The Chip Wars
In light of the rapid pace of technological advancement and all the hype surrounding Artificial Intelligence (AI) lately, it is clear that the colossal Fourth Industrial Revolution has only just begun.
Also known as Industry 4.0, this buzzword was coined in by Klaus Schwab, founder and executive chairman of the World Economic Forum, and describes a new era characterised by four foundational types of disruptive technologies expected to fundamentally transform the way we live and work: connectivity, data, and computational power, advanced analytics and intelligence,1 human- machine interaction, and advanced engineering. Notable applications of such technologies include blockchains, machine learning, virtual reality (VR), and renewable energy—the stuff everyone hears about nowadays.
In his book published in 2016, The Fourth Industrial Revolution, Schwab highlights the geopolitical concerns that this new technological revolution brings, in terms of shifting global power dynamics as advanced nations leverage cutting-edge technologies to exert both hard and soft power.
A prescient warning indeed. In the last 2 years, Industry 4.0 has convinced policymakers in the US and China that global technological hegemony is critical to the future of economic and military power, and hence shifted simmering US-China tensions into the realm of high tech. So far, the US-China tech battle has seen Washington cut off China from accessing key technologies such as semiconductors, while China grows its domestic technological capabilities to achieve self-sufficiency and eliminate dependencies on US tech.
Recently, fears over a technologically enhanced Chinese military led the US and its allies to impose a series of trade controls to stifle China’s semiconductor industry (see figure 1) and the country’s ambitions of becoming a leader in AI. In retaliation, China announced in July plans to limit exports of gallium and germanium, two important metals used in the global semiconductor industry.
To better appreciate the significance of such manoeuvres, it helps to gain a deeper understanding of the semiconductor industry that lies at the centre of the tech supremacy race.
What are semiconductors? An Overview of the Global Semiconductor Industry
Semiconductors, also known as integrated circuits or microchips, are “enablers” of virtually all modern technologies. Semiconductors are used to make tiny electronic components which control the flow of electricity in specific ways, allowing these components to perform specialised tasks like storing data and making calculations. Hence, these chips are the building blocks for technologies such as automobiles, robotics, consumer electronics, networking platforms, medical devices, and military grade electronics.
Figure 1: Timeline of key developments in the US China tech battle
Since its establishment circa 1960, the global semiconductor industry has experienced exponential growth, characterised by Moore’s law (named after former Intel CEO Gordon Moore). This is an empirical observation that the number of transistors in an integrated circuit doubles approximately every two years, thus greatly increasing the chip’s computing power while reducing its cost. In accordance with this law, continued innovations produce ever more sophisticated semiconductors that power technologies of the future, such as Artificial Intelligence (AI), quantum computing and advanced wireless networks.
Currently, the global semiconductor industry is dominated by companies from the US, Taiwan, South Korea, Japan and the Netherlands. The industry’s supply chain is highly specialised, with only a few companies in the above countries manufacturing the most advanced chips used in supercomputers and AI.
As an industry laggard, China has made significant efforts to close the technological gap and develop an advanced domestic semiconductor industry capable of leading the next technological revolution. The heightened economic and technological rivalry with the US has put pressure on China to achieve self-reliance in this critical industry, as Chinese local governments ramp up cash incentives and investments to support domestic semiconductor firms. In February this year, the municipal government of Guangzhou invested a staggering 200 billion yuan (US$29 billion) to expand the city’s semiconductor and high-tech sectors.
Why curb these two metals?
Aside from their usage in manufacturing the most advanced semiconductors today, germanium and gallium, have niche applications in the military and emerging technologies – two key strategic sectors. Germanium is used in fibre optic cables that transmit data signals over long distances, high-speed computing chips, night-vision devices, and satellite imagery sensors, while also being a vital component in low-carbon technologies like solar cells.5 Compound semiconductors made from gallium and germanium based wafers are capable of resisting high frequencies, voltages, and temperatures, making them suitable for use in Electric Vehicles (EVs) and a range of highly advanced electronics. Hence, this export curb is a strategic move by China to block off international access to critical raw materials.
The consequences from China’s retaliation are multifaceted. A direct consequence of the gallium and germanium export restrictions is significant disruption to the production of a wide range of products such as chips, solar panels, and consumer electronics due to higher raw material costs. Gallium prices surged by 27% in the wake of China’s announcement as buyers attempted to stock up supplies before the commencement of export controls in August. Surging production costs undoubtedly lead to higher prices for end consumers. Moreover, the indispensable role gallium and germanium play in enabling rapidly advancing technologies such as AI and cloud computing means that China’s actions hamper the development of promising technologies that augment economic productivity and living standards.
In addition, the metal export curbs have initiated a scramble to seek alternative suppliers (in Japan and South Korea for gallium, and the US, Canada and Belgium for germanium) and likely accelerated ongoing efforts by many countries to diversify supply chains away from China to mitigate increasing geopolitical tensions and volatility. In response to the incoming metal restrictions, the EU consulted with Greek aluminium producer Mytilineos Energy & Metals on the possibility of producing gallium as a byproduct at its refineries.
Figure 2: Semiconductor industry 2022 outlook by McKinsey.
However, reducing export dependence on such a dominant supplier in China may only be economically viable in the long term, because enormous production volumes and economies of scale currently give Chinese material producers a cost advantage that is hard to beat. Furthermore, supply chain diversification is costly and time-consuming and hence does not mitigate short-term pains for importing countries.
On the other hand, Chinese firms suffer as well. Given that China accounts for 98% of gallium production and 68% of germanium production globally, Chinese firms will likely experience a significant dip in revenues from the loss of export customers.
More worryingly, China monopolises the production of other important raw materials deemed critical to emerging green industries. In particular, China controls more than 85% of production of rare earths, which are metals integral to supply chains of EVs and renewable energy production. Notably, China banned rare earth exports to Japan during a dispute over the sovereignty of the Senkaku Islands in 2010. In light of the ongoing battle against climate change, escalating geopolitical tensions may lead China to leverage this position again to choke off rare earths supply from the rest of the world, impeding the already arduous green transition.
This ongoing battle for tech supremacy certainly exposes the world’s over-reliance on China and underscores how geopolitics influence economic policies, especially those enacted by global superpowers which prove to be the most disruptive and damaging. It remains to be seen what the next moves will be from each side.
What is clear is that there can be no winners in the US- China tech war. At a time when the climate crisis facing humanity calls for greater cooperation among nations than ever before, resource hoarding is the last thing we need. To quote the philosopher Bertrand Russell, “The only thing which will redeem mankind is cooperation.” Only when these two superpowers work together to share technological resources and capabilities can we maximise global economic welfare and avert climate catastrophe.