Chinese President Xi Jinping. AP
In August this year, a plane carrying Nancy Pelosi, the US House Speaker, touched down in Taipei. It was no ordinary visit — and seemed to echo the visit of Duke of Ferdinand to Bosnia and Herzegovina in June 1914. The Duke’s killing led to the outbreak of the First World War. Pelosi’s visit was viewed with a concern mirroring the disaster over a century ago. After all, China had threatened the entire world over Taiwan for decades. Two of Taiwan’s islands were close to the Chinese coast — which were attacked earlier in 1958. Was the world about to see the conflict veer away from Ukraine to one in Taiwan?
Pelosi landed, amidst Chinese threats. She met with Taiwanese President Tsai Ing-wen and others. In a show of strength, she affirmed America’s support for Taiwan and left China with an egg on its face. Pelosi completed her visit and flew away. Amid the medley of Chinese whispers, the expressions of posturing and salami slicing had acquired a new meaning: The Chinese bluff! By ensuring a safe visit, Pelosi had effectively called out the threats as hollow.
While China and America were playing the psychological game, a key, swift development was taking place in Beijing. The government purged Xiao Yaqing, former chief of the Ministry of Industry and Information Technology (MIIT). Yaqing was charged with failure to build a strong domestic semiconductor industry.
Why the Chip?
Taiwan controls 92 per cent of the global semiconductor industry. The Chinese economy — including its strategic economy — is so dependent on Taiwan that its missiles, cyber capability, technology integrated weapon systems, its tech sector would have been swiftly dismantled in the event of an attack on Taiwan. The organic defensive deterrence mechanism of Taiwan’s semiconductor industry prevented Chinese adventurism, when it came to execution over posturing.
The US move to impose restrictions on semiconductor exports to China has badly affected state-owned Yangtze Memory Technologies, which has suffered a big fall in its share price
In 2014, after Xi came to power, a National Integrated Circuit Industry Investment Fund or ‘Big Fund’ was set up. Its mandate: create a domestic semiconductor industry as the bulwark of Xi’s bark. The fund began ambitiously: raised $21.8 billion in 2014 and $30.19 billion in 2018 through internal state funding. The returns were meagre. When the project began in 2014, chip production met 15.1 per cent of the demand. By 2020, the production was just 15.9 per cent, woefully short of China’s 2020 target. The commercials weren’t working out.
Nervous about its race against time, China tried to get onboard Taiwanese expertise. Taiwan pressed charges of espionage and pilferage of technology against China. Clearly, Pelosi and the Americans knew China was desperate. They had factored in Beijing’s inability to execute action against Taiwan, and wanted to expose their dependence on Taiwanese technology.
For Xi, the result was evident during the Taiwan faceoff this year: when it came to testing the bulwark, the bite wasn’t half as good as the bark. China’s semiconductor industry, led by MIIT, had been a disaster. Its chief, Xiao Yaqing, had to go.
Suspicious America chips away
For sometime now, the US has been targeting China’s strategic tech sector. Chinese firms are expected to support its government’s strategic aims by providing information on companies, technology etc. Huawei had closer ties to the Chinese government and military than most other companies. In 2021 and 2022, Huawei faced a ban in the US and Canada, respectively. In 2020, President Trump put restrictions on chip exports. His successor, President Joe Biden, then signed a ‘chip4alliance’ with Taiwan, Japan and South Korea to make it tougher for China to access semiconductor technology.
President Joe Biden. AP
FDPR or Foreign Direct Product Rule, a provision introduced by the American government in 1959, to protect trading of US technologies, was brought back. Under FDPR, the US government could control the trade of products made in another country, if it was made using American technology. So, TSMC, a major Taiwan semiconductor firm using American technology, was blocked from supplying semiconductors to Huawei, who needed it for manufacturing phones.
Where does Xi go from here?
When Xi Jinping rose to leadership in 2013, he declared boldly from the ramparts his ambition of national rejuvenation — of turning China’s dream of occupying the ‘centre of the earth’ into a reality. A year later, Xi announced a $150-billion National Integrated Circuit Industry Investment Fund (NICIIF) to promote development of its tech industry, especially the semiconductor sector. In the tech space, despite support, corporations like Huawei, Alibaba, Tencent, Baidu and Xiaomi were unable to deter American control and dominance. That’s because China is still dependent on other countries for key circuits in the strategic tech space. Take photolithography, for instance, in the art of chip technology. Photolithography is used to draw and etch lines on a silicon wafer. The multiple etched lines create squares on the wafer that are known as transistors. Logically, the thinnest lines on a silicon chip can create more transistors. The more transistors there are on a chip, the more powerful the chip would be.
