Almost everything we use
depends on silicon semiconductors called chips.
From your iPhones, your fridge, your air filter.
The most advanced supercomputers,
the most basic toaster ovens.
What's turning on your indicators,
what's turning on your radio in your car.
That's a chip.
Today, about a trillion chips are made a year
or 128 for every person on the planet.
And China's government is lending the industry
the same strategic importance
it gave to its atomic bomb program.
It's arguably a lot more important
because you are talking about China becoming
self-reliant on the technology that powers
all of mankind's future scientific advances.
The key semiconductor
is the advanced logic chip.
It's the most expensive and complex piece of silicon
that gives computers and smartphones their intelligence.
This is the microprocessor designed by Apple,
designed by Qualcomm,
are made by only a very few companies,
and they're made on the very, very most
advanced manufacturing.
Right now, there's one company that's crucial
when it comes to making advanced logic chips:
Taiwan Semiconductor Manufacturing Company, or TSMC.
And it is a company that makes customized chips
for a lot of global tech companies,
including Apple and Nvidia and MediaTek.
So when TSMC has a shortage,
entire industries shut down.
And this dependency on Taiwan worries western countries.
The other concern that has been voiced by others
is the fact that China claims Taiwan,
which is a democratically self-governing island.
China has always said it wants to take over Taiwan
by force if necessary.
But China's also worried
since they too rely on Taiwan,
which has strong ties to the U.S., for their chip imports.
The result of all this:
multi-billion-dollar plans by multiple countries
in a race to dominate
the mother of all cutting-edge technologies.
The transistors which give chips their functionality
are small, very small.
The way to measure a size in the chip industry
is in nanometers.
These are billionths of a meter.
The current state of the art is 5 nanometers.
They are smaller than a virus.
Very soon, we're going to get to the point where
these layers of materials that we use to build up
a transistor on a chip are going to be an atom thick.
Once we get to that point, we can't make them any smaller.
The smaller transistors are
the more you can fit into a chip,
which in turn will offer more computing power.
But making these chips has gotten so incredibly
complicated and expensive
that it's difficult to keep up.
That's why the number of manufacturers
at the industry's cutting edge
has fallen from over 25 in 2000,
to just three.
There are fewer and fewer companies actually
producing leading-edge silicon for a very simple reason.
You need $15, $20 billion to build
just one semiconductor factory,
and that factory is obsolete within five years.
That means you need to be running that plant
24-7.
It needs to be producing
hundreds of millions of devices a year,
and those devices need to be selling at a very high premium,
otherwise you're losing money.
And there are really only a few companies that understand
the brutal, you know, economics of the industry
and that they can play that game and win.
But now the American champion, Intel,
has shown signs of a slowdown.
Although it's dominated the industry for the last 30 years,
it's starting to fall behind in manufacturing.
And it's announced that, like everyone else,
it may start outsourcing some of its work to TSMC.
What's really changed though over the last decade
is that you've had what's called the birth
and the growth of foundries.
These are companies that specialize only in manufacturing
and take designs from other companies
and make them with the best process technology.
In the past, they couldn't really keep up with Intel.
But now, particularly TSMC
and to a secondary extent Samsung,
have actually got ahead.
The net result of that is that a company like Qualcomm,
a company like Apple, can design a processor,
send that design around the world electronically
and have that design made into a piece of silicon
on a more advanced process.
By volume, South Korea's Samsung
actually makes more chips than any other manufacturer.
But the company mainly focuses on memory chips
rather than the custom-made logic chips
that companies depend on TSMC for.
Everybody wants TSMC to do their best stuff
because TSMC are better at it.
It's simple as that.
The economics and the technology...they've won.
Above 30% of the most advanced logic
is done in those factories in Hsinchu by TSMC engineers.
Both Samsung and Intel have recently announced
multi-billion-dollar investments in the foundry business,
although they won't be a threat to TSMC for years to come.
But whether it's South Korea, the United States or Taiwan,
China's relationship with all three is less than ideal.
Not to mention a lot of the equipment
and software provided to TSMC and Samsung
to manufacture chips
is made by U.S. companies.
There are only a select few companies
that can make these machines
that scrape off these fine patterns with ultra UV lasers.
You know, this is science fiction-level technology.
