Comment

US-China tensions detonate into global chip battle

These tiny components are the building blocks that drive our modern world

Huawei
The US has been trying to cut off the supply of essential components and funding to Huawei and other Chinese companies under the banner of “national security”

When Beijing decided that China needed to become an atomic power in the Sixties, its centrally planned state directed significant resources and resolve into developing a nuclear deterrent.

Within 32 months of its decision to “go nuclear”, China had detonated an atomic bomb, launched its first nuclear missile and exploded its first hydrogen bomb.

After Donald Trump’s attack on its technology industry, China’s politburo is planning to direct its energy towards another technological goal, this time in the field of semiconductors. The move could secure the country’s position at the vanguard of 5G technology – but means the chip war is now becoming deeply embedded in global trade.

In the future, there will be chips with everything. A microchip is basically a set of electronic circuits on a small piece of semiconductor material. These tiny components are the building blocks that drive our modern world – and China is about to throw everything it can into the development of third-generation semiconductor materials.

These components will be better in terms of speed, size and heat dissipation. They will make electronic devices and internet communication much more powerful and efficient – with greater functionality than we see today. They will be essential building blocks of 5G communication systems and the resulting “Internet of Things” (IoT) that will emerge.

The industry believes that, with the development of technology, the third generation of chips will completely replace the first and second-generation semiconductor materials that are still in use today.

The development of the IoT will see chips embedded in billions of everyday objects. These will allow devices such as vehicles, fridges and cooling and heating systems to become “smart”. The chips can send and receive data which can be used for remote management by human or artificial intelligence.

It will eventually be used to develop sensing systems for self-driving cars – and even managing whole cities’ traffic systems and peak energy demand. Just as we have become reliant on the benefits of smartphones in our everyday life in less than two decades, the benefits of the IoT look likely to be assimilated into everyday life over the next 20 years or so.

Since Chinese business Huawei managed to leapfrog the US in the development of equipment such as antennae for 5G infrastructure, America has been trying to cut off the supply of essential components and funding to Huawei and other Chinese companies under the banner of “national security”. The main aim, however, is to prevent China making further progress in developing the infrastructure that will drive the world of tomorrow.

Measures to boost semiconductor research, education and financing have been added to the draft document that will become China’s 14th five-year plan. This will be presented to the country’s great and good in October for approval, according to news agency Bloomberg. Beijing is fighting back against Washington’s war against Huawei using its tried and tested techniques.

It wants to harness the anger in China over US sanctions and actions – directing the energy to motivate its citizens to meet specific technological goals.

Conflict and competition have always driven innovation. The Second World War saw the development of rocket technology that would eventually allow a jump into space.

Without the battle for ideological supremacy between Moscow and Washington in the mid-20th century Cold War, the technology-driven race that propelled humanity to the moon is unlikely to have happened so quickly, if at all.

This week’s semiconductor briefing from Chinese authorities appeared to specifically want to draw parallels with the country’s development of the atomic bomb. Pointing to its success in this major geopolitical race, Beijing clearly wants to remind Washington that its centrally planned model can have a significant advantage when the planners set a direction and its people are properly motivated. Trump’s trade tactics against Chinese technology companies – and the implications for China if these tactics are a success – look like they have provided all the motivation that Beijing needs.

Meanwhile, amid the uncertainty created by political manoeuvring, the semiconductor industry waits and prepares. According to Dan Hutcheson, chief executive of semiconductor market researcher VLSI Research, the ban on Huawei has triggered a large inventory backlog in the entire chip industry.

He also said that the planned government assistance to try to encourage US manufacturers to build chip factories in America fell far short of what was needed.

A bi-partisan committee has proposed $28bn (£21bn) in funding to encourage chip plants to be built on home ground – but building just one plant can cost upwards of $15bn.

Hutcheson thinks this needs to be doubled to have any major impact. So, it seems unlikely to be a knockout blow in Washington’s attempts to lure the centre of global chip manufacturing away from Asia and into the US.

Of course, US chip suppliers could see a boost in demand if sanctions are tightened against China. However, the bigger issue will be “if they get locked out of China’s market, while the door remains open for other countries”, Hutcheson believes.

So, while officials in Beijing are busy formulating the hard details of the country’s next five-year plan – essentially “a super-policy package” that identifies and sets targets for strategically important projects – Washington is distracted by campaigning for November’s presidential election.

The American strategy of trying to starve the Chinese industry of components and funding is driving a new technological race between global powers with a conflicting ideology.

This may ultimately accelerate technological development, but it will certainly push us closer to a major digital divide between East and West. The global internet appears to be getting more fractured by the week.

 

Garry White is chief investment commentator at wealth management company Charles Stanley