How a chip war puts nations in a technology arms race

The crushingly complex, high-stakes business of making semiconductors has always been a battle between global giants. Now it is also a race among governments.

These critical bits of technology — also known as integrated circuits or, more commonly, just chips — may be the tiniest yet most exacting products ever manufactured. And because they are so difficult and costly to produce, there is a worldwide reliance on just a handful of companies.

That dependence has been brought into stark relief by shortages during the pandemic and by a ratcheting up of US restrictions on chip exports to China amid rising tensions around trade and security.

Tens of billions of dollars will be spent in the coming years in a dash to expand production, with geopolitical as well as economic fallout.

Why the war over chips? 

Chipmaking has become an increasingly precarious business. New plants have a price tag of up to US$20 billion, take years to build and need to be run flat-out for 24 hours a day to turn a profit.

The scale required has reduced the number of companies with leading-edge technology to just three — Taiwan Semiconductor Manufacturing Co (TSMC), South Korea’s Samsung Electronics and Intel of the US.

Chipmakers are under increasing scrutiny over what they sell to China, the largest market for chips. Shifts in the global supply chain and recent shortages has governments rushing to subsidise new factories and equipment, from the US and Europe to China and Japan. 

Why are chips so critical? 

They are the thing that makes electronic items smart. Made from materials deposited on disks of silicon, chips can perform a variety of functions.

Memory chips, which store data, are relatively simple and are traded like commodities. Logic chips, which run programs and act as the brains of a device, are more complex and expensive.

And as the technology running devices — from space hardware to refrigerators — is getting smarter and more connected, semiconductors are more pervasive in the modern world. That explosion has some analysts forecasting that the industry will double in value to become a trillion-dollar market this decade.

Is the world short of computer chips? 

Pandemic lockdowns and supply-chain shortages made many types of chips scarce for a period of about two years. That event helped usher in this new era, with an increasing realisation of their strategic importance. Now that PC and phone demand is cooling off post-pandemic — and much of the world is falling into a recession — the cycle has turned.

Chipmakers are warning of a glut in certain areas, though some customers including carmakers are still struggling to get enough. Yet for political reasons chipmakers are still poised to add capacity at a time of shaky demand – which could further upend the industry.