Applied Materials here in California, KLA-Tencor,
lots of these companies that you've never heard of
are absolutely crucial in the supply chain
in making these machines that then translate
into these multi-billion-dollar factories that make chips.
And the U.S. has leveraged its position
to enact sanctions on China,
banning the country from using U.S. technology
out of security concerns.
So we're all familiar with the example of Huawei,
whose smartphone business has basically been
essentially obliterated by U.S. sanctions.
Whether it's software, whether it's actual chip components,
materials that go into chips
or equipment that you use to fabricate chips,
all of that is technically banned.
The American tech embargo
began as an effort against Huawei over national security,
but bans and restrictions now affect at least 60 firms.
These include SMIC,
China's chip champion, which has been put on a blacklist.
At the end of 2020,
TSMC sales to Chinese clients dropped by roughly 70%.
And for the first time ever,
Huawei reported a drop in revenue.
I think China's rise as a superpower in technology
is regarded as a threat
to very fundamental American interests.
They are military foes,
and the last thing Washington wants
is also to see a technological foe with the wherewithal
or the capabilities to wage technological warfare
on the United States.
But U.S. sanctions might not be
such a simple solution.
China is the largest purchaser of chips in the world,
as well as a manufacturer of less sophisticated chip
for companies like Qualcomm and other American companies.
Bear in mind that a lot of American businesses
rely on China for growth.
So there is very strong pushback from the private sector
to allow the flow of American technology to China to resume.
But if you look at the overall picture,
I think the Biden administration shares
the Trump administration's objectives
in curtailing China's rise as a technological power.
And that's because that would have ramifications
for really long-term strategic goals.
We're investing aggressively in areas
like semiconductors and batteries.
That's what they're doing and others.
So must we.
But cutting China out completely isn't an option.
Since much of the world depends on China
to manufacture most of their electronics like iPhones.
A chip designed, say by Apple in Cupertino in California,
will be made in Taiwan,
then packaged into something that's going to end up
in an iPhone in the Philippines.
That chip then makes its way to China
where it gets plugged into an iPhone.
That iPhone then gets on a plane and gets sold in Europe,
or maybe even comes back to Cupertino
and get sold in the Apple store.
So the semiconductor supply chain
is arguably one of the most complex
and widely geographically spread supply chains in the world.
From Beijing's perspective,
U.S. sanctions are a way to keep China
at the bottom end of the supply chain,
forever stuck as a low-tier manufacturing hub.
That's why China is determined to become self-sufficient
and is shifting into its highest gear.
During its annual NPC meeting in 2021,
President Xi Jinping pledged $1.4 trillion
to accelerate their tech industry
and become totally independent from foreign technology.
One of the announcements that we've seen come out
since the NPC has been SMIC,
China's top chipmaker,
signing an agreement to build
a $2.5 billion semiconductor foundry,
or manufacturing plant with Shenzhen's government.
And I think you'll see more of those
private-public partnerships,
where a private giant or entity, such as SMIC,
drives more efficient private capital
into national objectives.
SMIC, or
Semiconductor Manufacturing International Corporation,
is China's largest foundry.
Although it's still decades behind Taiwan's TSMC,
China has shown its ability to throw money
and human resources at the development of mega projects.
But the chip industry isn't quite the same thing.
There have been numerous failures
in terms of China's domestic chip development effort.
SMIC is an example of a success
but have been plenty more that have fallen by the wayside.
Literally hundreds of much smaller corporations
that you and I have never heard of
that raised capital but ultimately failed
to deliver on its goals.
TSMC has shown
it takes much more than capital and human resources.
It takes time.
So TSMC was founded in 1987.
And it has spent more than 30 years
in developing and creating its own manufacturing technology.
It is just not very likely that you can create
a comprehensive semiconductor ecosystem overnight.
And unlike the U.S. or China,
Taiwan's economy is largely built around semiconductors.
TSMC is located in the small town of Hsinchu,
which hosts a whole ecosystem of other well-established
chip manufacturing and packaging companies.
And the industry also attracts Taiwan's best talent.
One of Taiwan's best-paying industries
is the semiconductor industry.
So with that incentive,
a lot of school children would see
the electrical engineering or anything that's related
to the semiconductor manufacturing as their top choice
when they decide on which university departments
they want to go to.
