The strange reason the US lost control of chip manufacturing | Chris Miller

0:00 - The chip industry was a global industry  from really the earliest days. The processes that are used to both design and manufacturer  semiconductors today were first pioneered by researchers working at Bell Labs. But because Bell  Labs wasn't a computer company, they were able to take those technologies and either spin out their  own startup or sell it to somebody else. And that's how many of the key technological advances  undergirding semiconductors first emerged. But one of the things that's changed a lot over the past  couple of decades is that, today, each region focuses on a different part of the semiconductor  supply chain. I'm Chris Miller, a professor at The Fletcher School and author of, "Chip War: The  Fight for the World's Most Critical Technology."

0:42 - [Announcer] The history of  the semiconductor revolution - In the middle of the 20th century, all  telephones were managed by AT&T. They were a monopoly, and the government regulated them,  and one of the rules was that their research lab had to share its inventions with the rest  of the world. And they had some of the most brilliant physicists and chemists working in  the world at that time, which they hired to improve the phone system. But in the process,  they created some of the key inventions that drove technological progress in computing for  decades to come. The transistor was one of the inventions that emerged out of Bell Labs, but  actually many of the processes that are used to both design and manufacturer semiconductors today  were first pioneered by researchers working at Bell Labs. But because Bell Labs wasn't a computer  company, they were able to take those technologies and either spin out their own startup or sell it  to somebody else. And that's how many of the key technological advances undergirding semiconductors  first emerged. So William Shockley, John Bardeen, and Walter Brattain invented the first transistor  while they were working at Bell Labs. They were initially planning to use these transistors  as part of the telephone network. But in the late 1950s, the first engineers realized  that you could take multiple transistors, and make them on a single piece of semiconductor  material. And so that was the first chip, a piece of material with multiple transistors carved into  it. And that was important, because if you had individual transistors, they were connected  via wires in a way, that was okay if you had a handful of transistors. But if you had 1,000  connected together, you had a jungle of wires you had to manage. But the chip managed to have  the electrical connection in a piece of material.

2:20 And so the jungle of connections was replaced by  a single block of material, which was much more reliable, and also much more easy to shrink in  its size. And so it was the invention of the chip that made it possible to deploy lots and lots of  transistors together in a way that was economical, but also possible to engineer and avoided all  of the wiring. The first chips were invented by engineers working at Texas Instruments and  a company called Fairchild Semiconductor in Silicon Valley. They were invented simultaneously.  Jack Kilby invented one in 1958 working in a Texas Instruments lab. And for a long time they were  really at the cutting edge of chip manufacturing.

2:59 At first, they were building chips primarily for  the U.S. government, for the space program, for example, and for weapon systems. But they realized  early on you could take the exact same chips that the government wanted to guide spacecraft,  and use them for commercial applications, like computers or pocket calculators. And that set  the industry off into its first phase of growth in the 1960s and '70s and '80s. For the past 15  years, they've taken a different tack. They don't today produce chips that are used in computing,  they're not, for example, in AI systems in a large way. Instead, they produce a lot of chips that  are in industrial applications, or in automobile uses. And so Texas Instruments chips are all  around you, but you don't see them because they're buried deep in your devices, making  sure your windshield wipers work, for example, on your car, or that your windows move up and  down when you press the button. Those are the types of use cases that Texas Instruments produces  chips for. One of the first startups in Silicon Valley was created by one of the researchers who  invented the first transistor, William Shockley, who was by all accounts, a brilliant physicist,  but a horrible manager and a horrible person. And so he hired a very talented set of engineers in  Silicon Valley. He moved to Palo Alto, California, where his mother lived, for the purpose.  And although he hired lots of great people, they detested working for him. And so eight of  them in the late 1950s went out on their own, and created Fairchild Semiconductor, which became  one of the key startups that would give rise to Silicon Valley, and played a major role in Silicon  Valley even being named Silicon Valley, because for a long time it was the absolute epicenter of  chip design and manufacturing thanks to people at Fairchild Semiconductor. Robert Noyce, one  of the two inventors of the integrated circuit, Gordon Moore, who later would go co-found Intel,  and many others first started their career working at Fairchild. Intel was founded in 1969, and  it initially planned to focus on making memory chips. But they realized early on that there was  a potentially larger market for a type of chip that wouldn't just remember data, but would also  process it, especially if that processing could be programmed in different ways for different use  cases. And it quickly focused on making chips for personal computers, which at the time was a very  small market, but they correctly bet that soon, everyone, would have a personal computer.  And Intel, even today, is the world's largest producer of chips that go inside of PCs. Gordon  Moore is one of the two co-founders of Intel.