That is where a company that started in a leaky shed in Eindhoven in the Netherlands comes in!
ASML is a firm that makes the thinnest lines on a silicon chip, which means creating more transistors that are used to make the most advanced semiconductor chips globally, including Taiwan’s TSMC which controls the global semiconductor market. China wants these Dutch machines so that they can control the domestic chip industry. For long, the US government has been trying to prevent the transfer of these machines from the Netherlands to China.
China wants the $150-million machines for developing domestic chip makers, so smartphone giant Huawei Technologies Co. and other Chinese tech companies can be less reliant on foreign suppliers. The US government is trying to make sure the machines don’t reach China. ASML was holding back the sale of machines to China — under pressure from the US. A tussle has been underway. Evidently, the US is conscious that China will use this advanced chip technology for its strategic, military, and AI use.
This October, China is likely to re-elect Xi Jinping as its leader for the next five years. One of Xi’s key priorities is strategic tech. A year ago, Xi understood that the focus of the large tech giants was unaligned to the cause of the party and national security. In 2021, the government clamped down on large tech companies in China. Their excessive market power — useless in Xi’s calculations on using tech as a strategic weapon for his global ambitions — collapsed after the crackdown, wiping out more than $1 trillion in stock value. Under Xi’s common prosperity agenda, tech billionaires such as Jack Ma were thought to be weak on nationalist commitment. The Taiwan gaffe only confirmed the tactical business ineptness caused by the lack of an iron hand of the state.
A chip on Xi’s shoulder
A transformation has begun along expected lines. Alibaba, Tencent and the likes have been cast aside. In their place, capital is now being funnelled into strategic spaces like semiconductors, robotics and AI. Xi Jinping, ahead of the election, has focused on building technologies that are force-multipliers towards China’s global roadmap. Post the elections, its semiconductors, robotics, AI, and muscle technology will be the focus.
China Development Bank is planning to roll out more than $60 billion in loans for 1,000 firms in the chosen tech space and has raised $30 billion for a new government-backed microchip investment fund. In the last two decades, China made rapid technological progress due to its access to western technology and innovations. Xi’s next term is likely to see increasing curbs on such lines of easy access. Thus, there is a state-fuelled and dogged homegrown desire to dominate tech — which Xi believes is the new gamechanger. A Chinese Academy of Engineering official, Ni Guangnan, wrote recently that the country should create a “Chinese system” that could supplant the combined systems of Intel, Microsoft, Oracle and others that have historically dominated computing.
China has been testing its UAVs and drone technology opposite eastern Ladakh to monitor Indian infrastructure development and movements close to the LAC. Though such Chinese activities are being closely monitored by the Indian Army, India is required to ramp up its strategic tech thinking. India is in advanced stages of discussion with the United States to acquire drones worth $3 billion to bolster its surveillance capabilities. There is also a need for India to shed lethargy and speed up its ties with an eager Taiwan on technology transfer. In times to come, the alliance of democracies could witness greater transfer of technology in the strategic space.
China is desperate to find a way amidst the melee. Lately, ASML — the tool manufacturer for chips that China has been chasing — disclosed an extension to an earlier contract to provide equipment to China’s largest semiconductor maker. Which means they can still find a way to supply equipment to the Chinese firm. That firm — SMIC — is on Biden’s blacklist. The contract extension is valid and exposes limits to America’s ability to stymie the Dragon.
Over the next 3-5 years, Xi, a chip of the old block, would want to use a whole-of-nation approach towards developing technological teeth for its global bite. Post the election — it’s a tiny silicon wafer that could decide which way the cookie crumbles.
The writer is the author of ‘Watershed 1967: India’s Forgotten Victory over China’. His fortnightly column for FirstPost — ‘Beyond The Lines’ — covers military history, strategic issues, international affairs and policy-business challenges. Views expressed are personal. Tweets @iProbal
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Updated Date: October 17, 2022 16:14:16 IST
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