The US-China chip war will end with small victories and losers all around

the us china chip war will end with small victories and losers all around

the us china chip war will end with small victories and losers all around

Huawei, China’s leading multinational, could not have become the largest telecommunications equipment manufacturer without an exodus of scientists from Canada’s Nortel. Thanks to joint ventures with German, Japanese and American auto companies, China today boasts the world’s largest automotive market. The same goes for the consumer electronics, mining and medical technology industries.

What happens when China tries to go it alone? It usually fails. Unable to find a joint venture partner, the state-owned Commercial Aircraft Corporation of China (Comac) has spent 14 years failing to build a Boeing 737-like commercial aircraft.

A Comac C919 aircraft, China’s first domestically produced large passenger jet, performs during the Airshow China 2022 in Zhuhai, Guangdong province, on November 8. Photo: CNS / AFP

A Comac C919 aircraft, China’s first domestically produced large passenger jet, performs during the Airshow China 2022 in Zhuhai, Guangdong province, on November 8. Photo: CNS / AFP

In a project fraught with delays and technical glitches, Comac in September finally received certification from China’s aviation regulatory agency. Its only customers are domestic carriers. Aviation experts consider the C919 too outdated and expensive to compete globally.

On top of needing foreign assistance, China would face a daunting task in trying to create its own semiconductor supply chain. Semiconductor independence would require China to match America’s dominance in chip design software, Taiwan’s and South Korea’s prowess in chip manufacturing, as well as the Netherland’s and Japan’s virtual monopoly on the equipment needed to produce cutting-edge chips.

Experts believe that China will never be able to move up the chip value chain, without the extreme ultraviolet equipment only available from the Dutch company ASML.

But let’s not totally count China out. Underestimating China and the will of its people has been a losing bet for the past 30 years. I give China more than a puncher’s chance to reach a level of respectability and competitiveness.

The global market intelligence firm International Data Corporation estimates that, while China is currently three to four generations behind in cutting-edge technology, it could catch up in about 10 years.

Investment capital certainly won’t be a factor holding China back. Beijing announced in 2020 that it would invest US$1.4 trillion in high technology over the next five years, with much of it in the semiconductor space. This makes Biden’s Chips and Science Act, a US$52.7 billion plan to revitalise US semiconductor manufacturing, a drop in the bucket.

China’s nascent semiconductor industry isn’t exactly starting from scratch. Before the sanctions, China was learning from the world’s best tech companies. China’s state media reported that all the chips in their new space station and the Mars rover that landed on the red planet in 2021 were made in China.

There is also a geopolitical angle to this contest. The US, aware that most of the world’s semiconductor talent resides within its sphere of influence, hopes to essentially strong-arm nations into making an economic choice between it and China. Many experts, however, question whether the US still wields that kind of influence.

Beijing is betting on America’s weakened clout; it has a point. Just look at the recent sanctions on Russia. India, Spain, Germany and Japan – democratic nations all – have actually imported more from Russia since the invasion of Ukraine began in February.

Finally, to sell to China, corporations might find ways to create technology without “Made in USA” components. I sat in boardrooms that discussed this route around the time Trump first weaponised sanctions.

Today, US and foreign companies alike are seriously vetting the de-Americanisation option, making product prototypes, and mapping out business strategies. Nikkei Asia recently reported that Japanese and Dutch semiconductor companies could produce equipment without the use of any US technology.

The US and China are preparing for a long battle. Don’t expect a clear-cut winner. Some nations will side with the US, while others may look to skirt the sanctions. More than likely, the US will dominate the chip technology needed for AI and military applications as China takes the lead in microprocessors, and the memory and commodity chips used in consumer electronics, cloud computing and electric vehicles. Both countries will claim some small victories, but ultimately, as most economists say about trade wars, there’ll be no winners. Only losers.

Who loses? You and me. We’ll have to contend with more expensive iPhones, PlayStation shortages and fewer of the fancy features we’ve come to expect from Teslas.

That kind of reminds me of the Covid days, only much, much longer.

Stanley Chao is the author of “Selling to China” (2018) and managing director for All In Consulting, assisting companies in their China business strategies. He has lived and worked in China for over 20 years

South China Morning Post

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