Microchips Are the New Oil: Scarce, Essential and a Source of International Conflict
- The worldwide microchip shortage first came to light during the pandemic, as supply-chain issues dogged almost every industry. But Chris Miller, the author of the book “Chip War: The Fight for the World’s Most Critical Technology,” says the semiconductor industry is particularly vulnerable.
- The manufacturing process necessary to make microchips (which are in everything from cars to iPhones to nuclear weapons) is complex. The machinery, supplies and hardware are controlled by just a handful of companies in the U.S., Asia and Europe.
- The backdrop to these supply-chain and manufacturing problems? Escalating tensions between America and China, as well as a host of other geopolitical relationships that complicate microchip production. At stake: Nothing less than global economic and military dominance.
We tend to think of petroleum as the epitome of a scarce resource on which the modern world depends. But in his book “Chip War: The Fight for the World’s Most Critical Technology,” economic historian Chris Miller argues that there’s another vital, precious resource with an even more profound impact on our lives.
His thesis? “Microchips are the new oil.”
Chris, an associate professor of history at Tufts University, believes that there’s no other item with a greater influence on globalization and international politics. And, as he claims in the book, recently named the Financial Times Best Business Book of 2022, the microchip is “the most complex piece of machinery ever assembled by humans.”
The complexity of microchips goes beyond the labyrinthine patterns carved into tiny pieces of silicon. The entire supply chain and manufacturing process relies on a handful of companies that produce the machinery, software and materials necessary to create microchips.
Just one company makes the equipment required to manufacture the latest iterations of the microchip, which are found in every new iPhone and high-end laptop — and, crucially, the supercomputers that are essential for AI innovation. Another company dominates the actual manufacturing of these chips. Of course, there’s a healthy dose of geopolitical tension between the countries these companies call home. And the nation that wins the international “chip war” will almost definitely emerge with military and economic superiority. Put simply, any global superpower needs to have access to, and preferably control of, every aspect of making microchips.
But how do chips work, exactly? Why are there so few companies involved in the manufacturing process, and how did that happen?
From cars, household appliances and smartphones to the stock market, military weapons and the electric grid — modern life practically runs on chips. So every investor should better understand the dynamics of an industry that powers just about everything else.
Chris Miller joined host Kevin Coldiron on an Ideas Lab installment of Top Traders Unplugged to talk about the tiny but mighty pieces of silicon that make the world go ‘round — the technology, the history, the power players and the geopolitics. Read on for a high-level overview of their discussion — and take notes.
Four-circuit chips to billions — in your pocket
“The words semiconductor, [micro]chip, and integrated circuit are all used basically interchangeably,” says Chris. “They refer to the same thing, which is a piece of material, usually silicon, that has lots of little transistors carved into it. A transistor is just a small circuit that’s either on or off. If it’s on, it creates a one; if it’s off, it creates a zero. And all of the ones and zeros undergird all data in computers — all software, all programs.”
These ones and zeros (aka binary code) don’t just exist ethereally in the cloud, he adds.
“The process of getting access to more computing power is quite simply the process of carving more circuits into silicon chips.”
The first commercially available chips, which came on the market in the 1960s, had just a handful of circuits on them.
“They could remember four ones or four zeros at a time,” Chris explains. “Whereas today, if you go to the Apple store and buy a new iPhone, you’ll get 15 billion of these transistors on just the main chip. And there are actually many chips inside of an iPhone.”
The transistors invented over half a century ago were so large, you could see them. But today, each of the transistors on an iPhone are the size of a Coronavirus — “carved by the millions with basically perfect accuracy every single day,” he adds.
This increase in the number of transistors a chip can hold (and therefore the number of ones and zeros a chip can process) drives the exponential, ongoing growth in computing power we call Moore’s Law. And in order to put more transistors on a chip, the chips continue to shrink. Now, chips can (and are) embedded in virtually every product that uses technology.
‘Choke points’ in the chip supply chain
In the book, Chris explains the typical process for creating a chip is labyrinthine and prone to what he calls “choke points.”
The process might start with a blueprint from a U.K.-based firm, which is then designed using software created by U.S. firms and programmed by Israeli engineers. It might be manufactured at a facility in Taiwan that buys gases and silicone from Japan. The designs will be carved by precise equipment made by one of the five companies that make it: a Dutch company, a Japanese company or any of the three companies in the U.S. Each chip, once manufactured, is packaged and sent to Southeast Asia for testing before getting sent to China for assembly into a product.
Chris defines a “choke point” as a part of a production process that’s difficult to find a way around, whether that’s because of the lack of alternative suppliers or because of the intricate nature of manufacturing. There are so many choke points in the chip supply chain because making chips “is just extraordinarily complicated,” he explains.
“The process of moving from four transistors per chip in 1960 to 15 billion or so today required extraordinary specialization … in software tools, in the chemicals used, in the machine tools used to manufacture chips. In order to produce the precision required, specialization has been the only way to move forward.”
Shining a light on lithography
What does that specialization look like and why is it a problem?
The companies that produce silicone have only been able to make it 99.99% pure by focusing solely on the process of purifying silicone — “and the same thing is true for all the other steps,” Chris notes. “We’ve needed that precision enabled by specialization, but the effect of it has been to leave expertise in each part of the production process in the hands of just a couple of companies or, in some cases, just one company.”
