Is Chinese technological alternative already becoming reality?
Review by Serhey Bohdan

ANALYTICS  17 October 2022 - 19:09

The Communist Party of China's twentieth congress opened in Beijing on October 16 against the backdrop of slowing economic growth in the country and escalating confrontation with the United States. In recent weeks, the global brinkmanship between the two powers in the technology field has become scandalous. Judging by it, the US has a serious competitor.

A new "big leap"

Washington's concern about China's successful development is obvious. At the end of September, the first meeting of representatives from the US, Taiwan, South Korea, and Japan was held in Taipei at the initiative of the US. The topic of the event, which had been announced back in March, sounded innocuous - cooperation in strengthening the supply chain of semiconductors - because the shortage of these components has already led to a decline in production in the automotive industry. In reality, it was an issue of huge strategic importance: the creation of a chipmaker's cartel, the so-called Chip 4.

The number four is from the four member countries of the world's largest and most advanced chipmakers. These include the global leader, Taiwan Semiconductor Manufacturing (TSMC) and South Korea's Samsung Electronics Co, and SK Hynix. Japan is home to the leading suppliers of materials and equipment for semiconductor manufacturing, and the US is a leader in semiconductor technology development.

As noted by BBC analysts, as of last year, 83% of global production of processor chips and 70% of memory chips came from Taiwan and South Korea, which have essentially become monopolists and continue to increase their market share. For example, TSMC owns more than half of the global market of microchips, and its share in the most advanced technology types reaches 90%. The company has factories across the planet, but Taiwan itself produces 21% of the world's semiconductors.

No one is hiding the fact that the Chip 4 initiative is aimed specifically at China and is designed to block its access to chips and chip manufacturing capabilities. The main objective is to inhibit China's scientific and technological development and prevent an alternative source of gear and technology to the West and its allies from entering the market.

Over the past two decades, China has built its microchip production from the ground up, and today the PRC is the largest producer among all countries, with nearly a quarter of the world's output. China still lags behind in the production of "thinner" chips, and its chips are not as reliable, but given their reasonable price, they are quite usable.

In August it was announced that China's SMIC had produced its first 7nm chips without foreign equipment. This put the firm, which is on the US sanctions list, on a par with Western electronics industry flagships. The Chinese, they claim, took just two years to reach 7nm process technology, faster than firms in pro-Western countries: TSMC took three years and Samsung took as much as five to get that level.

On September 14, China's main English-language newspaper, the Global Times, announced that Chinese firms in Shanghai (the centre of China's semiconductor industry) have mastered the mass production of 14nm chips, and are working to prepare mass production of the next most advanced chips in the 7nm and 5nm process. If everything is as the Chinese officials say, China will soon become the world leader in the industry.

Only the West has the right to shape the future of the world, or how Huawei was destroyed

Washington, meanwhile, was preparing more and more bans. On October 7, it became known that the Biden administration had imposed the toughest restrictions on high-tech trade with China since the 1990s. The White House has banned sales to the PRC of US-manufactured artificial intelligence computing chips and technology, equipment for their production, and a range of related technologies. US scientists are banned from collaborating with China on the development of new semiconductor technologies. Particularly tough restrictions have been imposed on dozens of Chinese companies which have refused to let American (!) inspect their factories in China (!) - they are no longer allowed to sell anything of any significance. Formally, the US domestic restrictions clearly affect foreign companies as well - in fact, all US laws of this kind have had a global impact since the late 1990s.

Earlier this summer, the US Congress passed the so-called "Chip Act" which prohibits investments in the expansion of high-tech semiconductor manufacturing in China for 10 years and approved the allocation of $52 billion for the development of the domestic semiconductor industry. In fact, we are talking about gigantic subsidies - otherwise, such high-tech industries don't emerge. Tales of unlimited free enterprise and the "hand of the market" are a propaganda cover for economic (and not only) expansion.

In August, Washington - without any loud public statements - banned US firms from selling equipment to China to produce chips with a topology more advanced than 14nm (primarily important in vehicle manufacturing), having previously imposed such restrictions on more advanced 10nm and smaller. At the same time, the US government ordered it to stop supplying China with software to design chips with next-generation transistors that have channels surrounded by gates - Gate All Around (GAA). This technology allows chipmakers to increase their processing power by reducing power consumption.

It should be noted that the current US-China technology war was sparked by the conflict around the Chinese company Huawei, which began in 2018. By the end of the 2010s, the company had become the world's second-largest smartphone seller (after Samsung) and then the world's number one, and had set out to create a more budget-friendly and equally high-quality alternative to iPhones. The final straw in the cup of the patience of the 'collective West' was Huawei's increasingly successful attempts to propose its own version of the G5 superfast mobile phone network, i.e. it was a question of who would define an important technological standard - the West or China?

"Huawei", which has emerged as a leader in deploying these new networks around the world, has been accused of intending to help Chinese intelligence agencies "spy" on the world using G5. They did not talk about how Western special services can do the same with the help of Western firms. The firm was also accused of supplying equipment to the Chinese army and being set up by former officers - as if Western firms do not supply equipment to Western armies and do not have ex-military personnel.

