Speaker 1: Welcome to Kobe Time, a podcast series on Markets and
Speaker 1: Economies from Devious Group Research. I'm ba chief economist, welcoming
Speaker 1: you to our 108th episode.
Speaker 1: If any book can make general audiences understand the Silicon
Speaker 1: age and finally recognize how it rivals the atomic age
Speaker 1: for drama and import chip war is it? That's what
Speaker 1: Virginia Hefferman wrote at the end of her New York
Speaker 1: Times book review.
Speaker 1: I'm very glad to have the Chip Wars author on
Speaker 1: Coy Time. Chris Miller is associated professor of International History
Speaker 1: at the Fletcher School at Tufts University. He published Chip
Speaker 1: War last year and it has been a major success
Speaker 1: winning the Financial Times best business book award for 2022.
Speaker 1: Chris Miller, a warm welcome to Cope time.
Speaker 1: Thank you for having me. So great to have you.
Speaker 1: Uh Chris, I'll begin by playing the devil's advocate. Uh
Speaker 1: the nuclear era quantum mechanics, DNS double he legs man
Speaker 1: on the moon. Even in my world, the futures and
Speaker 1: options in finance. All of these civilization, transforming advances took
Speaker 1: place in the 20th century with little or no shape,
Speaker 1: processing power behind them,
Speaker 1: modern cities, industrial agriculture, amazing bridges and tunnels, aviation. All
Speaker 1: these predate the computer age. And yet in your book,
Speaker 1: you state that today's military, economic and geopolitical power are
Speaker 1: built on a foundation of computer chips. Are you overseeing
Speaker 1: the case?
Speaker 2: Well, I, I think you're right that humanity has had
Speaker 2: lots of advances before chips were invented. Um, but it's
Speaker 2: also the case today that it's hard to go about
Speaker 2: your daily life without interacting with not just dozens but
Speaker 2: hundreds or thousands of semiconductors in your phone. There are
Speaker 2: dozens of semi
Speaker 2: devices in your computer in the data centers that process
Speaker 2: and store your data in your car. If it's a
Speaker 2: new car, it will have on average 1000 semiconductors inside
Speaker 2: in your refrigerator in your dishwasher in your microwave. Uh
Speaker 2: And almost every device you touch, there are lots and
Speaker 2: lots of semiconductors and
Speaker 2: they are so ubiquitous around us that we don't even
Speaker 2: think about them. Uh But in fact, as we learned
Speaker 2: uh during the pandemic era, shortages, modern economy simply can't
Speaker 2: function without them.
Speaker 2: And so in that sense, I think they're the most
Speaker 2: economically critical technology because during the pandemic, the largest dollar
Speaker 2: value uh disruption to manufacturing uh in terms of component
Speaker 2: shortages came from uh semiconductor shortages. And so I think
Speaker 2: that was one very brief and relatively small illustration of
Speaker 2: just how critically economically important semiconductors have become
Speaker 1: economic criticality. Aside. Do you also see security and conflict
Speaker 1: propensity coming in with the availability or lack there of chips.
Speaker 2: Well, certainly militaries are just as reliant on ships as
Speaker 2: the rest of us. Um militaries have reoriented the way
Speaker 2: they devise systems to take advantage of the sensing, the communications,
Speaker 2: the computing power that semiconductors enable. And just like today,
Speaker 2: it's impossible to buy a car without many, many chips
Speaker 2: and stuff.
Speaker 2: So too, it's impossible to feel a modern tank or
Speaker 2: a plane or a drone without lots of chips as well.
Speaker 2: And just like in cars or consumer devices, the more
Speaker 2: advanced the communication, the more advanced the sensing, the more
Speaker 2: advanced the computing, the more chips are inside the same
Speaker 2: is true of defense systems
Speaker 2: as well. Which is why today every major military is
Speaker 2: thinking harder than ever about its access to semiconductors, both
Speaker 2: in terms of assuring that it can access the chips
Speaker 2: that it needs. But also trying to find new ways
Speaker 2: to apply the capabilities that chips enable the defense systems.