So in the U.S. you have students
choosing to study computer science
or other subjects that would be more related to the skills
that big tech companies like Google or Amazon require.
Likewise in China,
students are much more likely to be attracted by companies
like Tencent, Baidu and Alibaba, or make their own app.
One of the things that Chinese officials
in recent years have been stressing
it's fine to build a world's best food-delivery app.
But at the same time you need also
to be able to attract talent into areas, such as AI,
quantum computing, basic scientific developments,
what we call the hard sciences or hard tech.
To counter the lack of talent in the field,
China's been recruiting talent from abroad,
which has been controversial in Taiwan and the U.S.
considering China's history of taking intellectual property.
China has been hiring aggressively from Taiwan
over the past few years.
And what the U.S. may be concerned
is these people may bring their know-how to China
and help China build up a semiconductor industry
more swiftly and more effectively.
And there is actually a well-known IP theft case.
The U.S. memory maker Micron has sued Taiwan's UMC
and a number of engineers.
Micron alleged that some of these engineers formally
have some know-how from Micron to help UMC's Chinese partner
to build up their memory chips in China.
But all these resources and talent
still don't necessarily equal success.
To make a profit, companies like TSMC
have a huge amount of orders
from a diverse number of clients,
and that also takes years to build up.
So, if Taiwan was suddenly cut off,
by a China invasion, for example,
there is no TSMC replacement.
Let's say if Apple decides to find another partner,
it will take years for them to get this other chipmaker
to be ready, if at all.
So without TSMC,
you will not be able to have chips in your iPhones,
and you will not have chips for your F-35 fighter jets
that the U.S. flies.
So it will be a very different world we are talking about
without TSMC in it.
This choke point came to light
during the pandemic when a chip shortage
cost the auto industry billions of dollars.
Yeah, the pandemic has been a fascinating story
and arguably
a turning-point moment for the semiconductor industry.
Dial the clock back a year ago to early 2020,
and the forecasts were dire.
Economic activity around the world in the pandemic
was going to come crashing down,
and that was going to kill demand for semiconductors.
What really happened though
was as we were locked in our homes,
studying and working from home,
we felt an increasing need for the electronic services,
for the electronic devices
that had been around us all the time
but we felt much more intense need for them.
And that had a knock-on huge effect
in creating demand for semiconductors.
Roll the clock forward to where we are now,
demand has come surging back.
And it's come surging back in sectors where
it really wasn't expected to.
For example, the automotive industry, which thought that
essentially the world was ending,
that there was no demand for cars
and they were going to have to shut plants down.
They are having to shut plants down
because they can't get enough chips.
This prompted the U.S. to sign deals
with TSMC and Samsung
to build factories on their own turf.
If we see what's being billed as a
an electronic Cold War fully materialize,
that China goes its own way in technology,
that Europe and the U.S. go in another direction,
then perhaps it makes increasingly more economic sense
to have facilities here.
The biggest economic choke point
of the 20th century may have been oil passing
through the Strait of Hormuz,
but now it's microscopic silicon transistors
manufactured in Taiwan.
But while the U.S. and China
are fighting for control of the technology,
they still depend on each other for the most part.
The trade war really is a case of
be careful what you wish for.
The chip industry brought attention to itself and lobbied
for action against China for years, on IP protection.
Now that it's happened,
they're not happy with the situation.
Why are they not happy with that situation?
Because they depend upon the Chinese market.
It's the fastest-growing, biggest market.
They need to be able to sell chips into China.
Right now, China needs them.
China needs what they're producing.
Massive wake-up call for China,
massive call to them
to show that they need to be independent.
The worst-case scenario for the U.S.,
is that China makes that leap.
That this next five-year plan
or the five-year plan after that finally hits home,
Chinese chip manufacturers emerge
and become competitive to Intel, to Nvidia, to Broadcom,
to what Apple can produce inside.
The worst-case scenario,
at least from a globalist's point of view,
is bipolarization of the world,
where you have U.S. and China and countries around the world
lining up behind one or the other.
It's not good for a lot of things,
just starting simply with global trade.
But if I may be allowed to wax lyrical for a second,
it ain't good for the advancement of humankind.