China vs the US: who will win the chip war?

There is a joke in Taipei that if China invades Taiwan, the best place to shelter will be in microchip factories, because they are the only places the People’s Liberation Army can’t afford to destroy. The country that controls advanced chips controls the future of technology – and Taiwan’s chip fabrication foundries (‘fabs’) are the finest in the world. Successful reunification between the mainland and its renegade province would give China a virtual monopoly over the most advanced fabs. Given Xi Jinping’s designs on Taiwan, it is no wonder that the US government is worried.

For this reason, in recent months the United States has taken various steps to thwart China’s attempts to make advanced semiconductors. New fabs are technically challenging to build, and eye-wateringly costly. A recent study by Boston Consulting found the cost of a large chip plant is now more than a next-generation aircraft carrier or a new nuclear power station. In Taiwan, Fab 18, which was built for the production of advanced chips, cost US$17.5 billion.

The US attack on China’s bid to dominate future technology is twofold. The first part of the strategy is to rebuild America’s share of the global chip fab business, which has fallen from a peak of 37 per cent in 1990 to just 12 per cent now. Last month, Joe Biden signed an Innovation and Competition Act with an extraordinary $52 billion to finance technological research and the fabrication of chips in the US. The EU is making similar noises, but America has made it a national priority.

It’s an attempt by Biden, supported by the Republican party, to reverse the hollowing out of US manufacturing – and is a policy that was first identified and pursued by President Trump. With bipartisan support, the new Act specifically aims to punish US companies that invest in China especially in areas where there is a struggle for supremacy, such as chipmaking.