US-China ten­sions de­t­o­nate into global chip bat­tle

‘Trump’s trade tac­tics look like they have pro­vided the mo­ti­va­tion that Bei­jing needs’

The Daily Telegraph - Business - - Business Comment - Garry White is chief in­vest­ment com­men­ta­tor at wealth man­age­ment com­pany Charles Stan­ley garry white

When Bei­jing de­cided that China needed to be­come an atomic power in the Six­ties, its cen­trally planned state di­rected sig­nif­i­cant re­sources and re­solve into de­vel­op­ing a nu­clear de­ter­rent.

Within 32 months of its de­ci­sion to “go nu­clear”, China had det­o­nated an atomic bomb, launched its first nu­clear mis­sile and ex­ploded its first hy­dro­gen bomb.

Af­ter Don­ald Trump’s at­tack on its tech­nol­ogy in­dus­try, China’s polit­buro is plan­ning to di­rect its en­ergy towards an­other tech­no­log­i­cal goal, this time in the field of semi­con­duc­tors. The move could se­cure the coun­try’s po­si­tion at the van­guard of 5G tech­nol­ogy – but means the chip war is now be­com­ing deeply embed­ded in global trade.

In the fu­ture, there will be chips with ev­ery­thing. A mi­crochip is ba­si­cally a set of elec­tronic cir­cuits on a small piece of semi­con­duc­tor ma­te­rial. These tiny com­po­nents are the build­ing blocks that drive our mod­ern world – and China is about to throw ev­ery­thing it can into the de­vel­op­ment of third-gen­er­a­tion semi­con­duc­tor ma­te­ri­als.

These com­po­nents will be bet­ter in terms of speed, size and heat dis­si­pa­tion. They will make elec­tronic de­vices and in­ter­net com­mu­ni­ca­tion much more pow­er­ful and ef­fi­cient – with greater func­tion­al­ity than we see to­day. They will be es­sen­tial build­ing blocks of 5G com­mu­ni­ca­tion sys­tems and the re­sult­ing “In­ter­net of Things” (IoT) that will emerge.

The in­dus­try be­lieves that, with the de­vel­op­ment of tech­nol­ogy, the third gen­er­a­tion of chips will com­pletely re­place the first and sec­ond­gen­er­a­tion semi­con­duc­tor ma­te­ri­als that are still in use to­day.

The de­vel­op­ment of the IoT will see chips embed­ded in bil­lions of ev­ery­day ob­jects. These will al­low de­vices such as ve­hi­cles, fridges and cool­ing and heat­ing sys­tems to be­come “smart”. The chips can send and re­ceive data which can be used for re­mote man­age­ment by hu­man or ar­ti­fi­cial in­tel­li­gence.

It will even­tu­ally be used to de­velop sens­ing sys­tems for self-driv­ing cars – and even man­ag­ing whole cities’ traf­fic sys­tems and peak en­ergy de­mand. Just as we have be­come re­liant on the ben­e­fits of smart­phones in our ev­ery­day life in less than two decades, the ben­e­fits of the IoT look likely to be as­sim­i­lated into ev­ery­day life over the next 20 years or so.

Since Chi­nese busi­ness Huawei man­aged to leapfrog the US in the de­vel­op­ment of equip­ment such as an­ten­nae for 5G in­fra­struc­ture, Amer­ica has been try­ing to cut off the sup­ply of es­sen­tial com­po­nents and fund­ing to Huawei and other Chi­nese com­pa­nies un­der the ban­ner of “na­tional se­cu­rity”. The main aim, how­ever, is to pre­vent China mak­ing fur­ther progress in de­vel­op­ing the in­fra­struc­ture that will drive the world of to­mor­row.

Mea­sures to boost semi­con­duc­tor re­search, ed­u­ca­tion and fi­nanc­ing have been added to the draft doc­u­ment that will be­come China’s 14th five-year plan. This will be pre­sented to the coun­try’s great and good in Oc­to­ber for ap­proval, ac­cord­ing to news agency Bloomberg. Bei­jing is fight­ing back against Wash­ing­ton’s war against Huawei us­ing its tried and tested tech­niques.

