China’s Plan to Dominate Future of Tech, Economy, Military Is Failing

China’s Plan to Dominate Future of Tech, Economy, Military Is Failing

Beijing is furious. China’s leadership knows that it is losing the race for the future of technology. It is a race that could make or break the country’s super power status. And Washington is determined to do everything possible to slow it down. 

Semiconductor chips are the tiny brains that power our technological world, from cars and cellphones to fighter jets and advanced missile systems. They’re so complex that no country can produce a single chip by itself. In years past, this was a good thing. Governments understood that technology is not a zero-sum game — that innovation in one place can push the whole world forward. This understanding created stability; an attack on any part of the globally dispersed semiconductor supply chain can bring the world to a standstill.

But that’s all changed now that the US and China are locked in a tech cold war. In this war, chips are weapons.

China has spent tens of billions of dollars to catch up to the most elite chipmakers over the past few decades, a race that has intensified under President Xi Jinping. But development has stalled. One of China’s vaunted chip makers, Tsinghua Unigroup, has gone bankrupt. The men who ran the industry are caught in a never-ending corruption probe. And the US is intent on blocking China’s access to the foundational technologies that make chip production possible.

“China’s chip-development program has been a totally mixed bag,” Paul Triolo, a semiconductor expert and senior vice president for China and technology policy at the consultancy Albright Stonebridge Group, told me. “It’s not about money. Right now China is awash in money for tech, but you need the right people and customers that trust you. All of that you can’t buy.”

Beijing understands that controlling production of advanced chips will not only enrich its economy but boost China’s geopolitical influence. To Xi, semiconductors and the technologies they facilitate are “the main battleground” in the global contest for power.

The US understands that if it allows China to control advanced chip production, Beijing will have the tools it needs to become the world’s preeminent superpower. Leland Miller, the founder of the research firm China Beige Book, told me that while Washington has stymied Beijing to some extent, there’s no guarantee America’s lead will be maintained.

“There’s just nothing more important than this,” he said.

Peak globalization

Semiconductor chips don’t just power today’s technology — they are the tiny keys that will unlock the next world-changing innovations, like quantum computing and artificial intelligence. Right now, a chip cannot be made without contributions from all over the world: chemicals from Germany; machines from Japan and the Netherlands; packaging and testing in China and Malaysia. The supply chain is the product of globalization, trust, and free capital markets.

But there are some parts of this chain that are more critical, more delicate, and more lucrative. The most advanced chips — the smallest chips with the most processing power — require extremely specialized knowledge to design and manufacture. The machines and factories that make these chips are engineering feats in and of themselves, requiring tens of billions of dollars of investment to develop.

The bulk of these cutting-edge chips are designed by US companies and manufactured in Taiwan and South Korea. A 2021 report from Boston Consulting Group said Taiwan produced 92% of all chips at 10 nanometers or smaller, while South Korea made the other 8%. Taiwan Semiconductor Manufacturing Company, Taipei’s crown jewel, is set to produce chips as small as 3 nm by the end of this year, with South Korea’s Samsung and the US’s Intel following behind.

China’s leading semiconductor company, Semiconductor Manufacturing International Corporation, claims to be able to make, at smallest, 7 nm chips, though analysts haven’t seen them. Samsung and TSMC were at 7 nm four years ago. Experts have told me that without trust and cooperation from the rest of the world — especially the US and its East Asian allies — it’s nearly impossible to make breakthroughs in semiconductor technology. China is stuck behind the very countries that have become its main adversaries, but the stakes are too high for Beijing to give up.

Why China needs the chips

The Chinese economy is big, but it isn’t wealthy. China’s 2021 GDP per capita ranked just below Antigua and Barbuda’s and above Thailand’s. The country has spent more than a decade growing its economy through debt-driven infrastructure development, but that strategy is becoming less productive — leaving China with a growing number of debt-ridden zombie companies and ghost cities. To avoid getting caught in the middle-income trap, it needs to start developing higher-value businesses. In other words, China needs a more lucrative line of business the same way someone with credit-card debt needs a raise.

Harking back to the days of Mao Zedong, Xi has staked the future of the country on state-led industrial development plans, most notably the “Made in China 2025” plan. Xi has stressed that the entire country needs to help seize “the technology lifeline,” and figuring out how to design and manufacture chips is central to the plan’s success.

And Xi has been backing up this philosophy with cash. Since he became president in 2012, the country has invested over $100 billion in chip development. But much to Beijing’s chagrin, the outpouring of money has produced lackluster results. Money was handed to fashion brands or construction firms that became chipmakers overnight in order to get some cash. The government gave tens of billions of dollars to Zhao Weiguo, the CEO of Tsinghua Unigroup, who is known in Chinese media as “the semiconductor madman.” As you might expect, Beijing suspects Zhao blew its money like a drunken sailor on shore leave, and he is now under investigation. The Made in China 2025 plan lays out a goal for domestically manufactured chips to meet 70% of China’s semiconductor needs within three years. However, state media has suggested that as of 2019 China was supplying only 30% of its own needs. The researcher IC Insights put the percentage for 2020 even lower, at about 16%. 

China is catching up in parts of the semiconductor supply chain with “lower barriers to entry,” like designing the chips, Triolo told me. “But on the manufacturing and manufacturing-equipment side, they’re way behind,” he said. “You can’t steal that either, because the secret sauce in a lot of this is implicit knowledge. You can’t fake your way to a commercially viable, sustainable model.”