5:22 He's most famous today probably for coining the  term Moore's Law, but he also played an absolutely critical role running Intel's R&D operations from  the earliest days for many years. And when it came to the microprocessor, he was an early advocate  of focusing on microprocessors at the expense of the more memory-focused chips that Intel had  previously made. And so in some ways, he was the key figure in Intel in making the company focus  on microprocessors. A tiny computer on a chip, as they originally called it. And it gave rise to  the idea that you could deploy chips in lots of different use cases without having to redesign the  chip itself, because the chips themselves could have a program running on top of them. Today, we  take it for granted that you can have a chip in your phone, and a chip in your dishwasher,  and a chip in your car. But at the time, that would've required many different chips for  each of those purposes. Whereas, today, thanks to the microprocessor, we have programmable chips.  And that was the main source of revenue for the chip industry, the main focus of technology, until  about 20 years ago when the first smartphones began being produced. And today, smartphone chips  are generally designed by one set of companies, but they're manufactured largely in Taiwan. So the  largest designers of smartphone chips are Apple, which designs its own chips in California.  Qualcomm, and other companies, almost all of them manufacture all of the chips that they  design in Taiwan. And so today, the chip industry is split into two different parts. There's the  chip designers, which, today, is essentially like a type of programming almost, programming  where each of the transistors goes on the chip, and the actual manufacturing takes place generally  in Taiwan or elsewhere in East Asia, where different companies specialize in manufacturing  at precision scale. The chip industry was a global industry from really the earliest days. Fairchild  Semiconductor was founded in Silicon Valley before it was even called Silicon Valley, but they opened  their first facility in Hong Kong just a couple years later. So there was already a globalized  nature to the chip industry from day one. But one of the things that's changed a lot over the  past couple of decades is that, today, each region focuses on a different part of the semiconductor  supply chain. The first chips that were invented in the late '50s and early '60s were used for  space programs and missile systems. So they were at the center of the Cold War competition. And the  U.S. was ahead, but the Soviet Union realized that they also needed chips to guide their missiles  more accurately or to help their spacecraft launch effectively. And so they were focused  on building their own chip industry, but also on copying whatever they could from the West.  And so since the earliest days of the Cold War, there were Soviet exchange students in physics,  for example, studying at Stanford University, but also transmitting the knowledge that they gained  back to the Soviet Defense industrial complex. And so there was a lot of copying, a lot of efforts to  replicate what the U.S. was doing. But the Soviets made a couple of key errors. One was that they  focused too much on copying, and not enough on innovating. And so they got very good at copying,  but not so good at innovating, and that left them behind. And the second error they made was that  they only focused on the military aspects. And the military was where the first chips were used,  but today, most chips go to the private sector.

8:28 99% of chips that are made go into phones, or PCs,  or data centers, not for defense equipment. And so if you only focus on the government and military  uses, you've got a tiny market relative to the vast consumer market that was out there. U.S.  firms were profit-seeking, they focused on the consumer market as early as they could. In the  Soviet Union, they never made that shift, and so their chip industry was always tiny in comparison  to the U.S., which meant they could invest less, they could hire fewer workers, and ultimately  their technology fell behind even though they were pretty good at copying. So in the U.S. right  now, most of the key chip firms only design chips.

9:02 Most of the manufacturing of chips happens in  East Asia, in Taiwan, for example, or in Korea. Many of the chemicals that go into chipmaking come  from Japan. And the machines that are used to make chips come from either Silicon Valley, where  some of them are still made, or the Netherlands or Japan. So the industry has globalized, but  it's also specialized in the process. And so there's not a single region today that can  make cutting edge chips on its own. Everyone relies on this internationalized supply chain  that brings together the U.S., Taiwan, Europe, Japan, and Korea. Japan was a major player in  electronics assembly early in the 1950s and 1960s, so devices would be assembled in Japan because  labor costs at the time were lower. But Japanese firms were fixated on moving up the value chain,  producing more complex, more expensive types of goods. And Japanese firms realized very early on  that consumer electronics could be a major growth area for them, where they could sell not just  domestically, but all around the world. And so companies like Sony, which were among the leaders  in the 1970s and 1980s, bet on the consumer market to produce the types of goods that would take  advantage of the advanced chip technology that they were pursuing at the time. And so although  we don't remember it much today, devices like the Sony Walkman in the 1980s was at the center of the  tech industry, and it put Japan really on the map.

