggested that if the US launched a nuclear first strike in the 1980s, it could have disabled or destroyed 98% of Soviet ICBMs.
The USSR barely had a consumer market, so it produced only a fraction of the chips built in the West. One Soviet source estimated that Japan alone spent 8 times as much on capital investment in microelectronics as the USSR.
A final challenge was that the Soviets lacked an international supply chain. Working with America’s Cold War allies, SV had forged an ultra-efficient globalized division of labor.
The USSR had only a handful of allies, most of whom weren’t much help. In the late 1980s, East Germany’s chip industry was only able to produce memory chips less advanced than Japan’s, at 10 times the price. Advanced Western manufacturing equipment remained hard to access, while East Germany had none of the cheap labor that SV firms hired across Asia.
Planes using laser guidance for their bomb strikes hit 13 times as many targets as comparable planes without guided munitions.
The Iraqi military — armed with some of the best equipment the USSR’s defense industry produced — was helpless in the face of the American assault.
He knew his country’s problems cut deeper than its financial markets. Morita had spent the previous decade lecturing Americans about their need to improve production quality, not focus on “money games” in financial markets. But as Japan’s stock market crashed, the country’s vaunted long-term thinking no longer looked so visionary. Japan’s seeming dominance had been built on an unsustainable foundation of government-backed over investment. Cheap capital had underwritten the construction of new semiconductor fabs, but also encouraged chipmakers to think less about profit and more about output.
For Andy Grove and Intel, making money on microprocessors was a matter of life or death. Japan’s DRAM firms, with massive market share and few financial constraints, ignored the microprocessor market until it was too late. As a result, the PC revolution mostly benefitted American chip firms.
With lower wages and several hundred million peasants eager to trade subsistence farming for factory jobs, China’s entry into electronics assembly threatened to put Taiwan out of business. It amounted to economic “warfare,” Taiwanese officials complained to visiting TI executives. It was impossible to compete with China on price. Taiwan had to produce advanced technology itself.
He was turned down by his former colleagues at TI and by Intel. “Morris, you’ve had a lot of good ideas in your time,” Gordon Moore told him. “This isn’t one of them.”
The rest of the capital was raised from wealthy Taiwanese who were “asked” by the government to invest. What generally happened was that one of the ministers in the government would call a businessman in Taiwan to get him to invest. The government asked several of the island’s wealthiest families, who owned firms that specialized in plastics, textiles, and chemicals, to put up the money. When one businessman declined to invest after 3 meetings with Chang, Taiwan’s PM called the stingy executive and reminded him, “The government has been very good to you for the last 20 years. You better do something for the government now.” A check for Chang’s chip foundry arrived soon after. The government also provided generous tax benefits for TSMC, ensuring the company had plenty of money to invest. From day one, TSMC wasn’t rally a private business: it was a project of the Taiwanese state.
China’s chip industry, which had lagged far behind SV before the CR, was now far behind China’s neighbors, too. China accomplished nothing beyond harassing its smartest citizens.
It fended off competition in the DRAM market from Taiwan and Singapore, benefitting from formal government support and from unofficial government pressure on Korea’s banks to provide credit. This financing mattered because Samsung’s main product, DRAM memory chips, required brute financial force to reach each successive technology node — spending that had to be sustained even during industry downturn. Carrying on spending was ruinously expensive, but stopping investments, even for a single year, risked ceding market share to rivals.
NEC received a sweet financial deal from the Chinese government in exchange for promising to bring its technology to China. However, NEC made sure that Japanese experts were in charge; Chinese workers were only allowed to undertake basic activities. China gained little expertise from the joint venture.
Chang’s strategy was simple: do as TSMC had done. In Taiwan, TSMC had hired the best engineers it could find, ideally with experience at American or other advanced chip firms. TSMC bought the best tools it could afford. It focused relentlessly on training its employees in the industry’s best practices. And it took advantage of all the tax and subsidy benefits that Taiwan’s government was willing to provide.
He gave Carruthers $200M to spend developing EUV lithography. Intel would eventually spend billions of dollars on R&D and billions more learning how to use EUV to carve chips.
With the Cold War over, the Bush administration, which had just taken power, wanted to loosen technology export controls on all goods except those with direct military applications. The administration described the strategy as “building high walls around technologies of the highest sensitivity.” EUV didn’t make the list.