He thinks the best way to understand the increase in precision is by comparing the process and equipment involved in making a ‘60s-era four-transistor chip with the process today. Both use a process called lithography, which is essentially shining light in a specific pattern onto a silicon chip. The light reacts to chemicals and allows the manufacturer to create shapes on its surface.
As Chris explains, chip pioneer Bob Noyce (the founder of both Fairchild Semiconductor and Intel, who “more than anyone else created modern Silicon Valley”) created his own lithography tools to manually make chips — with a 20-millimeter camera lens he bought from a local film shop. Today, a cutting-edge lithography machine costs $150 million. Each machine is so massive it “takes multiple 747s” to transport and features what Chris calls “the flattest mirrors ever made.”
The evolution from a 20-millimeter, off-the-shelf camera lens to today’s advanced lithography machines “is just one example of the huge jump in precision that has been necessary and possible for producing chips,” he says.
ASML: The European powerhouse
The fastest semiconductors were once (not that long ago) made in the U.S., but America can no longer make that exclusive claim. And while only a few companies are responsible for most parts of the chip-manufacturing process, just one makes the revolutionary EUV lithography systems capable of mass-producing patterns on the fastest, latest and greatest chips: ASML, which originally stood for Advanced Semiconductor Materials Lithography and is headquartered in the Netherlands.
ASML spun out of Dutch conglomerate Philips in the mid-1980s. Today, it’s the most highly valued tech company in Europe, with a $200 billion market cap. That’s for good reason: ASML has “100% market share,” says Chris. “And I think they will for a very long time. Their machines are critical because you can’t make an advanced chip without them.”
That’s good news for the people of ASML and its shareholders, but it’s clearly a choke point — and less than ideal for one manufacturer to supply the equipment that makes every chip on earth. It leaves those who need chips (so … pretty much everyone) vulnerable, even superpowers like the U.S. and China.
TSMC: Taiwan’s pride, big business for Arizona
TSMC (Taiwan Semiconductor Manufacturing Company) is another choke point in the world of chips — and one readers might recognize, since President Biden recently met with the company’s chairman, Mark Liu, at its facility under construction in Phoenix, Arizona. At that event, Liu announced TSMC will build a second semiconductor factory in Arizona and raise its investment there from $12 billion to $40 billion.
TSMC’s foray into manufacturing in America is the result of political pressure — and plenty of incentives. The new factories are an outcome of Biden’s $200 billion CHIPS and Science Act, which focuses on technology as economic opportunity, especially in underserved communities. But welcoming a Taiwanese manufacturer to the U.S. is also a strategy to ensure America’s share of chips in the midst of a global shortage that could get even worse.
TSMC was founded by Morris Chang, who Chris thinks is “the most underrated and underappreciated businessman of the last century.” Born in China, Chang fled his homeland during the Communist revolution, went to Harvard and rose to the top of the tech industry in the U.S. He was famously passed over for the CEO role at Texas Instruments in the 1970s. That’s “one of the greatest errors TI ever made,” Chris adds. “It could have been that TSMC stood for Texas Semiconductor Manufacturing Company … and the world would look very different today.”
But the Taiwanese government “swept in and offered him, essentially, a blank check” to build a new business there in the mid-1980s, says Chris.
The foundry model and why it won
Back then, almost all chips were both designed and manufactured by the same companies. But Chang realized as chips became more complex, doing both would become more difficult (and expensive). He “envisioned a world in which companies that design chips wouldn’t have to worry about manufacturing,” Chris explains. “They wouldn’t need the expertise or the capital investment required, because they could outsource manufacturing to a firm that focused solely on manufacturing. Today we call those firms foundries — companies that manufacture chips but don’t design any. And today, there are a number of companies that use this foundry business model.”
Chang launched TSMC as a foundry in 1987, which “proved to be the right business model because it let him sell chips to multiple different customers,” Chris adds. “Which let him build on a huge scale, reaping efficiencies both in terms of purchasing equipment and materials, but also in terms of honing its technology … Today, TSMC has the world’s most advanced manufacturing processes, in no small part because it’s the world’s largest chipmaker.”
That means we all use TSMC-made chips every single day in our smartphones, PCs, even our dishwashers and microwaves. Chris says one-third of the new computing power the world adds each year comes from chips produced by TSMC.
Chips across America
Back on American shores, Intel, the most prominent American chipmaker, struggles to turn itself around. Although it has been immensely profitable over the past several decades, Intel “missed a couple of key technological transitions,” says Chris.
“When Steve Jobs approached Intel and asked the company to produce chips for iPhones, Intel turned it down, thinking that smartphones would be a niche product with low margins … Then when it came to the rise in chips for artificial intelligence about a decade ago, Intel was late to the game on that, too.”
That’s why Intel has been losing market share to competitors like TSMC and South Korea’s Samsung.
But the bright spots in the stateside semiconductor industry are in the realm of design. NVIDIA designs chips that power AI (manufactured by TSMC) and Apple, which is one of the world’s largest chip designers, because it designs many of the chips that power its devices in house. “Apple has never had to manufacture a single chip, because it too, can take its designs to TSMC in Taiwan and get them all manufactured.”
While TSMC continues to grow, political strife between Taiwan and China threatens to make its dominance a considerably more vulnerable choke point. Meanwhile, tensions remain high between the U.S. and China.
What will the future look like for the chip business? Lucrative, certainly. Resilient? Let’s hope so.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.
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