Why does Xi Jinping want the chip? Tech it up, when the chips are down


In August of this year, a plane carrying Nancy Pelosi, the Speaker of the United States House, landed in Taipei. It was no ordinary visit – and seemed to echo the Duke of Ferdinand’s visit to Bosnia and Herzegovina in June 1914. The Duke’s murder led to the outbreak of World War I. Pelosi’s visit was viewed with trepidation reflecting the disaster more than a century ago. After all, China had been threatening the 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 move away from Ukraine and into Taiwan?

Pelosi landed, amid Chinese threats. She met Taiwanese President Tsai Ing-wen and others. In a show of force, she affirmed America’s support for Taiwan and left China with an egg in its face. Pelosi finished her visit and flew away. Amid the medley of Chinese whispers, the expressions of posture and slicing salami had acquired new meaning: The Chinese bluff! By ensuring a safe visit, Pelosi had effectively called the threats hollow.

As China and America played the psychological game, a key and rapid development was occurring in Beijing. The government purged Xiao Yaqing, former head of the Ministry of Industry and Information Technology (MIIT). Yaqing has been accused of failing to build a strong national semiconductor industry.

Why the chip?

Taiwan controls 92% of the world’s semiconductor industry. China’s economy – including its strategic economy – is so dependent on Taiwan that its missiles, its cyber capability, its technological integrated weapons systems, its technology sector would have been quickly dismantled in the event of an attack on Taiwan. Taiwan’s semiconductor industry’s organic defensive deterrence mechanism has prevented Chinese adventurism, with respect to execution rather than posture.

The US decision to impose restrictions on semiconductor exports to China has severely affected state-owned Yangtze Memory Technologies, which suffered a sharp drop in its share price

In 2014, after Xi came to power, a National Integrated Circuit Industry Investment Fund or “Big Fund” was established. Its mandate: to create a national semiconductor industry as a bulwark of Xi’s bark. The fund started out ambitiously: $21.8 billion in 2014 and $30.19 billion in 2018 with internal state funding. The returns were meager. When the project started in 2014, chip production met 15.1% of demand. In 2020, production was only 15.9%, well below China’s 2020 target. The ads weren’t working.

Concerned about its race against time, China has tried to bring Taiwanese expertise on board. Taiwan has sued China for espionage and theft of technology. Clearly, Pelosi and the Americans knew China was desperate. They had taken into account Beijing’s inability to execute action against Taiwan and wanted to expose their reliance on Taiwanese technology.

For Xi, the result was evident in the showdown in Taiwan this year: when it came to testing the bulwark, the bite was not half as good as the bark. China’s semiconductor industry, run by MIIT, had been a disaster. Its leader, Xiao Yaqing, had to leave.

Suspicious America is collapsing

For some time now, the United States has been targeting China’s strategic technology sector. Chinese enterprises are expected to support its government’s strategic goals by providing business information, technology, and more. Huawei had closer ties to the Chinese government and military than most other companies. In 2021 and 2022, Huawei faced a ban in the United States and Canada, respectively. In 2020, President Trump imposed restrictions on chip exports. His successor, President Joe Biden, then signed a “chip4alliance” with Taiwan, Japan and South Korea to make it harder for China to access semiconductor technology.

Beyond the lines Why Xi Jinping wants the chip Tech it up when chips are down

President Joe Biden. PA

The FDPR or Foreign Direct Product Rule, a provision introduced by the US government in 1959, to protect trade in US technology, has been brought back. Under FDPR, the US government could control trade in products made in another country, if they were made using US technology. Thus, TSMC, a large Taiwanese semiconductor company using American technology, was prevented from supplying semiconductors to Huawei, which needed them to manufacture phones.

Where does Xi go from here?