Otellini inherited a company that was enormously profitable. He saw his primary task as keeping profit margins as high as possible by milking Intel’s de facto monopoly on x86 chips, and he applied textbook management practices to defend it.
He understood the limits of relying on in-house manufacturing. “Silicon is like steel,” he insisted in the early debates over Arm’s strategy. “It’s a commodity. We should build chips over my dead body.” Instead, Arm adopted a business model of selling licenses for use of its architecture and letting any other chip designer buy them.
Nintendo chose Arm-based chips for its handheld video games, for example, a small market that Intel never paid much attention to. Intel’s computer processor oligopoly was too profitable to justify thinking about niche markets. Intel didn’t realize until too late that it ought to compete in another seemingly niche market for a profitable computing device: the mobile phone.
But the idea of pouring money into mobile devices seemed like a wild gamble at a time when there was far more money to be made selling processors for PCs. So Intel decided not to enter the mobile business until it was too late.
Everyone at Intel knew Chistensen and his concept of “the innovator’s dilemma.” However, the company’s PC processor business looked likely to print money for a very long time. The problem wasn’t that no one realized Intel ought to consider new products, but that the status quo was simply too profitable. If Intel did nothing at all, it would still own 2 of the world’s most valuable castles — PC and server chips — surrounded by a deep x86 moat.
Since the late 1980s, Intel has made a quarter trillion dollars in profit, even before adjusting for inflation, a track record that few other companies have matched. It has done this by charging a ton for PC and server chips. Intel could sustain high prices because of the optimized design processes and advanced manufacturing that Grove had honed and bequeathed to his successors. The company’s leadership consistently prioritized the production of chips with the highest profit margin.
This was a rational strategy — no one wants products with low profit margins — but it made it impossible to try anything new. A fixation on hitting short-term margin targets began to replace long-term technology leadership. The shift in power from engineers to managers accelerated this process. Otellini admitted he turned down the contract to build iPhone chips because he worried about the financial implications. A fixation on profit margins seeped deep into the firm — its hiring decisions, its product road maps, and its R&D processes. The company’s leaders were simply more focused on engineering the company’s balance sheet than its transistors. “It had the technology, it had the people,” one former finance executive at Intel reminisced. “It just didn’t want to take the margin hit.”
It operated facilities on multiple continents. However, Grove was worried about the offshoring of advanced manufacturing jobs. The iPhone, which had been introduced just 3 years earlier, exemplified the trend. Few of the iPhone’s components were built in the US. Though offshoring started with low-skilled jobs, Grove didn’t think it would stop there, whether in semiconductors or any other industry. He worried about lithium batteries needed for electric vehicles, where the US made up a tiny share of the market despite having invented much of the core technology. His solution: “Levy an extra tax on the product of offshore labor. If the result is a trade war, treat it like other wars — fight to win.”
Yet producing chips was less profitable than selling ads on apps. Grove idolized “disruptive innovation,” but by the 2010s, Intel’s business was being disrupted.
When they’d faced Japanese competition in the 1980s, SV CEOs spent plenty of time in the halls of Congress. Now they didn’t think they needed government help. Their main concern was for government to get out of the way, by signing trade deals with other countries and removing controls on export.
Washington concluded that export controls would do more harm than good, hurting US industry without preventing China from buying goods from firms in other countries. Japan and Europe were eager to sell almost anything to the PRC. No one in Washington had the stomach for a fight with allies about export controls, especially as US leaders were focused on befriending their Chinese counterparts.
A new consensus in Washington formed around the idea that the best policy was to “run faster” than America’s rivals.
“Run faster” was an elegant strategy with only a single problem: by some key metrics, the US wasn’t running faster, it was losing ground.
In 2007, the DoD commissioned a study to assess the impact of semiconductor industry “globalization” on the military’s supply chains. Van Atta had worked on defense microelectronics for several decades and had lived through the rise and fall of Japan’s chip industry. He wasn’t prone to overreaction and understood how a multinational supply chain made the industry more efficient. In peacetime, this system worked smoothly. However, the Pentagon had to think about worst-case scenarios. Van Atta reported that the DoD’s access to cutting-edge chips would soon depend on foreign countries because so much advanced fabrication was moving abroad.
