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

**Creator:** Big Think Clips
**Platform:** youtube
**Duration:** 21m
**Source:** https://www.youtube.com/watch?v=XTDOgrTlTco

## Summary

The semiconductor industry has evolved into a highly specialized global supply chain, with distinct regions focusing on different aspects of chip design and manufacturing. The historical development of semiconductors, from early innovations at Bell Labs to the rise of companies like Intel and TSMC, highlights the interplay between technological advancement and market demands, as well as the geopolitical implications of chip production.

- The semiconductor industry began with innovations at Bell Labs, leading to the invention of the transistor and the first integrated circuits.
- Companies like Texas Instruments and Fairchild Semiconductor were pivotal in the early growth of the chip industry, focusing on both government and commercial applications.
- Intel's shift to microprocessors revolutionized computing, allowing for programmable chips that could serve multiple functions.
- The industry has become globalized, with design primarily occurring in the U.S. and manufacturing concentrated in East Asia, particularly Taiwan.
- TSMC, founded by Morris Chang, specializes in chip manufacturing, becoming the largest and most advanced chipmaker globally by focusing solely on manufacturing rather than design.
- China's chip industry is growing but remains behind leaders like TSMC, particularly in advanced technology, despite significant investments in domestic manufacturing.
- India's semiconductor sector is rapidly developing, with potential to become a major player in the coming decades as it follows the paths of earlier successful nations in chip production.
- The complexity and high costs associated with semiconductor production necessitate a collaborative global supply chain, where no single region can independently produce cutting-edge chips.

## Transcript

[[0:00]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=0s)
- 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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=42s)
- [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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=140s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=179s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=322s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=508s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=542s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=624s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=827s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=974s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=1031s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=1056s)
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]](https://www.youtube.com/watch?v=XTDOgrTlTco&t=1189s)
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.