When Xi Jinping came to power in 2013, he boldly declared from the ramparts his ambition for national rejuvenation – to turn China’s dream of occupying the “center of the earth” into reality. A year later, Xi announced a $150 billion National Integrated Circuit Industry Investment Fund (NICIIF) to promote the development of its technology industry, especially the semiconductor sector. In the tech space, despite the support, companies like Huawei, Alibaba, Tencent, Baidu and Xiaomi have been unable to deter US control and dominance. Indeed, China still depends on other countries for key channels in the strategic technology space. Take photolithography, for example, in the art of chip technology. Photolithography is used to trace and etch lines on a silicon wafer. The multiple etched lines create squares on the wafer called transistors. Logically, the finer lines on a silicon chip can create more transistors. The more transistors on a chip, the more powerful the chip will be.

This is where a company that started in a leaky hangar in Eindhoven in the Netherlands comes in!

ASML is a company that makes the finest lines on a silicon chip, which means creating more transistors that are used to make the most advanced semiconductor chips in the world, including Taiwan’s TSMC which controls the global market semiconductors. China wants these Dutch machines to be able to control the national chip industry. For a long time, the US government tried to prevent the transfer of these machines from the Netherlands to China.

China wants the $150 million machines to develop domestic chipmakers, so smartphone giant Huawei Technologies Co. and other Chinese tech companies can be less dependent on foreign suppliers. The US government is trying to make sure the machines don’t reach China. ASML was holding back selling machines to China – under pressure from the United States. A fight is in progress. Obviously, the United States is aware that China will use this advanced chip technology for its strategic, military and AI use.

In October, China is expected to re-elect Xi Jinping as its leader for the next five years. One of Xi’s top priorities is strategic technology. A year ago, Xi realized that the attention of big tech giants was misaligned with the cause of the party and national security. In 2021, the government cracked down on big tech companies in China. Their excessive market power – useless in Xi’s calculations of using technology as a strategic weapon for his global ambitions – plummeted after the crackdown, wiping out more than $1 trillion in market value. Under Xi’s common prosperity agenda, tech billionaires such as Jack Ma were seen as weak in nationalist commitment. Taiwan’s gaffe only confirmed the tactical incompetence of business caused by the state’s lack of an iron fist.

A chip on Xi’s shoulder

A transformation has begun in the expected direction. Alibaba, Tencent and others have been sidelined. In their place, capital is now channeled into strategic spaces like semiconductors, robotics and AI. Xi Jinping, ahead of the election, focused on building force-multiplier technologies toward China’s global roadmap. After the elections, its semiconductors, robotics, AI and muscle tech will be the center of attention.

The China Development Bank plans to roll out more than $60 billion in loans for 1,000 companies in the chosen tech space and has raised $30 billion for a new government-backed microchip investment fund. Over the past two decades, China has made rapid technological progress due to its access to Western technology and innovations. Xi’s next term will likely see more and more restrictions on these easy access lines. Thus, there is a state-fueled and stubborn local desire to dominate technology – which Xi says is the new game-changer. A Chinese Academy of Engineering official, Ni Guangnan, recently wrote 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 drones and drone technology facing east Ladakh to monitor Indian infrastructure development and movements near the LAC. Although these Chinese activities are closely monitored by the Indian military, India is bound to step up its strategic technological thinking. India is at an advanced stage of talks with the United States to acquire drones worth $3 billion to boost its surveillance capabilities. It is also necessary for India to emerge from lethargy and accelerate its ties with a Taiwan that is keen on technology transfer. In times to come, the alliance of democracies may witness a greater transfer of technology into the strategic space.

China is desperately looking for a way in the middle of the fray. Recently, ASML – the chip tool maker China is looking for – announced an extension of an earlier contract to supply equipment to China’s largest semiconductor maker. Which means they can still find a way to supply equipment to the Chinese firm. This company – SMIC – is on Biden’s blacklist. The contract extension is valid and exposes the limits of America’s ability to thwart the Dragon.

Over the next 3-5 years, Xi, a chip of the old bloc, would like to use a pan-national approach to develop tech teeth for its global bite. After the election – a tiny silicon wafer could decide which way the cookie crumbles.

The writer is the author of “Watershed 1967: India’s Forgotten Victory over China”. His bimonthly column for FirstPost — “Beyond the Lines” — covers military history, strategic issues, international affairs, and political and business challenges. The opinions expressed are personal. Tweets @iProbal

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