Amid the hubris of America’s unipolar moment, hardly anyone was willing to listen. Most people in Washington simply concluded the US was “running faster” without even glancing at the evidence.
By the 2000s, it was common to split the semiconductor industry into 3 categories. “Logic” refers to the processors that run smartphones, computers, and servers. “Memory” refers to DRAM, which provides the short-term memory computers need to operate, and flash, also called NAND, which remembers data over time. The third category of chips is more diffuse, including analog chips like sensors that convert visual or audio signals into digital data, radio frequency chips that communicate with cell phone networks, and semiconductors that manage how devices use electricity.
Huang spent lavishly on this software effort, at least $10B, to let any programmer — not just graphics experts — work with Nvidia’s chips. Huang gave away CUDA for free, but the software only works with Nvidia’s chips.
By most measures this new generation of executive talent was far more professional than the chemists and physicists who’d built Silicon Valley. But they often seemed stale in comparison to the giants who preceded them.
An era of wild wagers on impossible technologies was being superseded by something more organized, professionalized, and rationalized. Bet-the-house gambles were replaced by calculated risk management. It was hard to escape the sense that something was lost in the process.
Morris Chang wasn’t about to give up dominance of the foundry business, though. He’d lived through every industry cycle since his old colleague Jack Kilby invented the IC. He was sure this downturn would eventually end, too. Companies that were overextended would be pushed out of business, leaving those that invested during the downturn positioned to grab the market share. Moreover, Chang realized as early as anyone how smartphones would transform computing — and therefore how they would change the chip industry, too. He was committed to winning the lion’s share of this business, whatever the cost.
Amid the financial crisis, Chang’s handpicked successor, Rick Tsai, had done what nearly every CEO did — lay off employees and cut costs. Chang wanted to do the opposite. Getting the company’s 40nm chipmaking back on track required investing in personnel and technology. Trying to win more smartphone business required massive investment in chipmaking capacity. Chang saw Tsai’s cost cutting as defeatist. “There was very, very little investment. I had always thought that the company was capable of more. It didn’t happen. There was stagnation.”
So Chang fired his successor and retook direct control of TSMC. The company’s stock price fell that day, as investors worried he’d launch a risky spending program with uncertain returns. Chang thought the real risk was accepting the status quo. He wasn’t about to let a financial crisis threaten TSMC in the race for industry leadership.
The world still has several hundred million subsistence farmers who’d happily fasten components into an iPhone for a dollar an hour.
By the late 2010s, ASML had spent nearly 2 decades trying to make EUV lithography work. Doing so required scouring the world for the most advanced components, the purest metals, the most powerful lasers, and the most precise sensors. EUV was one of the biggest technological gambles of our time.
The company’s engineers realized the best approach was to shoot a tiny ball of tin measuring thirty-millionths of a meter wide moving through a vacuum at a speed of around 200mph. The tin is then struck twice with a laser, the first pulse to warm it up, the second to blast it into a plasma with a temperature around half a million degrees, many times hotter than the surface of the sun. This process of blasting tin is then repeated 50K times per second to produce EUV light in the quantities necessary to fabricate chips. Jay Lathrop’s lithography process had relied on a simple bulb for a light source. The increase in complexity since then was mind-boggling.
Ultimately, Zeiss created mirrors that were the smoothest objects ever made, with impurities that were almost imperceptible small. If the mirrors in an EUV system were scaled to the size of Germany, their biggest irregularities would be a tenth of a millimeter. To direct EUV light with precision, they must be held perfectly still, requiring mechanics and sensors so exact that Zeiss boasted they could be used to aim a laser to hit a golf ball as far away as the moon.
For van Houts, the most crucial input into an EUV lithography system wasn’t any individual component, but the company’s own skill in supply chain management. ASML engineered this network of business relationships “like a machine,” producing a finely tuned system of several thousand companies capable of meeting ASML’s exacting requirements.
The result was a machine with hundreds of thousands of components that took tens of billions of dollars and several decades to develop. The miracle isn’t simply that EUV lithography works, but that it does so reliably enough to produce chips cost-effectively.