It wants to har­ness the anger in China over US sanc­tions and ac­tions – di­rect­ing the en­ergy to mo­ti­vate its cit­i­zens to meet spe­cific tech­no­log­i­cal goals.

Con­flict and com­pe­ti­tion have al­ways driven in­no­va­tion. The Sec­ond World War saw the de­vel­op­ment of rocket tech­nol­ogy that would even­tu­ally al­low a jump into space.

With­out the bat­tle for ide­o­log­i­cal supremacy between Moscow and Wash­ing­ton in the mid-20th cen­tury Cold War, the tech­nol­ogy-driven race that pro­pelled hu­man­ity to the moon is un­likely to have hap­pened so quickly, if at all.

This week’s semi­con­duc­tor brief­ing from Chi­nese au­thor­i­ties ap­peared to specif­i­cally want to draw par­al­lels with the coun­try’s de­vel­op­ment of the atomic bomb. Point­ing to its suc­cess in this ma­jor geopo­lit­i­cal race, Bei­jing clearly wants to re­mind Wash­ing­ton that its cen­trally planned model can have a sig­nif­i­cant ad­van­tage when the plan­ners set a di­rec­tion and its peo­ple are prop­erly mo­ti­vated. Trump’s trade tac­tics against Chi­nese tech­nol­ogy com­pa­nies – and the im­pli­ca­tions for China if these tac­tics are a suc­cess – look like they have pro­vided all the mo­ti­va­tion that Bei­jing needs.

Mean­while, amid the un­cer­tainty cre­ated by po­lit­i­cal ma­noeu­vring, the semi­con­duc­tor in­dus­try waits and pre­pares. Ac­cord­ing to Dan Hutch­e­son, chief ex­ec­u­tive of semi­con­duc­tor mar­ket re­searcher VLSI Re­search, the ban on Huawei has trig­gered a large in­ven­tory back­log in the en­tire chip in­dus­try.

He also said that the planned gov­ern­ment as­sis­tance to try to en­cour­age US man­u­fac­tur­ers to build chip fac­to­ries in Amer­ica fell far short of what was needed.

A bi-par­ti­san com­mit­tee has pro­posed $28bn (£21bn) in fund­ing to en­cour­age chip plants to be built on home ground – but build­ing just one plant can cost up­wards of $15bn.

Hutch­e­son thinks this needs to be dou­bled to have any ma­jor im­pact. So, it seems un­likely to be a knock­out blow in Wash­ing­ton’s at­tempts to lure the cen­tre of global chip man­u­fac­tur­ing away from Asia and into the US.

Of course, US chip sup­pli­ers could see a boost in de­mand if sanc­tions are tight­ened against China. How­ever, the big­ger is­sue will be “if they get locked out of China’s mar­ket, while the door re­mains open for other coun­tries”, Hutch­e­son be­lieves.

So, while of­fi­cials in Bei­jing are busy for­mu­lat­ing the hard de­tails of the coun­try’s next five-year plan – es­sen­tially “a su­per-pol­icy pack­age” that iden­ti­fies and sets tar­gets for strate­gi­cally im­por­tant projects – Wash­ing­ton is dis­tracted by cam­paign­ing for Novem­ber’s pres­i­den­tial elec­tion.

The Amer­i­can strat­egy of try­ing to starve the Chi­nese in­dus­try of com­po­nents and fund­ing is driv­ing a new tech­no­log­i­cal race between global pow­ers with a conflictin­g ide­ol­ogy.

This may ul­ti­mately ac­cel­er­ate tech­no­log­i­cal de­vel­op­ment, but it will cer­tainly push us closer to a ma­jor dig­i­tal di­vide between East and West. The global in­ter­net ap­pears to be get­ting more frac­tured by the week.

Of­fi­cials in Bei­jing are aim­ing to har­ness the Chi­nese pub­lic’s anger over US sanc­tions

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