“AI will be a huge technological revolution, even bigger than the Industrial Revolution. It will have a lot of consequences, create a lot of value and wealth, but it also brings about a lot of challenges.”1 — Kai Fu Lee
The leaders of the world’s great powers have made themselves very clear. They believe they need to dominate AI technology. The United States is the leader for now. Yet America’s rivals are working hard to reduce this edge.
Vladimir Putin remarked in 2017: “Whoever becomes the leader in this sphere will become the ruler of the world.”
China’s Xi Jianping has said “he wants China, by year’s end, to be competitive with the world’s AI leaders, a benchmark the country has arguably already reached. And he wants China to achieve AI supremacy by 2030.”2
AI will be used not just for commercial reasons but also for the military. This is crucial for cybersecurity, for autonomous driving & flying and robotics.
“For China’s part, mounting investment in autonomous weapon development is a key plank in its ongoing effort to usurp American military dominance. Almost all large-scale AI programs in China benefit from massive governmental support and a huge trove of data, and it’s autonomous weapons program is the jewel in Beijing’s AI crown.
A further dimension to China’s AI strategy is economic, with Beijing seemingly interested in profiting from its autonomous weapons program as a new export product.”3
This is no different from the goals of the USA or other major powers; AI dominance is THE MOST important strategic initiative for the future. But the critical piece that often goes unrecognized is Artificial Intelligence’s dependence on microchips. This is especially so in the case in China.
China’s Chip Gap:
“China will still lag behind America in computing hardware in the near term. Just as data must be processed by algorithms to be useful, algorithms must be instantiated in physical strata — specifically, in the innards of microchips…..The most sophisticated chips are arguably the most complex objects yet built by humans. They’re certainly too complex to be quickly pried apart and reverse-engineered by China’s vaunted corporate-espionage artists”.4
“What AI chips do is optimize performance for specific tasks further down the AI stack. For instance, an AI chip can be tailored specifically for facial recognition, autonomous driving, or cloud computing. The best of these chips represent the bleeding edge of global semiconductor technology, and have grabbed the attention of Washington and Beijing. The Trump administration sees Chinese semiconductor progress as a grave economic and national security threat, and hopes to use a combination of sanctions and incentives to slow down China’s work on AI chips.”5
America used to be the leader with big chip players like Nvidia and Intel. But this expertise is slowly degrading in the USA, as best exemplified by US Chip giant Intel. A Chip giant who “admitted….. that it could actually partner with another semiconductor foundry to help with its next-generation manufacturing technology, as it announced a delay in its next process technology for future chips.
That was a huge admission of defeat for one of Silicon Valley’s most iconic companies. Intel is one of the last remaining semiconductor companies that still uses its own fabrication plants (also called fabs) to manufacture most of its chips.”6
It should be clear that Microchips are now a major chokepoint for China’s AI ambitions. The critical component of microchips and microchip parts are becoming a big tool used by the present US Administration to hammer the Chinese. One the most public examples, the American government has spent the last half decade undercutting the big Chinese telecom equipment provider Huawei by cutting them off from big global chip suppliers.7
“China needed to build more advanced and sophisticated products on par with the United States. However, most of these products required custom chips — and China lacked the domestic manufacturing capability to make them. China uses 61 percent of the world’s chips in products for both its domestic and export markets, importing around $310 billion worth in 2018. China recognized that its inability to manufacture the most advanced chips was a strategic Achilles heel.”8
China’s Big Chip Push:
China is not sitting back nor taking this quietly. They have made concerted efforts to build their own capabilities in microchip production. Officials in Beijing have made it their priority to build a self sufficient industry that will withstand American sanctions and compete at the global level. They are doing this by different levels.
At one level through legitimate means in big government policy and investment. A clear example being the push and support of Cambricon Technology.
“China’s flagship artificial intelligence chip startup Cambricon Technologies is set to raise 2.58 billion yuan ($368 million) in its initial public offering that Beijing hopes will accelerate its challenge to dominant U.S. rivals.
The IPO on Shanghai’s STAR tech market would be the first by a Chinese homegrown AI chip startup and would underline Beijing’s commitment to facilitating capital flow to strategic chip developers. It follows a plan by Semiconductor Manufacturing International Corp. — China’s biggest contract chipmaker — to raise at least $6.55 billion in the biggest-ever offering on STAR, which China touts as its version of the U.S. Nasdaq market.”9
At another level they are bridging the skill gap and hiring experts. Two newly established Semiconductor firms in China, Jinan and Hongxin Semiconductor Manufacturing Co (HSMC) have poached about 100+ engineers from the big Taiwanese semiconductor giants in a push to develop 14 and 12-nanometer chip process technology. This technology is still 2–3 generations behind Taiwan but still cutting edge for China.10
And at a more base level, the old fashioned way of stealing that knowledge through industrial espionage and cyberhacking. As recently as August 6th, it was reported by cybersecurity firm Cycraft that there was a hacking campaign that specifically targeted at least 7 Taiwanese chip firms over the last 2 years. This campaign was “aimed at stealing as much intellectual property as possible, including source code, software development kits, and chip designs.”