ASML’s EUV lithography tool is the most expensive mass-produced machine tool in history, so complex it’s impossible to use without extensive training from ASML personnel, who remain on-site for the tool’s entire life span.
Having worked in Texas and California as well as in Taiwan, Chiang was always struck by the ambition and the work ethic that drove TSMC. The ambition stemmed from Morris Chang’s vision of world-beating technology, evident in his willingness to spend huge sums expanding TSMC’s R&D team from 120 people in 1997 to 7K in 2013. This hunger permeated the entire company. “People worked so much harder in Taiwan.” In the US, if something broke at 1am, the engineer would fix it the next morning. At TSMC, they’d fix it by 2am. “They do not complain, and their spouse does not complain either.”
IBM executives used to share an image of the computing ecosystem: an upside-down pyramid with semiconductors at the bottom, on which all other computing depended. Yet though IBM had played a fundamental role in the growth of the semiconductor business, its leaders concluded that fabricating chips made no financial sense. Facing a decision to invest billions to build a new advanced fab, or billions on high-margin software, they chose the latter.
GlobalFoundries decided that as a medium-sized foundry, it could never make a 7nm process financially viable. It announced it would stop building ever-smaller transistors, slashed R&D spending by a third, and quickly turned a profit after several years of losses. Building cutting-edge processors was too expensive for everyone except the world’s biggest chipmakers.
Since the 1980s, Intel had specialized in a type of chip called a CPU of which a microprocessor in a PC is one example. These are the chips that serve as the “brain” in a computer or data center. They are general-purpose workhorses, equally capable of opening a web browser or running Excel. They can conduct many different types of calculations, which makes them versatile, but they do these calculations serially, one after another.
Where a CPU would feed an algorithm many pieces of data, one after another, a GPU could process multiple pieces of data simultaneously. To learn to recognize images of cats, a CPU would process pixel after pixel, while a GPU could “look” at many pixels at once.
With every year that passed, the precariousness of China’s technological position became clearer. China’s import of semiconductors increased year by year. The chip industry was changing in ways that weren’t favorable to China. “The scale of investment has risen rapidly and market share has accelerated to the concentration of dominant firms,” China’s State Council noted in one technology policy report. These dominant firms — TSMC and Samsung chief among them — would be extremely difficult to displace. The trends were dangerous: chips were becoming even more important, yet the design and production of the most advanced chips was monopolized by a handful of companies, all located outside of China.
China’s import of chips — $260B in 2017 — was far larger than Saudi Arabia’s export of oil or Germany’s export of cars. China spends more money buying chips each year than the entire global trade in aircraft. No product is more central to international trade than semiconductors.
ICs made up 15% of Korea’s exports in 2017; 17% of Singapore’s; 19% of Malaysia’s; 21% of the Philippines’; and 36% of Taiwan’s.
Chip firms simply can’t ignore the world’s largest market for semiconductors. Chipmakers jealously guard their critical technologies, of course. But almost every chip firm has non-core technology, in subsections that they don’t lead, that they’d be happy to share for a price. When companies are losing market share or in need of financing, moreover, they don’t have the luxury of focusing on the long term. This gives China powerful levers to induce foreign chip firms to transfer technology, open production facilities, or license IP, even when foreign companies realize they’re helping develop competitors. For chip firms, it’s often easier to raise funds in China than on Wall Street. Accepting Chinese capital can be an implicit requirement for doing business in the country.
Viewed on their own terms, the deals that IBM, AMD, and Arm struck in China were driven by reasonable business logic. Collectively, they risk technology leakage.
Lee built Samsung from a trader of dried fish into a tech company churning out some of the world’s most advanced processor and memory chips by relying on 3 strategies. First, assiduously cultivate political relationships to garner favorable regulation and cheap capital. Second, identify products pioneered in the West and Japan and learn to build them at equivalent quality and lower cost. Third, globalize relentlessly, not only to seek new customers but also to learn by competing with the world’s best companies.
Starting in 1999, Huawei hired IBM’s consulting arm to teach it to operate like a world-class company. One former IBM consultant said Huawei spent $50M in 1999 on consulting fees, at a time when its entire revenue was less than $1B. At one point it employed 100 IBM staff to redo business process. “They weren’t too daunted by the engineering tasks, but they felt they were 100 years behind when it came to economic knowledge and business knowledge.” Thanks to IBM and other Western consultants, Huawei learned to manage its supply chain, anticipate customer demand, develop top-class marketing, and sell products worldwide.