In the end, all value discussions and non-market competition was discarded, and political and police measures came into play. In 2018-19, under the pretext of Huawei's activities in Iran, the US banned any interaction with it (as well as the similarly profiled Chinese company ZTE), Huawei telecommunications equipment was effectively banned in the US, Australia, and New Zealand, "independent business" represented by Google disabled Huawei smartphones from several Android operating system updates and several apps, and in Canada, they simply arrested the daughter of its founder. Further restrictions began to escalate, extending into Europe.

As a result, this competitor was effectively removed from the supposedly "free" world market. By 2020, the company had gone into 'survival mode', cutting research and development costs and starting to withdraw from some countries.

Will microchips lead to war?

The outcome of the US-China rivalry in technology is far from certain. It is difficult to imagine how the US could reshape the semiconductor industry even of its allies in a situation where China is the largest semiconductor market, accounting for around 60% of South Korea's semiconductor exports, for example. In 2021, 70% of all laptops and mobile phones were sold in China. There is simply no substitute for those markets in the US.

China also has another advantage - it accounts for over 70% of the production of rare-earth metals that are critical for the electronics industry. In general, it is believed that this country has at least one-third of the world's rare earth metal reserves.

A look at the more general balance of power in the technological confrontation also shows that China has a chance. Yes, the US has faced such challenges to its primacy in the past - in the 1980s, for example, there was speculation that the Japanese would overtake the Americans economically and technologically, but Washington pulled through. But then it was a solitary country that not only was not trying to forge an alternative bloc to the West (like Beijing through the SCO and other initiatives), it had itself been part of that "global West" since its occupation by US forces in 1945 (they are still there today). Japanese elites have been - for all their cultural specificity - locked into ties with the West, and Japanese politics and public discourse itself have rapidly westernised - all that is not the case in the Chinese case.

It is not surprising, therefore, that the new US National Security Strategy unveiled this week identifies Beijing and Moscow as the main opposing forces to the global hegemon. It is within this broad framework of the American vision of the world and its enemies that arguments that appear to be about economics or values should be considered.

It is within this framework that Washington sets out to drag microchip production, acting not through so-called "open market competition" but through hard political measures. This entire unsophisticated operation is being carried out with the accompaniment of independent NGOs and professional activists who suddenly got a chance to talk in the key Western media about China's gigantic violations of everything. Actually, China has never been a liberal democracy by and large - but that's bad luck, violations began to be loudly revealed only when the need for China as an ally against the collapsed USSR disappeared. And then the criticism grew in correlation with China's rise and its transformation into an objective competitor to the West.

It should be stressed that much, much of the criticism of China is not without merit, for example in relation to the Uyghur issue, but alas, too often it hides only the opportunistic exploitation of problems by external forces. If we analyze what is really behind the growing concern, as we have done with a particular industry, the net result is an unsightly picture. Namely, Washington is trying to demonstrate to Beijing that it can strangle it by restricting access to resources and products that are critical to the modern economy.

US pressure on China has begun to affect major semiconductor manufacturers even before the current round of sanctions. South Korea's Samsung Electronics and SK Group have already announced plans to invest tens of billions in developing and expanding semiconductor production in the US.

Biden seems to be doing a good job, but in reality, this technological stranglehold is full of risks. For one thing, Chinese designers and manufacturers may be able to cope with such a power grab: last year Beijing announced its intention to invest $160 billion in developing the domestic semiconductor industry. In addition, in the new geopolitical situation, Washington has presented Beijing with a number of useful additional sources of technology and resources to do so - ranging from the Russian Federation to countries in the developing world where relevant resources are available (such as the Taliban in Afghanistan with its lithium deposits secretly explored by Soviet geologists).

Second, China has the potential to seriously respond to attempts to deny it supplies of semiconductors from US allies by, for example, creating problems with the functioning of not only the semiconductor industry but also the entire economy in Taiwan - by inflaming the situation around the island. Alas, these obvious political economies and geostrategic aspects of the crisis around Taiwan were not talked about much in the Western media when they recently covered the provocative visit of the head of the US lower house of parliament to this Chinese province, which has broken away from China.

But for the world, the worst thing about the current conflict is that by cutting the strings of ties with China under the pretext of the need to "protect" its interests, Washington is destroying Chinese motivation for cooperation and pushing China into violent confrontation. After all, it is extremely difficult to go to war when one has many dynamic and complex economic ties, and there is usually a long period of decline before a war breaks out. To stress, many relationships may still exist when war begins (the USSR supplied raw materials to Germany until June 22, and the United States traded with Japan up to Pearl Harbor), but the sides must begin to assess these relationships as something unpromising before they decide to take up arms.

A couple of decades of severing Russian ties with Ukraine and other countries in the region is a case in point - the current war was made possible after Russian money, goods and interests left the region - recall how the Kremlin bypassed the region through the Baltic Sea bed, cut off supplies through the ports of the Baltic republics, etc. Sometimes this money was "helped away" by global competitors - the last Ukrainian Maidan and further developments in eastern Ukraine were made possible precisely in the context of a bitter dispute over the redistribution of economic spheres of influence between the West and Russia, in which all sides simply exploited the justified resentment of Ukrainians against the corrupt authorities. Ties between the Russian Federation and Eastern Europe were gradually severed over a number of years and it looked like some kind of economic dispute, but it ended legitimately - with war. Because the opposite sides lost the motivation to interact, but not the means to clarify their relations. And the same dynamic is evident today in East Asia.

Caliber.Az