“CyCraft concedes it can’t determine what the hackers are doing with the stolen chip design documents and code. And the more likely motivation of the hacking campaign is simply to give China’s own semiconductor makers a leg up over their rivals.”11
This is a national priority for China as semiconductors are now among their most critical technology bottlenecks. “Semiconductor Manufacturing International Corporation (SMIC), the country’s largest chipmaker, remains stuck anywhere from three to five years behind industry leaders Intel, Samsung and TSMC, according to Triolo, of Eurasia Group.”12
Three to five years is a very long time to be behind in technology years. So this is leading to even more global dependence on the giant Taiwan Semiconductor Manufacturing Company (TSMC). So let me explain the fascinating world of the Chip industry.
The Chip Industry=Taiwan:
“There are two types of semiconductor manufacturing companies in the chip industry. Some (like Intel, Samsung, SK Hynix, and Micron) design and make their own products in factories that they own.
There are also foundries, which fabricate chips designed by consumer and military customers; TSMC is the largest of these in the world. The chips that TSMC makes are found in almost everything: smartphones, high-performance computing platforms, PCs, tablets, servers, base stations, game consoles, internet-connected devices like smart wearables, digital consumer electronics, cars, and almost every weapon system built in the 21st century. About 60 percent of the chips TSMC makes are for American companies.”13 “In short, TSMC is the best chipmaker in the world, no matter what vector of performance you care about.”14
TSMC had a dominant 50% market share in 2019. Another big Taiwanese Chip player United Microelectronics Corporation’s (UMC) has 7.5%. If you include some of the other global players who also have microchip fabs in Taiwan, Taiwan’s centrality to this industry becomes very clear.15
For those who are fans of “Dune”, Taiwan is the new “Arrakis”, a place that is the only source of a material critical for everything! In this modern case, Microchips replace the Spice.
Ben Hunt goes on to say:
“There is no future where the United States can both maintain its existential national interests and allow the world’s principal supplier of semiconductors to come under the direct political control of China.
And there is no future where China can both maintain its existential national interests and allow the world’s principal supplier of semiconductors to remain outside its direct political control.”16
Net Net: If Artificial Intelligence is the next BIG strategic initiative for all world powers, Taiwan has become the linchpin in the global AI Arms Race.
As a business person and biased Taiwanese- American/Canadian, it is critical for the United States and western countries to ensure the future of Taiwan’s independence against China’s growing belligerence. Look no further than at China’s despotic acts in Hong Kong or Xinjiang to be concerned. “The West probably would like to help protect Taiwan not just geopolitically, but because of this technical prowess and technical capacity there,” said Brad Swanson of the American Enterprise Institute.
Strategically, the USA needs Taiwan, as much as Taiwan needs America’s military and economic support. From an Information Technology perspective, Taiwan has always been a crucial piece of the consumer technology industry (PCs and Laptops). Just think back to the delays in the supply chain caused by the major earthquake in Taiwan back in 1999.
Taiwan has now become even more central, with the growing importance of Microchip manufacturing.
Investment Analyst Gavin Baker states:
“Modern semiconductor manufacturing is at least as important to the economy as oil was in the 1970s — at least in the case of oil, it was available all over the world albeit at higher prices than in the Middle East. If the overwhelming majority of leading edge semiconductor manufacturing is concentrated in Taiwan with the rest in South Korea, then the geopolitical implications are significant as there is no cost curve with leading edge semiconductor manufacturing — either you can do it or you cannot. It would be as if the Middle East was the only place in the world with oil rather than simply the region with the lowest costs.”17
It is quickly becoming the next flashpoint between China and the United States as it was in 1949. If the United States does not prioritize Taiwan’s independence and defense, they will be undercutting America’s own long term national security, economic and military interests but that of much of the democratic countries in Asia and Europe as well.
Big Thanks to John Lanza and Jason Scott for their valuable feedback and helping me get this to readable form.
Bibliography and Source:
- (Source: Kai-Fu Lee on the Future of AI in the United States and China)
- (Source: https://www.theatlantic.com/magazine/archive/2020/09/china-ai-surveillance/614197)
- (Source: The AI Arms Race in 2020. The UN says we have entered… | by Matt Bartlett | Jun, 2020)
- (Source: China’s Artificial Intelligence Surveillance State Goes Global)
- (Source: AI chips gap may be larger than it appears)
- (Source: Intel admits another defeat with unprecedented manufacturing issues)
- (Source: U.S. moves to cut Huawei off from global chip suppliers as China eyes retaliation)
- Steve Blank
- (Source: China’s top AI chip unicorn to raise $368m in Shanghai debut)
- (Source: China hires over 100 TSMC engineers in push for chip leadership)
- (Source: Chinese Hackers Have Pillaged Taiwan’s Semiconductor Industry)
- (Source: TSMC walks tightrope between US and China as Intel falls behind)
- (Source: The Chip Wars of the 21st Century)
- (Source: Chips and Geopolitics)
- (Source: TSMC is outperforming the shrinking foundry market)
- (Source: TSMC is outperforming the shrinking foundry market)
- (Source: Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020)