Speaker 2: If you talk to defense ministries, you'll hear a lot
Speaker 2: today about autonomy about applying A I to defense systems
Speaker 2: and intelligence capabilities. And all of that means using more
Speaker 2: and more semiconductors for military purposes.
Speaker 1: Right? And in your book also, I think there are
Speaker 1: these fascinating chapters about the Soviet Union's attempts to get
Speaker 1: some degree of uh security on ship making and how
Speaker 1: spectacularly fi you know, it all ended in largely failure.
Speaker 1: And you point out that by the early nineties, the
Speaker 1: gap was so insurmountable that even
Speaker 1: Soviet defense specialists would say one of the major reasons
Speaker 1: for their decline was the tech related uh gap with
Speaker 1: the US and its allies. Um Chris, your book has
Speaker 1: just fantastic first. So 67 chapters on the history of
Speaker 1: chip making. And we go all the way back to
Speaker 1: the forties and fifties, the uh the noise and Shockley
Speaker 1: of the world. And
Speaker 1: by the way, I did my phd at Urbana Champagne, Illinois.
Speaker 1: I did not know about John Barin till I read
Speaker 1: your book. And now I know why there's a Barine
Speaker 1: quad at Illinois. Um So looking at at that uh and,
Speaker 1: and the incredible success that Silicon Valley has had over
Speaker 1: the last 50 60 years in terms of pushing uh innovation.
Speaker 1: So help us sort of walk through the critical ingredients
Speaker 1: behind this continuous series of innovation in the area of
Speaker 1: computer chips.
Speaker 1: Well, the the the
Speaker 2: key to the rate of innovation in the chip industry
Speaker 2: is to understand Moore's law. Um Gordon Moore was one
Speaker 2: of the co-founders of Intel even before he founded Intel,
Speaker 2: though he was involved in the chip industry. And he
Speaker 2: realized very, very early on that the number of transistors
Speaker 2: per chip was doubling every year or two.
Speaker 2: Um And at the time a cutting edge ship would
Speaker 2: have a very small number of transistors on it. Today,
Speaker 2: your phone has billions of transistors, but just uh six
Speaker 2: years after the first ship was invented, that he saw
Speaker 2: a pattern of doubling every year or two and predicted
Speaker 2: that that rate of doubling would continue for some time.
Speaker 2: He thought
Speaker 2: continue for at least a decade. It turns out it
Speaker 2: continued all the way up basically to the present. And
Speaker 2: what that's meant is that the chip industry has improved
Speaker 2: its capabilities more rapidly over a longer time horizon than
Speaker 2: any other type of technology in all of human history.
Speaker 2: Nothing else comes remotely close to that rate of technological improvement,
Speaker 2: exponential growth for uh more than half a century. It's
Speaker 2: something that the rest of the economy can only dream
Speaker 2: of
Speaker 2: in most companies if sales grow by 5% or if
Speaker 2: technology improves by 10% it's a great success. And in
Speaker 2: the chip industry, that's an extraordinary failure. And so III
Speaker 2: I like to compare that to other types of veggies, aviation,
Speaker 2: for example. Um you know what if planes flew twice
Speaker 2: as fast every year while also being reduced in cost
Speaker 2: on a regular basis? Will they be flying
Speaker 2: uh many times faster than the speed of light at
Speaker 2: this point? If that rate of growth were sustained over
Speaker 2: half a century. And so it's it's physically impossible for
Speaker 2: that to happen. But the chip industry has done something
Speaker 2: similar and and when you look at the proliferation of
Speaker 2: chips across society and across economy, that's been made possible
Speaker 2: because Moore's law has driven down the cost of computing.