However, the company asked its consultants to determine its supply chain risk. They reported that the company had 2 key vulnerabilities: access to Google’s Android OS, and the supply of the semiconductors that every smartphone requires.
The company identified the 250 most important semiconductors that its products required and began designing as many as possible in-house.
Sending 1s and 0s through the air while minimizing dropped calls or delays to video streaming is staggeringly complicated. The amount of space available in the relevant part of the radio-wave spectrum is limited. There are only so many radio-wave frequencies, many of which aren’t optimal for sending lots of data or transmitting over long distances. Telecom firms have therefore relied on semiconductors to pack ever more data into existing spectrum space.
The next generation of network technology, 5G, will make possible the wireless transmission of even more data. Partly, this will be via even more intricate methods of sharing spectrum space, which require more complex algorithms and more computing power on phones and in cell towers so that 1s and 0s can be slotted din even the tiniest free space in the wireless spectrum. Partly, 5G networks will send more data by using a new, empty radio frequency spectrum that was previously considered impractical to fill. Advanced semiconductors make it possible not only to pack more 1s and 0s into a given frequency of radio waves, but also to send radio waves farther than target them with unprecedented accuracy.
The idea of military AI evokes images of killer robots, but there are many spheres where applying ML can make military systems better. Predictive maintenance — learning when machines need to be fixed — is already helping keep planes in the sky and ships at sea. AI enabled submarine sonars or satellite imagery can identify threats more accurately. New weapons can be designed more quickly. Bombs and missiles can be aimed more accurately, especially when it comes to moving targets. Autonomous vehicles in the air, underwater, and on land are already learning to maneuver, identify adversaries, and destroy them.
Making semiconductors is so expensive that even the Pentagon can’t afford to do it in-house. Today even designing a leading-edge chip — which can cost several hundred million dollars — is too expensive for all but the most important projects.
Today there’s simply no way to avoid buying some things from abroad — and buying many from Taiwan. So DARPA’s betting on technology to enable a “zero trust” approach to microelectronics: trust nothing and verify everything, via technologies like tiny sensors implanted on a chip that can detect efforts to modify it.
Most people in Washington barely knew what a semiconductor was. The Obama administration moved slowly on semiconductors because many senior officials simply didn’t see chips as an important issue.
In Washington and in the chip industry, almost everyone had drunk their own Kool-Aid about globalization. Newspapers and academics alike reported that globalization was in fact “global,” that technological diffusion was unstoppable, that other countries’ advancing technological capabilities were in the US interest, and that even if they weren’t, nothing could halt technological progress.
“Policy can, in principle, slow the diffusion of technology, but it cannot stop the spread.” Neither of these claims was backed by evidence; they were simply assumed to be true.
America’s technological lead in fabrication, lithography, and other fields had dissipated because Washington convinced itself that companies should compete but that governments should simply provide a level playing field. A laissez-faire system works if every country agrees to it. Many governments, especially in Asia, were deeply involved in supporting their chip industries. However, US officials found it easier to ignore other countries’ efforts to grab valuable chunks of the chip industry, instead choosing to parrot platitudes about free trade and open competition. Meanwhile, America’s position was eroding.
Inaction wasn’t a viable option, they believed. Nor was “running faster” — which they saw as code for inaction. “It would be great for us to run faster,” one NSC official put it, but the strategy didn’t work because of China’s “enormous leverage in forcing the turnover of technology.” The new NSC adopted a much more combative, zero-sum approach to technology policy.
When Micron sued UMC and Jinhua for violating its patents, they countersued in China’s Fujian province. A Fujian court ruled that Micron was responsible for violating UMC and Xinhua’s patents — patents that had been filed using material stolen from Micron. To “remedy” the situation, Fuzhou Court banned Micron from selling 26 products in China, the company’s biggest market.
This was a perfect case study of the state-backed IP theft foreign companies operating in China had long complained of.
