China-US chip battle: When buyer becomes competitor

Intel CEO Brian Krzanich was then the chairman of the Semiconductor Industry Association (2015). Naturally, he regularly traveled to Washington, where he made the usual business demands such as tax cuts or loosening regulations. But that year he stopped asking for business benefits, saying directly, “The way China is rushing to take over our chip industry is dangerous for America. We need to take action now.”

At that time, China was the biggest market for almost every US chip company. Almost all of the world's electronics assembly was done in Chinese factories. US companies were making huge profits by selling chips directly to China. But at the same time, China was secretly trying to remove US companies from its supply chain. Beijing announced a huge aid package of about $250 billion just to build its own chip industry so that it would no longer have to rely on America.

American companies, despite understanding the situation, were unable to say anything publicly. Because China was their biggest customer. They had only one fear: if they made a noise, China would get angry and close the business!

Anxiety began to grow within the US government. The Commerce Department saw that China was violating international rules with subsidies. The Pentagon feared that China would use these chips to make advanced weapons. Intelligence agencies found evidence that China was using its companies to drive American competitors out of the market.

Meanwhile, the old US chip industry slogan was still alive and well—“Globalization is the solution.”

But the reality was different. The most difficult part of chip making—fabrication—had almost entirely gone to Taiwan and South Korea, especially TSMC. America’s once-strong position—manufacturing, lithography, and other key technologies—was all but fading. And Washington still believed, “The market will fix everything.”

By the end of 2016, Americans were beginning to realize that things were not as they had been before. Secretary of Commerce Penny Pritzker pointed the finger directly at China, accusing it of unfair trade policies and state-sponsored takeover attempts. The White House also released a major report on the future of the chip industry. But the report almost silently ignored how weak the global supply chain had become, and how Taiwan-centric production had become. Everyone in America was still using peaceful words like “globalization” and “multilateralism.” No one seemed to understand the real crisis.

National security officials deep in the government viewed the matter much more cautiously. They believed that China’s strong position in the electronics supply chain increased the risk of espionage or backdoor use. Huawei and ZTE were rapidly capturing markets around the world. US intelligence had long said that Huawei had close ties to the Chinese government. In addition, ZTE and Huawei were accused of selling banned equipment to Iran and North Korea. The Obama administration restricted the sale of US technology to ZTE. This move was a death knell for ZTE. In March 2017, they settled the matter by paying a fine.

The chip companies sought government help but kept quiet to avoid China’s wrath. They did not want major changes to the global supply chain. Publicly, they said it was better to get along with China. But behind the scenes, they admitted that China’s state-backed companies could eventually sink them. According to US security officials, if the government did not intervene, American chip companies would gradually transfer all their knowledge, technology, and human resources to China. So they pushed for stricter export controls.

In April 2018, the US learned that ZTE had lied again and violated previous conditions. This time, Commerce Secretary Wilbur Ross got tough and quietly imposed another ban on ZTE. ZTE immediately stopped getting American chips, and its survival became virtually impossible.

But President Donald Trump did not see the issue as a technology security issue. For Trump, ZTE was simply a bargaining chip for trade deals. When Xi Jinping urged him, Trump tweeted that he wanted to save ZTE, otherwise many jobs would be lost in China. ZTE paid another fine, and the US revoked its permission to buy American technology.

But one thing became clear from the incident: any global tech company could collapse if it did not get American chips. Semiconductors are not only the foundation of the digital age, but they are now the most powerful economic and geopolitical weapon in the world.

(Adapted and abridged from Chris Miller's groundbreaking book, Chip Wars, Chapter 49, "Everything We Are Competing On")

About the Author:

Mahmud Hossain, a BUET graduate, has over three decades of leadership experience in Bangladesh’s telecom and ICT sectors. He played a key role in introducing mobile technologies in the country. He now serves as a Commissioner at BTRC, following senior leadership roles in several national and multinational industry-leading companies.