While the media has you focused on Ukraine, something massive is quietly happening behind the scenes of the new global economic order.
Last month, China’s Foreign Ministry declared de facto sovereignty over the Taiwan Strait—a waterway separating Taiwan and China’s mainland.
And immediately, China’s defense minister, Wei Fenghe, pre-warned the U.S. to stay out of it.
But that’s not all.
He threatened to start a war “no matter the cost…if anyone dares to split Taiwan from China.”
While this rhetoric looks like typical muscle flexing between the West and China, there’s much more to it.
In fact, it’s a brewing war over the most precious yet little-understood “future commodity.”
And securing its supply is part of China’s plan to break its dependence on the West and create a new world order.
Let me explain.
The World’s Most Influential Company
Taiwan is a relatively small island nation with few natural resources.
And while its pro-Western attitude may stomp on Xi Jinping’s communist ego, it doesn’t have much geopolitical significance on its own.
So, what makes Taiwan so important that China is willing to go to war over it?
One of the most critical manufactured resources on the planet: semiconductors.
Taiwan is home to the Taiwan Semiconductor Manufacturing Company (TSMC).
TMSC is the world’s largest chipmaker, cranking out more than half of all made-to-order chips on the planet.
And when it comes to the most advanced chips, it holds more than 90% of the market.
This company is so far ahead in its abilities that most tech giants rely on TMSC’s production—including Apple, Nvidia, and Qualcomm.
Your new Mac with that revolutionary M1 chip? Made in TSMC’s foundries.
In other words, the world’s chip market is dead reliant on this company.
Remember the shortages of the latest tech gadgets over the last year? From game consoles to cars and trucks, many products which rely on these chips are still backordered.
For example, Ivan just received his truck ordered over a year ago and a PS5 I purchased for a nephew in December 2020 just arrived last month.
There were a lot of reasons for the delays, but at its core, it was a shortage of one key input: microchips.
TSMC and the few other chipmakers couldn’t keep up with demand. And there was no one to pick up the slack.
Now, imagine what would happen if a company like TSMC went offline or were nationalized?*
(*Side note: This isn’t a long shot. Most TSMC operations are on the Western coast of Taiwan. And in case of war, they would fall right in the line of fire, which is probably the reason China doesn’t go to war head-on.)
The global supply of products with at least one chip inside—from a kettle to modern artillery—would grind to a halt.
That explains why Xi is so protective of Taiwan. He doesn’t want to give up control over the supply of this vital resource to China’s fiercest enemy.
It also explains why the West is also.
Lithography Arms Race
Taiwan’s chip hegemony risks aren’t news for China and the U.S.
Over the last few years, China and the U.S. have been plowing billions of dollars into “onshore” chip manufacturing.
Yet, the technology remains concentrated in just a few companies.
That’s because leading-edge chips are masterpieces of innovation and surgical-precision microelectronics. It takes decades of expertise and trillions of dollars of R&D to manufacture them to tolerances on a mass scale.
You may think that with so many decades of chip production, the world has figured it out – but consider this:
A strand of human hair is 100,000 nm wide. Meanwhile, Apple’s new iPhone 13 is powered by TSMC-made 5nm (nanometer) class chips. In other words, a human hair is 20,000x the size of a circuitry element printed on that chip.
And if you think that’s complicated, think again.
To make chip classes over 10 nm, you can use an older-generation technology called Deep Ultra Violet (DUV). Three major suppliers sell it: Nikon, Canon, and ASML from the Netherlands.
It’s what Intel currently makes.
But for anything under 10 nm (where TSMC currently holds more than 90% of the market), you need a next-gen machine called Extreme Ultra Violet (EUV).
It was developed by the Netherlands’ ASML in 2013, which has had a complete monopoly over it since.
ASML has sold over 200 such machines, but none shipped to China because Trump convinced the Dutch government to embargo these systems for China in 2019.
“ASML feels like it’s caught in a tug-of-war between Washington and Beijing. Brussels, too, is jumping into the fray.
“Already in 2019, the United States blocked exports of the machines to China, fearing that the Chinese would copy the technology,” Michiel Hoogeveen told Fortune. The conservative Dutch member of the European Parliament, where he sits on the influential trade committee, raised his concerns during a meeting right before key E.U. summit talks with the U.S. government.”
And now the Biden administration is pushing for a full ban that would bar ASML from selling even run-of-the-mill DUV systems to China.
“The U.S. is pushing the Netherlands to ban ASML Holding NV from selling to China mainstream technology essential in making a large chunk of the world’s chips, expanding its campaign to curb the country’s rise, according to people familiar with the matter.
Washington’s proposed restriction would expand an existing moratorium on the sale of the most advanced systems to China, in an attempt to thwart China’s plans to become a world leader in chip production.
American officials are lobbying their Dutch counterparts to bar ASML from selling some of its older deep ultraviolet lithography, or DUV, systems, the people said.”
This is why China is scrambling to build a self-reliant domestic semiconductor industry.
Last year, Alibaba designed its most advanced 5nm Yitian 710 chip. Baidu, China’s Google, released a 7nm chip called Kunlun 2. And Oppo, the Apple of China, is reportedly working on a revolutionary 3nm circuitry.
But while China can design chips, it doesn’t have leading-edge foundries to produce them at scale. So all they can do is contract TSMC and a few other makers to manufacture their designs.
Industry experts think it will probably take a decade or so for China’s chip foundries to catch up to TSMC – and by then, there may be even better technologies, making China always a few steps behind.
And while China plays catchup, it will have to count on the West and its allies for the supply of this crucial technology.
“China’s semiconductor industry sits several generations behind the leading-edge of innovation. Massive investments are required to close that gap, particularly in chip manufacturing. Therefore, the ability of the defense sector to spin-off anything cutting-edge—or of the private sector to spin-on anything superior to foreign offerings—is limited. Chinese companies have attempted to acquire foreign leading-edge technology through forced technology transfer agreements, intellectual property theft, and talent poaching.”
And that’s one of China’s biggest Achilles heels in the confrontation with the West.
EUV Is the “Oil” of Modern Warfare
Microscopic chips made using EUV lithography will shape the future of technology.
TSMC’s 5nm chips are already built into Apple’s newest Macbooks and iPhones. Nvidia and AMD will also use 5nm lithography for their upcoming lineup of computer processors.
All next-gen tech, including machine learning and quantum computing, will run on the 5nm node and smaller. That means all future weapons, such as AI-driven combat drones or guided missiles, will use these chips.
Imagine being cut off from the “commodity” that will power tomorrow’s warfare?
It’s the equivalent of running out of oil in WW2 – maybe worse.
Via National Security Commission on Artificial Intelligence:
“Despite tremendous expertise in microelectronics research, development, and innovation across the country, the United States is constrained by a lack of domestically located semiconductor fabrication facilities, especially for state-of-the-art semiconductors. If current trends continue, the United States will soon be unable to catch up in fabrication, and could eventually also be outpaced in microelectronics design. If a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off U.S. access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare.”
There’s no way China or the U.S. will let that fly.
War Is Coming
Mark my words, EUV foundries will be the next battleground between the West and China (and thus, semiconductor stocks should benefit.)
Will this lead to a trade war or a real one?
We’ll find out soon enough.
One way or another, China will have to secure a reliable supply of 5nm chips “no matter the cost.”
That’s because breaking itself away from the West-controlled supply chains is the only way to cement its superpower status in a new world order.
And if China controls Taiwan, look out.
To be continued …
Next week, we’ll pick it back up and discuss what new world order China and its allies are plotting and how it will affect you. If someone forwarded you this letter, subscribe here to stay tuned.