Many IP experts predicted that China would soon begin stealing less IP as its companies produced more sophisticated goods. However, the evidence for this thesis was mixed. Efforts by the Obama administration to cut a deal with China’s spy agencies whereby they agreed to stop providing stolen secrets to Chinese companies lasted only long enough for Americans to forget about the issue, at which point the hacking promptly restarted.
Micron had little reason to expect a fair trial in China. Winning court cases in Taiwan or California meant little when kangaroo courts in Fujian could lock the company out of its biggest market.
Had this occurred during the Obama administration, the case would have resulted in stern statements but little else. American CEOs, knowing they couldn’t count on serious US government backing, would have tried to cut a deal with Beijing, surrendering their IP in hopes of regaining access to the Chinese market. Jinhua, knowing to expect nothing worse than an angry press release, would have squeezed the company as hard as it could. Other foreign firms would have stayed quiet even though they knew they could be next.
Huawei and other Chinese firms were assuming central roles in tech subsections that the US thought it needed to dominate to retain a technological advantage over China, militarily and strategically. “Huawei became a really a proxy for everything we had done wrong with our tech competition with China.”
Germany, which exports large quantities of cars and machinery to China, was warned by the Chinese ambassador of “consequences” if it banned Huawei. “The Chinese government will not stand idly by.”
The pressing question was: Could the US let a Chinese company like this succeed?
Questions like this made many people in Washington uncomfortable. For a generation, America’s elite had welcomed and enabled China’s economic rise.
On the NSC, however, competition with China was now seen primarily in zero-sum terms. These officials interpreted Huawei not as a commercial challenge but as a strategic one. Sony and Samsung were tech firms based in countries that were allied with the US. Huawei was a national champion of America’s primary geopolitical rival. Viewed through this lens, Huawei’s expansion was a threat.
Beijing has evidently calculated that it’s better to accept that Huawei will become a 2nd-rate technology player than to hit back against the US. The US, it turns out, has escalation dominance when it comes to severing supply chains. “Weaponized interdependence,” one former senior official mused after the strike on Huawei. “It’s a beautiful thing.”
Domesticating every part of the supply chain would be impossibly expensive. The global chip industry spends over $100B annually on capital expenditure. China would have to replicate this spending in addition to building a base of expertise and facilities that it currently lacks. Establishing a cutting-edge, all-domestic supply chain would take over a decade and cost well over $1T in that period.
Almost all of China’s chip firms are dependent on government support, so they’re oriented toward national goals as much as commercial ones. “Making profits and going public are not the priority. Instead, we focus on building the country’s own chips and realizing the Chinese dream.”
If even one chip is missing, the car can’t be shipped. Carmakers spent much of 2021 struggling and often failing to acquire semiconductors. These firms are estimated to have produced 7.7M fewer cars in 2021 that would have been possible had they not faced chip shortages, which implies a $210B collective revenue loss.
The semiconductor shortage is mostly a story of demand growth rather than supply issues. It’s driven by new PCs, 5G phones, AI-enabled data centers — and, ultimately, our insatiable demand for computing power.
It’s also perfectly reasonable to think China might conclude that military pressure without a full-scale invasion could decisively undermine America’s implicit security guarantee and fatally demoralize Taiwan. Beijing knows that Taiwan’s defense strategy is to fight long enough for the US and Japan to arrive and help. The island is too small relative to the cross-strait superpower that there’s no realistic option besides counting on friends. Imagine if Beijing were to use its navy to impose customs checks on a fraction of the ships sailing in and out of Taipei. How would the US respond? A blockade is an act of war, but no one would want to shoot first.
Russia’s war in Syria found that up to 95% of munitions dropped were unguided. The fact that Russia faced shortages of guided cruise missiles within several weeks of attacking Ukraine is also partly due to the sorry state of its semiconductor industry. Meanwhile, Ukraine has received huge stockpiles of guided munitions from the West, such as Javelin anti-tank missiles that rely on over 200 semiconductors each as they home in on enemy tanks.
A facility to fabricate the most advanced logic chips costs twice as much as an aircraft carrier but will only be cutting-edge for a couple of years.
The staggering complexity of producing computing power shows that SV ins’t simply a story of science and engineering. Technology only advances when it finds a market. The history of the semiconductor is also a story of sales, marketing, supply chain management, and cost reduction. SV wouldn’t exist without the entrepreneurs who built it.