Almost everything we use depends on silicon
semiconductors called chips. From your iPhones, your
fridge, your air filter. The most advanced supercomputers, the most basic toaster ovens. What's turning on your indicators, what's turning on your radio in your car. That's a chip. Today, about a trillion
chips are made a year or 128 for every person on the planet. And China's government
is lending the industry the same strategic importance it gave to its atomic bomb program. It's arguably a lot more important because you are talking
about China becoming self-reliant on the technology that powers all of mankind's future
scientific advances. The key semiconductor is the advanced logic chip. It's the most expensive and
complex piece of silicon that gives computers and
smartphones their intelligence. This is the microprocessor
designed by Apple, designed by Qualcomm, are made by only a very few companies, and they're made on the very, very most advanced manufacturing. Right now, there's one
company that's crucial when it comes to making
advanced logic chips: Taiwan Semiconductor
Manufacturing Company, or TSMC. And it is a company that
makes customized chips for a lot of global tech companies, including Apple and Nvidia and MediaTek. So when TSMC has a shortage, entire industries shut down. And this dependency on Taiwan
worries western countries. The other concern that
has been voiced by others is the fact that China claims Taiwan, which is a democratically
self-governing island. China has always said it
wants to take over Taiwan by force if necessary. But China's also worried since they too rely on Taiwan, which has strong ties to the
U.S., for their chip imports. The result of all this: multi-billion-dollar plans
by multiple countries in a race to dominate the mother of all
cutting-edge technologies. The transistors which give
chips their functionality are small, very small. The way to measure a
size in the chip industry is in nanometers. These are billionths of a meter. The current state of
the art is 5 nanometers. They are smaller than a virus. Very soon, we're going
to get to the point where these layers of materials
that we use to build up a transistor on a chip are
going to be an atom thick. Once we get to that point, we
can't make them any smaller. The smaller transistors are the more you can fit into a chip, which in turn will offer
more computing power. But making these chips
has gotten so incredibly complicated and expensive that it's difficult to keep up. That's why the number of manufacturers at the industry's cutting edge has fallen from over 25 in 2000, to just three. There are fewer and
fewer companies actually producing leading-edge silicon
for a very simple reason. You need $15, $20 billion to build just one semiconductor factory, and that factory is
obsolete within five years. That means you need to
be running that plant 24-7. It needs to be producing hundreds of millions of devices a year, and those devices need to be
selling at a very high premium, otherwise you're losing money. And there are really only a
few companies that understand the brutal, you know,
economics of the industry and that they can play that game and win. But now the American champion, Intel, has shown signs of a slowdown. Although it's dominated the
industry for the last 30 years, it's starting to fall
behind in manufacturing. And it's announced that,
like everyone else, it may start outsourcing
some of its work to TSMC. What's really changed
though over the last decade is that you've had what's called the birth and the growth of foundries. These are companies that
specialize only in manufacturing and take designs from other companies and make them with the
best process technology. In the past, they couldn't
really keep up with Intel. But now, particularly TSMC and to a secondary extent Samsung, have actually got ahead. The net result of that is
that a company like Qualcomm, a company like Apple,
can design a processor, send that design around
the world electronically and have that design made
into a piece of silicon on a more advanced process. By volume, South Korea's Samsung actually makes more chips
than any other manufacturer. But the company mainly
focuses on memory chips rather than the custom-made logic chips that companies depend on TSMC for. Everybody wants TSMC
to do their best stuff because TSMC are better at it. It's simple as that. The economics and the
technology...they've won. Above 30% of the most advanced logic is done in those factories
in Hsinchu by TSMC engineers. Both Samsung and Intel
have recently announced multi-billion-dollar investments
in the foundry business, although they won't be a threat
to TSMC for years to come. But whether it's South Korea,
the United States or Taiwan, China's relationship with
all three is less than ideal. Not to mention a lot of the equipment and software provided to TSMC and Samsung to manufacture chips is made by U.S. companies. There are only a select few companies that can make these machines that scrape off these fine
patterns with ultra UV lasers. You know, this is science