10:24 And at that point, Japan was, by a lot of metrics,  just as capable as the United States when it came to building advanced chips and then deploying them  in very profitable uses like the Sony Walkman. One of the places where the Japanese excelled was in  video games, which most people might not think of as driving technological advances, but actually,  the computing that's required to show graphics that look real life is extraordinarily complex.  And so the Japanese companies like Sony, Nintendo is another one, were fixated on how to make better  graphics, and it required more and more computing power to make better and better graphics. And  today, they're no longer major players in that sphere, but NVIDIA, which is the central player  in AI, actually started as a video game company, it made graphics cards for computers. And for most  of their early history, they were selling chips primarily to gamers, because the graphics were  better and rendered more rapidly. But it turns out that the same essential math that's used for  showing graphics on a screen is pretty similar to the math that's used in training AI systems. And  so NVIDIA was able to take chips that were made for video games, and made for computer games,  and pivot them to be used in AI systems, which is why a video game company that was founded in  the 1990s has now become not just any AI company, but the most important AI company in the world. In  the 1980s, the South Koreans saw Japan becoming a major player in the chip industry and saw Japanese  firms rise to the top, both in terms of technology and in terms of the amount of money they were  making, selling both chips and devices that used them, and South Korea wanted to replicate  Japan's strategy. So companies like Samsung and SK Hynix were founded to establish chip industries  in Korea. And they replicated the Japanese model, they get very good at manufacturing, they competed  very effectively on cost. They also represented an alternative to Japanese production. 'Cause U.S.  firms in the 1980s were very worried that Japan was gonna take over the chip industry. So they  were excited to have another option besides Japan, and shifted business towards Koreans, both because  the Korean producers were cost competitive, but also because it provided a bit more  diversification in the industry that would limit the ability of Japanese firms to dominate.  One of the biggest European chip makers in the 1960s, '70s, and '80s was the Dutch company  Phillips, which today still exists, but doesn't produce any semiconductors. They got out of the  semiconductor business several decades ago. But one of the legacy units that they'd created was  a unit that made the tools that make chips. And in particular, they focused on the lithography  tools that are capable of patterning transistors on a chip. ASML was spun out of Phillips several  decades ago, and at the time, most people thought it would likely fail, the Netherlands wasn't a big  part of the chip industry, Silicon Valley was a long way away. But ASML took a series of pretty  wild technological bets on technologies most people thought would fail. And the best example  of this is the current cutting edge of lithography called extreme ultraviolet lithography, the  tools that cost $350 million a piece to produce, everyone else thought that was a technology  that would never work. It took three decades to commercialize, tens of billions of dollars  of research and development money went into it, but ASML made that bet, and it was a bet that  looked like a very bad bet for many years until about a decade ago when they first were able  to build the initial EUV lithography machines.

13:47 So chip makers have always used lithography to  manufacture semiconductors, but as transistors have gotten smaller and smaller, we've needed  better and better lithography systems to print smaller transistors onto silicon chips. And  several decades ago, it was clear that the cutting edge in lithography at the time was gonna be too  broad in terms of the wavelength of light used to print tiny transistors. The cutting edge used  light with a wavelength of 193 nanometers, which sounds really small, and it is really small. But  if your transistors are measured in 10 nanometers, or 5 nanometers, 193 nanometers is still too broad  of a brush with which to paint your transistors on the silicon chip. And so ASML bet on a new type of  lithography system using light with a wavelength of 13.5 nanometers, much more narrow. Which sounds  logical, but it was extraordinarily difficult to produce. Research started in the early 1990s,  and it took 25 years before these machines were commercialized, because it required building a  supply chain that involved these extraordinarily complex components, the flattest mirrors humans  have ever made, the most powerful laser ever in a commercial device, all of these had to be  invented in the process of making these machines work. So Taiwan was a major player in electronics  assembly, and putting together transistor radios, for example, in the 1950s and '60s, or assembling  televisions. And they did quite well on that, but there's not much money to be made in the  assembly, the money is made in the manufacturing of the complex components involved. And  so the Taiwanese government realized, as early as the 1970s, that they needed to move up  the value chain and learn to do the more complex parts of electronics manufacturing. In 1987, there  was a American engineer named Morris Chang who was passed over for the CEO job of Texas Instruments  where he'd worked for several decades. And so he left TI, and was looking for something else to do,  and he'd gotten to know the Taiwanese government for several years, because Texas Instruments, his  former employer, operated a number of plants in Taiwan. And so the Taiwanese approached him and  said, "Would you like to build a chip factory in Taiwan?" And he said yes. And he had an idea,  which was to do manufacturing differently than anyone else. At the time, most chips were  manufactured and designed by the same companies, but Morris Chang realized that manufacturing is  getting more and more complex every single year, that if you specialized on manufacturing, you  could manufacture better than your competitors.

