Legendary venture capitalist and software wizard Marc Andreessen famously said that “software would eat the world”. He wasn’t wrong but he took for granted one “minor” detail, i.e. that the enabling hardware—semiconductors– would always be there. And thanks to Moore’s law, the hardware was ever improving at rate which doubled every two years and was there to satisfy  software’s feeding appetite. In my opinion, even when Moore’s law reaches its physical limitations, semiconductor progress will continue. But the progress will be faster so long as the industry is market driven and nationalism does not intervene.

China has just launched a manned space station and put up a technically superior satellite system called BeiDou. It is reputedly superior to the US GPS system. China has covered its territory with high speed trains. Something the US cannot seem to do.  China has a number of technological achievements to its credit. But for some reason China has shown a pronounced inability to manufacture advanced semiconductors. In the semiconductor area, the Chinese have a record of one huge expensive failure after the other.

Starting under Trump, the US government belatedly discovered that it could punish China by embargoing the sale of semiconductor chips to key Chinese companies. The embargoed chips typically weren’t actually manufactured in the US but no matter. The US has the world’s largest military, with eleven nuclear powered aircraft carriers and bases all around the world. As Chairman Mao once supposedly said, “All power flows from the barrel of a gun.” Added to that, the US currency, the dollar, is the world’s number one medium of exchange for international trade and the world’s number one reserve currency. If it doesn’t like a country, US can seize a country’s reserves and block its dollar transactions. It can put companies and countries out of business.

When the US told ASML, a Dutch company, that it could not export its EUV equipment to China’s Semiconductor Manufacturing  International (SMIC), ASML obeyed. SMIC is China’s only major fab producing logic chips. EUV is a type of lithography equipment absolutely critical in the production of state of the art 5 nm (nanometer) or less semiconductors. ASML is the world’s only manufacturer of this equipment. SMIC, which can’t produce 5nm chips anyway, for now is out of luck.

With Friends Like the US, Who Needs Enemies

In addition to its growing awareness of the importance of semiconductors to China, thanks to the Covid virus the US has been sensitized to the reality of supply chains . The US has become alarmed that so many tech products come from Asia and are therefore vulnerable to Chinese pressure. In a 250 page report released on June 8, US officials produced a comprehensive picture of the country’s supply chain vulnerabilities in four key areas: semiconductors, battery technology, pharmaceuticals and minerals. Tech suppliers in Taiwan, Japan and South Korea—all American allies– have been bracketed alongside China as dangerous risks to US national security. Tech suppliers in Asia are being urged to on-shore in the US.

Needless to say, if carried out this on-shore policy will be a giant step in the direction of economic inefficiency. The market put these tech suppliers in Asia because it made economic sense to do so. It’s kind of ironic. In America Asian Americans have been accosted on the street with words like “Go home.” Now the US is accosting Asian tech manufacturers with the words “Go back”. Such a policy if successful would result in a considerable hollowing out of US allies’ economies.

In conjunction with this supply chain paranoia, the US is planning to pour government money into domestic production of semiconductors. The number $50+ billion is tossed around depending on the final version of the infrastructure bill. But Taiwan Semiconductor and Intel have already announced they will build fabs in Arizona. They apparently weren’t counting on a government handout.  Intel actually announced it would build two. State of the art fabs cost some $15 billion. These are cash rich companies. Making chips is a difficult manufacturing challenge. You have to ask what companies are going to get the government money. This is an industry of a few megafirms which alone have the knowledge and skill to run a fab.  They don’t need handouts.

Undeterred by the new US attitude that all of Asia is a security risk, the governments of South Korea and Japan are apparently planning measures to support semiconductor investments. According to Nikkei Asia, the South Korean government announced that South Korean firms (Samsung and SK Hynix) would invest $451 billion in semiconductors through 2030. The government would provide beefed up tax benefits. This is industrial policy gone global.

And of course there is China. China is desperate to catch up and reportedly is throwing money at the problem. According to some reports there are over a thousand Chinese semiconductor firms most of which will fail. Some commentators have compared the multitude of these Chinese chip startups with the infamous backyard steel furnaces during the Great Leap Forward. As long as the US retains its embargoes, I don’t see China becoming a major factor in the high end of the market any time in the near to intermediate future.

All of this is potentially bad news for some market favorites. Take Taiwan Semiconductor. This company in many ways is the most important company in the entire world. Although Samsung is a worthy competitor, no other company can produce state of the art 5nmn (or lower) chips in volume. If Taiwan Semiconductor suddenly disappeared, the world would abruptly enter a recession. But US pressure has forced it to stop exporting to key customers in its biggest market, China. At the same time the company is being pressured by the US to build a fab in Arizona which it is doing despite the misgivings of its founder Morris Chang. Finally it has to compete in a world where Asian governments are throwing money at its competitors.