The Seen and the Unseen - hosted by Amit Varma
Ep 358: The Semiconductor Wars
Episode guests
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Quick takeaways
- Semiconductors are at the center of major global conflicts and geopolitics.
- Bell Labs played a crucial role in the growth of the semiconductor industry.
- State spending has driven innovation in semiconductors and other technologies.
- The US has experienced both successes and challenges in its relationship with semiconductors.
- Japan's focus on memory chips contributed to the growth of market leaders like Samsung.
- East Asian countries moved up the value chain in the semiconductor industry.
Deep dives
The Importance of Semiconductors in Geopolitics
Semiconductors play a crucial role in today's world, and understanding their importance is essential for anyone who cares about the state of the world. Semiconductors are required for nearly every piece of technology, with complex supply chains that involve multiple processes and countries. The COVID-19 pandemic has highlighted the vulnerability of these supply chains, which can disrupt the global economy. Geopolitical tensions, particularly between the United States and China, have put semiconductors at the center of major global conflicts. The book 'When the Chips Are Down' delves into these issues and provides insights into the complex world of semiconductors.
The Historical Significance of Bell Labs
Bell Labs, a research arm of AT&T, was a hotbed of innovation during the mid-20th century. It attracted brilliant minds from different fields and fostered an environment of collaboration and creativity. The Cold War era and the imperative for technological superiority created the perfect backdrop for groundbreaking discoveries at Bell Labs. It was there that the transistor, a key building block of modern electronics, was invented. The monopoly enjoyed by AT&T allowed for long-term investments in research and the free sharing of patents, which further fueled innovation. Bell Labs became a driving force behind the growth of the semiconductor industry.
State Spending and Unintended Consequences
State spending, particularly during times of war and geopolitical tensions, has played a significant role in driving innovation. The military's demand for technological advancements has led to breakthroughs in various fields, including semiconductors. Government research institutions like DARPA and NASA have contributed to the development of technologies that are now commonplace, such as the internet and GPS. State spending has often defied conventional wisdom, as it has propelled innovation in sectors that might have otherwise stagnated. The unintended consequences of state-led investment have had far-reaching positive externalities in the world of technology.
The Role of Semiconductors in US Geopolitics
The US has a long history with semiconductors and their role in geopolitics. It started during the Cold War when the US raced against the USSR to achieve technological superiority. This led to the funding of NASA and DARPA, which had significant impacts on society. The US also played a key role in supporting Japan's growth in the electronics industry, especially in memory chips. However, this relationship turned contentious when the US imposed tariffs and price floors on Japanese chips, leading to trade deficits and the rise of South Korea as a competitor. Overall, the US has experienced both successes and challenges in its relationship with semiconductors and their impact on geopolitics.
Japan's Journey in the Semiconductor Industry
Japan's journey in the semiconductor industry began with US support after World War II. The US helped fund the growth of electronics in Japan and provided knowledge transfer to ensure the replication of technology. Japan quickly caught up in the memory chip segment due to its advanced manufacturing capabilities. However, trade disputes between the US and Japan arose, leading to the implementation of tariffs and market share mandates. This had mixed results, as both countries experienced unintended consequences, including the loss of market share to South Korea. Nonetheless, Japan's focus on memory chips contributed to the growth of market leaders like Samsung.
The Technological Fight between the US and Japan
The US and Japan were engaged in a technological fight, driven by market share and trade deficits. The US formed a consortium of major semiconductor players to combat Japan's dominance in the memory chip market. However, the policies implemented, such as tariffs and market share mandates, had mixed effects. While the US aimed to protect its market and reduce trade imbalances, it also led to higher prices for consumers and the rise of South Korea's semiconductor industry. Additionally, Japan's acquisition of Intel sparked concerns about foreign control and highlighted the complexities of the semiconductor industry's global dynamics.
Evolution of the semiconductor industry in East Asia
East Asian countries like Japan, South Korea, and Taiwan initially entered the semiconductor industry by focusing on the lower end of the value chain, such as assembly. However, over time, they moved up the value chain, investing in research, development, and manufacturing. Japan, for example, prioritized national companies, while South Korea welcomed multinational companies (MNCs) to establish bases. These countries continuously developed their capabilities and improved their expertise in chip manufacturing. China, on the other hand, struggled due to limited technology transfers, but eventually made progress by opening to foreign direct investment (FDI) after liberalization.
Europe's semiconductor industry and its challenges
Europe initially had a strong presence in the semiconductor industry, but it lagged behind due to policies that favored imports rather than domestic manufacturing. European countries focused on niche areas like research and development, design, and specialized machinery manufacturing. Companies like ARM and ASML emerged as successful players in these areas. However, Europe faced challenges due to high labor costs, complex business environments, and trade dependence on China. While Europe has unique areas of expertise, such as ASML's lithography machines, it struggles with mass manufacturing and reducing trade dependence on China.
India's journey in the semiconductor industry
India's involvement in the semiconductor industry has gone through different phases. Initially, the government tried to establish semiconductor companies, but it failed due to lack of competition, inefficiency, and inward-looking trade policies. In the second phase, the private sector attempted semiconductor assembly, but faced challenges due to policy uncertainty, tax issues, and high gestation periods. In the current phase, the government aims to focus on comparative strengths like design and reduce vulnerabilities by developing indigenous capabilities. However, attracting foreign investment and providing a conducive business environment remain key challenges.