16:14 And so he established TSMC in Taiwan in  1987 with the aim never of designing chips, only of manufacturing. His vision was sort of like  to do for chips what Gutenberg had done for books. Gutenberg didn't write any books, he only printed  them. Morris Chang didn't wanna design any chips, he only wanted to manufacture them. That's  exactly what TSMC has done. And it's enabled TSMC to win among its customers, some of the largest  companies in the world, Apple, NVIDIA, Qualcomm, AMD, they all rely on TSMC to produce its chips,  which means that TSMC is the largest chipmaker in the world by far. And as a result, it's got more  scale, it can drive down its costs, and it can hone its technology more than anyone else. And  so TSMC, thanks to this unique business model, is both the largest and the most advanced  chipmaker in the world. Today, China's the world's largest importer of chips. They spend  as much money each year importing chips as they spend importing oil. There's nothing that China's  more reliant on the outside world to purchase.

17:11 And China imports all these chips, both for its  own use, but also because most of the world's phones and computers and servers are assembled  in China. So there's a flow of chips into China, they're assembled in the devices, and the many  of those devices are re-exported to the U.S., or to Europe, or to Japan, or to international  markets. And so today, China's primary interface with the chip industry is by buying chips,  assembling them, and then shipping them abroad.

17:36 But the Chinese government realizes this is not  the best place in the industry to be. They wanna do the higher value add parts of the industry,  just like Taiwan did, just like Japan did to move up the value chain. And so for the past decade,  China's been trying to build its own chip industry to manufacture more chips domestically. And right  now it's having a lot of success when it comes to more low-end chips, the types of commodity chips  that are in many different types of devices, where China is vastly expanding its manufacturing  capacity and making real strides towards becoming a lot more self-sufficient. But at the cutting  edge, the types of chips that are inside phones or in AI systems, China's still meaningfully behind  industry leaders like TSMC. Right now, the most advanced Chinese firm, SMIC, is about five years  behind TSMC, which might not sound like a lot, but that's two and a half Moore's Laws behind  TSMC, which means that, for the most cutting edge applications, you really take a performance  hit if you want to use a Chinese manufacturer versus a Taiwanese one. Until 2020, TSMC'S  two largest customers were first, Apple, the biggest U.S. smartphone maker, and second Huawei,  China's largest phone company. TSMC manufactured ships for both of their phones. But the United  States is worried that Huawei is controlled by the Chinese government, it's worried about the  surveillance capabilities that this might enable, and so the U.S. has been trying to limit Huawei's  access to advanced technologies. And since 2020, it's prohibited Huawei from manufacturing  advanced chips at TSMC. And so Huawei's had to turn to domestic suppliers to manufacture many  of the chips that it needs. And this has been a challenge, it's possible to find Chinese domestic  suppliers, but they're not as good as TSMC, the costs are higher, the performance is lower.  And it's been a real headwind for Huawei over the past couple of years as they've tried to  build their own supply chain to make up for the fact that they've lost access to the cutting  edge in Taiwan. So until recently, India was a very small player in the chip industry. There's  a couple of chip companies in India, but they're not at the cutting edge, and they're not that  large. Much of the semiconductor manufacturing, as well as the rest of the supply chain, the  assembly of phones, for example, of computers takes place in Southern India. Tamil Nadu, for  example, is one of the key hubs for manufacturing.

19:49 And then Bangalore is a major center for  chip design inside of India. But right now, India is the country that's changing the most  rapidly, I think, when it comes to investment in semiconductors. There's a series of new projects  underway in India to put it more on the map of electronics manufacturing. And I think if you  look at India today, you see what China looked like 30 years ago, or what Taiwan looked like 50  years ago, a country that's on the early stages of a major change in the types of manufacturing that  happened there. And so I wouldn't be surprised at all if in 10 or 20 years we looked at India as a  really central player in the production of all the computing and electronics that we rely on, because  they're taking the exact same steps that China, and Taiwan, and Japan before them took when they  were becoming major manufacturers. The irony of the chip industry is that it's simultaneously  globalized, and yet extraordinarily localized for certain types of production. And that's  inevitable I think, because the engineering involved is so complicated, the dollar values  required to spend are so vast that we need specialization. And specialization implies that  we've got to rely on other people to help in the process. And so I think it's inevitable that  U.S. firms will rely on manufacturing in Taiwan, and chemicals from Japan, and the rest of the  supply chain for a very long time because no one has the capabilities they need to produce  the chips that they require on their own.