Chips also play a key role in modernizing China’s military. Not all of China’s military equipment requires state-of-the-art chips (not all of the US’s equipment does either), but it’s clear Beijing understands that being able to manufacture state-of-the-art chips will make a huge difference in future conflicts. In a 2021 report to Congress, a US commission made up of technologists and researchers made it clear to American lawmakers that while China may be behind on developing its own chips, Beijing’s semiconductor push must be taken seriously.

“For the first time since World War II, America’s technological predominance—the backbone of its economic and military power—is under threat,” the report said. “China possesses the might, talent, and ambition to surpass the United States as the world’s leader in AI in the next decade if current trends do not change.”

An angry Uncle Sam

Two years ago, Xi said in a speech that because the world was “undergoing profound changes unseen in a century,” China would need to expedite its technological, military, and economic development. The subtext of the speech was clear: After decades of biding its time, China was starting to gain equal footing among the global superpowers — and it was time for China to assert itself.

Over the past few years, Washington has woken up to Xi’s aggression and begun to see China’s technological development as not only an economic challenge but a matter of national security. During the Trump administration, departments across the federal government worked to deny Chinese tech firms access to the lifeblood of their businesses: Commerce made it so that Chinese companies couldn’t buy certain American-made parts, Treasury blocked Chinese companies from taking over American companies that work on semiconductors, and State used diplomatic pressure to get allies to limit sales to China.

The clearest example of this approach came in 2019, when the US cut off the Chinese telecom giant Huawei. The Justice Department accused the company of doing business with Iran and North Korea in violation of international sanctions. As punishment, Washington denied Huawei the use of advanced chip components containing US intellectual property. Now the company is on its knees; its CEO, Ren Zhengfei, has said the company “must make survival our main goal” for the next two years.

Bonnie Glaser, the director of the Asia Program at the German Marshall Fund of the United States, told me the US “went after the company in a really fulsome way.”

America’s excommunication of Huawei — and its ability to choke China off from the semiconductor game — wouldn’t have been possible without Taiwan, Glaser told me. The US has not officially recognized Taiwan, an island nation off the coast of China that Beijing claims as its own, since the 1970s. Instead, the American government holds a “One China” policy that condemns any attack by Beijing on the island, but also acknowledges it as technically a part of China.

Taiwan built up its chip industry in part as a defense mechanism. The country’s state-of-the-art semiconductor factories, or fabs, act as a “silicon shield” to deter China from invading. China is the world’s biggest importer of chips, and the world would suffer if the complex fabs that manufacture chips went offline for any reason. But over the next few decades, as the idea of taking back Taiwan becomes more central to Chinese politics and the country’s military gets stronger, that shield could be tested. 

“The Chinese are not going to decide whether or not to invade Taiwan based on their need for semiconductors,” Glaser said. “This is about the sovereignty of the Chinese Communist Party.”

But that doesn’t mean Beijing won’t get angry. Recently, the US proposed a semiconductor consortium with Japan, South Korea, and Taiwan called Chip 4. Chinese state TV called the move “discriminatory and exclusive” and said it threatened to fragment the global market. The consortium has its detractors in the US, too. A former State Department diplomat focused on East Asia expressed skepticism that South Korea and Taiwan would work seriously with the US to box out China because it could put their sales to Chinese customers at risk.

The US is leaning on its European allies as well. US officials have barred Advanced Semiconductor Materials Lithography, a Dutch company that makes the machines that etch writing onto the circuits of advanced chips through a process called lithography, from selling advanced machinery to Chinese chipmakers.

The US also took a page from Beijing’s industrial policy book in June, when Congress passed the CHIPS Act, designed to funnel $250 billion toward revitalizing research in tech connected to semiconductors. While this money could help keep the US ahead of China in the chips arms race, Washington will need to rely on the free market and international collaboration to truly counter Beijing’s ambition. Maintaining the US’s lead will be particularly tricky given that key chip materials, suppliers, and chip-manufacturing capacity are concentrated in East Asia.

Miller, of China Beige Book, told me that “there’s no guarantee” that “throwing money at semiconductor companies will create the supply-chain resiliency we need.” Still, he thinks our policies around chips are a lot stronger than they were 10 years ago.

The challenge for Washington is maintaining a proactive rather than reactive mindset about innovation. Instead of simply trying to counter China’s every move, the US needs to use policies — from manufacturing investments to exports controls — that make sure America and its allies stay at the center of the semiconductor universe. Reacting to Beijing’s moves would only put us on our back foot, but being proactive keeps the US looking ever forward, where innovation lies. 

No rest for the winners

The world is pulling back from China for reasons beyond geopolitics. Beijing’s “COVID Zero” strategy has created great uncertainty in the economy. Xi is increasingly grabbing control of the economy and putting pressure on foreign companies to do business the way he wants. Companies like Honda and Apple are looking to move some supply chains out of China and into countries like Vietnam. More and more US companies are bringing their manufacturing back to America; Intel, for example, is building chip plants in Ohio and Arizona.

Beijing should not be underestimated, though, especially not in technology. In the 1960s and 1970s when China was poor, state scientists still managed to develop a hydrogen bomb and a nuclear bomb and launch a satellite. The Chinese exalt these efforts, known in the country as “Two Bombs, One Satellite,” as a feat of development and proof of the country’s ability to punch above its weight. Xi is trying to imbue this chip effort with the same spirit — he has no other option. Losing the semiconductor race means China will always be at the mercy of countries with more power over the chip supply chain, like the US and Taiwan. And that is not something Xi will tolerate.

Linette Lopez is a senior correspondent at Insider.