The present and future of the semiconductor industry
The semiconductor industry has become a critical geopolitical concern, driven by concerns of supply chain disruptions and national security. Global stakeholders, including the US and Taiwan, are taking measures to reduce dependence on China. India aims to develop expertise in design and reduce trade dependence on China as well. However, prioritizing comparative strengths like design and creating an enabling business environment should take precedence over building fabs, as India struggles with policy uncertainty and a not-so-conducive tax regime. The semiconductor industry is driven by long-term thinking, and India needs to foster trust with foreign investors to attract capital and technology transfers.
Best Case Scenario: Increased Cooperation and Resilient Supply Chains
The best case scenario for the semiconductor industry in the next 10 years would be a return to pre-pandemic levels of cooperation, with low tariffs and international trade agreements in place. This scenario would prioritize resilient supply chains, mapping and diversifying them to minimize shocks. Governments would play a role in facilitating this mapping process to ensure supply chain resiliency. Additionally, partnerships between countries and private high-tech players would be encouraged to outpace adversaries collectively. For India specifically, a best case scenario would involve the establishment of a successful local fab, specializing in areas like compound semiconductors, and attracting semiconductor talent to fuel innovation and competitiveness.
Worst Case Scenario: Siloing and Loss of Technological Progress
The worst case scenario for the semiconductor industry in the next decade would be the siloing of countries, with China and other nations becoming self-sufficient and excluding themselves from global trade. This siloing would lead to higher consumer prices, lower demand, reduced revenue, and a stagnant technological progress. Nations would lose the gains made through globalization, and the entire industry would suffer from over-politicization. For India, the worst case scenario would be an unsuccessful attempt to establish a fab without creating a conducive business environment, resulting in limited investment and reluctance from companies to engage in the industry, leading to stagnation and missed opportunities.
Semiconductors power much of modern technology -- and thus, our lives and our politics. Pranay Kotasthane and Abhiram Manchi join Amit Varma in episode 358 of The Seen and the Unseen to shed light on how so much geopolitics today centres around chips -- and why its such a big deal. (FOR FULL LINKED SHOW NOTES, GO TO SEENUNSEEN.IN.) Also check out 1. Pranay Kotasthane on Twitter, LinkedIn, Amazon and the Takshashila Institution. 2. Abhiram Manchi on Twitter, LinkedIn, Instagram and the Takshashila Institution. 3. When the Chips Are Down: A Deep Dive into a Global Crisis -- Pranay Kotasthane & Abhiram Manchi. 4. Puliyabaazi — Pranay Kotasthane’s podcast (co-hosted with Saurabh Chandra). 5. Missing In Action: Why You Should Care About Public Policy — Pranay Kotasthane and Raghu S Jaitley. 6. The Long Road From Neeyat to Neeti -- Episode 313 of The Seen and the Unseen (w Pranay Kotasthane & Raghu S Jaitley). 7. Anticipating the Unintended — Pranay Kotasthane and Raghu Sanjaylal Jaitley’s newsletter. 8. Siliconpolitik -- The tech newsletter started by Pranay Kotasthane. 9. Pranay Kotasthane Talks Public Policy — Episode 233 of The Seen and the Unseen. 10. Foreign Policy is a Big Deal — Episode 170 of The Seen and the Unseen (w Pranay Kotasthane & Manoj Kewalramani). 11. Older episodes of The Seen and the Unseen w Pranay Kotasthane: 1, 2, 3, 4, 5, 6, 7, 8. 12. Ilya Sutskever on the dinner invite from Elon Musk, Sam Altman and Greg Brockman. 13. The BJP Before Modi — Episode 202 of The Seen and the Unseen (w Vinay Sitapati, with the quote about perfection being the enemy of production). 14. Luke Burgis Sees the Deer at His Window — Episode 337 of The Seen and the Unseen. 15. Chip War -- Chris Miller. 16. The New World Upon Us (2017) -- Amit Varma. 17. The Incredible Insights of Timur Kuran -- Episode 349 of The Seen and the Unseen. 18. The Beauty of Finance -- Episode 21 of Everything is Everything. 19. The Tamilian gentleman who took on the world -- Amit Varma. 20. Demystifying GDP — Episode 130 of The Seen and the Unseen (w Rajeswari Sengupta). 21. I, Pencil — Leonard Read. 22. The Three Globalizations -- Episode 17 of Everything is Everything. 23. The Great Redistribution (2015) -- Amit Varma. 24. A trade deficit with a babysitter (2005) -- Tim Harford. 25. Nuclear Power Can Save the World — Joshua S Goldstein, Staffan A Qvist and Steven Pinker. 26. Paper Tigers, Hidden Dragons -- Douglas B Fuller. 27. Why Talent Comes in Clusters -- Episode 8 of Everything is Everything. 28. Jawaan -- Atlee. 29. Terry Pratchett on Amazon. 30. Robert Sapolsky and Joseph Henrich on Amazon. This episode is sponsored by the Pune Public Policy Festival 2024, which takes place on January 19 & 20, 2024. The theme this year is Trade-offs! Amit Varma and Ajay Shah have launched a new video podcast. Check out Everything is Everything on YouTube. Check out Amit’s online course, The Art of Clear Writing. And subscribe to The India Uncut Newsletter. It’s free! Episode art: ‘Fighting for Chips’ by Simahina.
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