fiction-level technology. Applied Materials here in
California, KLA-Tencor, lots of these companies
that you've never heard of are absolutely crucial in the supply chain in making these machines
that then translate into these multi-billion-dollar
factories that make chips. And the U.S. has leveraged its position to enact sanctions on China, banning the country from
using U.S. technology out of security concerns. So we're all familiar with
the example of Huawei, whose smartphone business
has basically been essentially obliterated by U.S. sanctions. Whether it's software, whether
it's actual chip components, materials that go into chips or equipment that you
use to fabricate chips, all of that is technically banned. The American tech embargo began as an effort against
Huawei over national security, but bans and restrictions
now affect at least 60 firms. These include SMIC, China's chip champion, which
has been put on a blacklist. At the end of 2020, TSMC sales to Chinese clients
dropped by roughly 70%. And for the first time ever, Huawei reported a drop in revenue. I think China's rise as a
superpower in technology is regarded as a threat to very fundamental American interests. They are military foes, and the last thing Washington wants is also to see a technological
foe with the wherewithal or the capabilities to
wage technological warfare on the United States. But U.S. sanctions might not be such a simple solution. China is the largest purchaser
of chips in the world, as well as a manufacturer
of less sophisticated chip for companies like Qualcomm
and other American companies. Bear in mind that a lot
of American businesses rely on China for growth. So there is very strong
pushback from the private sector to allow the flow of American
technology to China to resume. But if you look at the overall picture, I think the Biden administration shares the Trump administration's objectives in curtailing China's rise
as a technological power. And that's because that
would have ramifications for really long-term strategic goals. We're investing aggressively in areas like semiconductors and batteries. That's what they're doing and others. So must we. But cutting China out
completely isn't an option. Since much of the world depends on China to manufacture most of their
electronics like iPhones. A chip designed, say by Apple
in Cupertino in California, will be made in Taiwan, then packaged into something
that's going to end up in an iPhone in the Philippines. That chip then makes its way to China where it gets plugged into an iPhone. That iPhone then gets on a
plane and gets sold in Europe, or maybe even comes back to Cupertino and get sold in the Apple store. So the semiconductor supply chain is arguably one of the most complex and widely geographically spread
supply chains in the world. From Beijing's perspective, U.S. sanctions are a way to keep China at the bottom end of the supply chain, forever stuck as a
low-tier manufacturing hub. That's why China is determined
to become self-sufficient and is shifting into its highest gear. During its annual NPC meeting in 2021, President Xi Jinping pledged $1.4 trillion to accelerate their tech industry and become totally independent
from foreign technology. One of the announcements
that we've seen come out since the NPC has been SMIC, China's top chipmaker, signing an agreement to build a $2.5 billion semiconductor foundry, or manufacturing plant
with Shenzhen's government. And I think you'll see more of those private-public partnerships, where a private giant
or entity, such as SMIC, drives more efficient private capital into national objectives. SMIC, or Semiconductor Manufacturing
International Corporation, is China's largest foundry. Although it's still decades
behind Taiwan's TSMC, China has shown its ability to throw money and human resources at the
development of mega projects. But the chip industry
isn't quite the same thing. There have been numerous failures in terms of China's domestic
chip development effort. SMIC is an example of a success but have been plenty more that
have fallen by the wayside. Literally hundreds of
much smaller corporations that you and I have never heard of that raised capital but ultimately failed to deliver on its goals. TSMC has shown it takes much more than
capital and human resources. It takes time. So TSMC was founded in 1987. And it has spent more than 30 years in developing and creating its
own manufacturing technology. It is just not very
likely that you can create a comprehensive semiconductor
ecosystem overnight. And unlike the U.S. or China, Taiwan's economy is largely
built around semiconductors. TSMC is located in the
small town of Hsinchu, which hosts a whole ecosystem
of other well-established chip manufacturing and
packaging companies. And the industry also
attracts Taiwan's best talent. One of Taiwan's best-paying industries is the semiconductor industry. So with that incentive, a lot of school children would see the electrical engineering
or anything that's related to the semiconductor
manufacturing as their top choice when they decide on which
university departments they want to go to. So in the U.S. you have students choosing to study computer science or other subjects that would
be more related to the skills that big tech companies like
Google or Amazon require. Likewise in China, students are much more likely
to be attracted by companies like Tencent, Baidu and
Alibaba, or make their own app. One of the things that Chinese officials in recent years have been stressing it's fine to build a world's
best food-delivery app. But at the same time you need also to be able to attract talent
into areas, such as AI, quantum computing, basic
scientific developments, what we call the hard
sciences or hard tech. To counter the lack of
talent in the field, China's been recruiting
talent from abroad, which has been controversial
in Taiwan and the U.S. considering China's history of
taking intellectual property. China has been hiring
aggressively from Taiwan over the past few years. And what the U.S. may be concerned is these people may bring
their know-how to China and help China build up
a semiconductor industry more swiftly and more effectively. And there is actually a
well-known IP theft case. The U.S. memory maker
Micron has sued Taiwan's UMC and a number of engineers. Micron alleged that some
of these engineers formally have some know-how from Micron
to help UMC's Chinese partner to build up their memory chips in China. But all these resources and talent still don't necessarily equal success. To make a profit, companies like TSMC have a huge amount of orders from a diverse number of clients, and that also takes years to build up. So, if Taiwan was suddenly cut off, by a China invasion, for example, there is no TSMC replacement. Let's say if Apple decides
to find another partner, it will take years for them
to get this other chipmaker to be ready, if at all. So without TSMC, you will not be able to
have chips in your iPhones, and you will not have chips
for your F-35 fighter jets that the U.S. flies. So it will be a very different
world we are talking about without TSMC in it. This choke point came to light during the pandemic when a chip shortage cost the auto industry
billions of dollars. Yeah, the pandemic has
been a fascinating story and arguably a turning-point moment for
the semiconductor industry. Dial the clock back a
year ago to early 2020, and the forecasts were dire. Economic activity around
the world in the pandemic was going to come crashing down, and that was going to kill
demand for semiconductors. What really happened though was as we were locked in our homes, studying and working from home, we felt an increasing need
for the electronic services, for the electronic devices that had been around us all the time but we felt much more
intense need for them. And that had a knock-on huge effect in creating demand for semiconductors. Roll the clock forward
to where we are now, demand has come surging back. And it's come surging
back in sectors where it really wasn't expected to. For example, the automotive
industry, which thought that essentially the world was ending, that there was no demand for cars and they were going to
have to shut plants down. They are having to shut plants down because they can't get enough chips. This prompted the U.S. to sign deals with TSMC and Samsung to build factories on their own turf. If we see what's being billed as a an electronic Cold War fully materialize, that China goes its own way in technology, that Europe and the U.S.
go in another direction, then perhaps it makes
increasingly more economic sense to have facilities here. The biggest economic choke point of the 20th century may
have been oil passing through the Strait of Hormuz, but now it's microscopic
silicon transistors manufactured in Taiwan. But while the U.S. and China are fighting for control
of the technology, they still depend on each
other for the most part. The trade war really is a case of be careful what you wish for. The chip industry brought
attention to itself and lobbied for action against China
for years, on IP protection. Now that it's happened, they're not happy with the situation. Why are they not happy
with that situation? Because they depend
upon the Chinese market. It's the fastest-growing, biggest market. They need to be able to
sell chips into China. Right now, China needs them. China needs what they're producing. Massive wake-up call for China, massive call to them to show that they need to be independent. The worst-case scenario for the U.S., is that China makes that leap. That this next five-year plan or the five-year plan after
that finally hits home, Chinese chip manufacturers emerge and become competitive to
Intel, to Nvidia, to Broadcom, to what Apple can produce inside. The worst-case scenario, at least from a globalist's point of view, is bipolarization of the world, where you have U.S. and China
and countries around the world lining up behind one or the other. It's not good for a lot of things, just starting simply with global trade. But if I may be allowed to
wax lyrical for a second, it ain't good for the
advancement of humankind.