Speaker 2: You want a data point that the first chips that
Speaker 2: were available commercially had just four transistors on them
Speaker 2: today. You can go to Amazon and buy a, a
Speaker 2: thumb drive with a billion transistors or 10 billion transistors
Speaker 2: for about $10. Which means that ballpark, the cost of
Speaker 2: computing has fallen by roughly 1 billion fold uh since
Speaker 2: uh since the 19 fifties. And that's all possible. Thanks
Speaker 2: to Moore's Law,
Speaker 1: right? I was looking up the Apple iphone 12 had
Speaker 1: the A 14 processor, something like 10 billion I CS.
Speaker 1: And the iphone 14 pro max has the A 16
Speaker 1: processor with 16 billion. There's a 60% increase in the
Speaker 1: I CS just in the latest ones. Um I wanna
Speaker 1: talk to you later about the likelihood that this will
Speaker 1: not go on forever and what that means. But uh
Speaker 1: before we go in that direction,
Speaker 1: uh Chris, you spent a lot of time in your
Speaker 1: book talking about the immense complexity and the cost associated
Speaker 1: with producing chips uh share with us some idea of how,
Speaker 1: how complex and how coffee that is.
Speaker 2: Well, to make an advanced chip, you need to make
Speaker 2: a chip with billions of transistors, each of which is
Speaker 2: roughly the size of a Coronavirus. So it's, it's the
Speaker 2: most complex manufacturing humans have ever done. You think in
Speaker 2: most manufactured goods, they have bolt tolerances measured in millimeters
Speaker 2: or 10th of millimeters. But in the chip industry, misplacing
Speaker 2: a single atom can at times cause catastrophic failure to
Speaker 2: the way the semiconductor works.
Speaker 2: So there's no other industry that combines the scale manufacturing
Speaker 2: transistors by the billions with the level of precision required.
Speaker 2: And and doing this is it's, it's simply the most
Speaker 2: complex uh manufacturing that we do. And as a result,
Speaker 2: it requires the most complex supply chain
Speaker 2: that exists. And so today, it's fundamentally impossible, simply impossible
Speaker 2: to create an advantage ship without drawing on machine tools,
Speaker 2: software materials, um software from multiple different uh companies in
Speaker 2: multiple different countries. And there are several that stand out.
Speaker 2: Uh the US Japan, the Netherlands, uh Taiwan and Korea
Speaker 2: are the five big players
Speaker 2: uh in the chip industry. Uh They're the only five
Speaker 2: countries that have um uh a substantial share of the
Speaker 2: chip industry's revenue in double digit terms. Uh And you
Speaker 2: can't produce a cutting edge uh chip without drawing on
Speaker 2: expertise from uh each of those countries.
Speaker 1: And if I am not just taken like a lithography,
Speaker 1: the extreme ultraviolet lithography machines cost like $300 million to
Speaker 1: make or something like that.
Speaker 2: That, that's right. Yeah, the, the, the next generation lithography
Speaker 2: machines will cost 300 billion or so dollars and like
Speaker 2: a cutting edge ship making facility as a result of
Speaker 2: all the machinery you need inside of it uh can
Speaker 2: cost $20 billion or so the most expensive factories in
Speaker 2: human history and 70% or so. The cost of a
Speaker 2: new chip fab fab is what we call a manufacturing
Speaker 2: facility is just to pay for the machine tools. So these,
Speaker 2: these tool
Speaker 2: tools that can lay down thin films and materials, just
Speaker 2: four atoms thick with basically complete deformity or carve canyons
Speaker 2: into silicon, just a couple of atoms wide. This is
Speaker 2: the most complex machinery humans have ever made that requires
Speaker 2: the supply chain that stretches from the Netherlands to the
Speaker 2: US to Japan. And you can't make advanced ships without
Speaker 2: these tools. And these tools themselves
Speaker 2: are are not just made exclusively in these three countries.
Speaker 2: They're also made by a tiny number of firms. Uh
Speaker 2: And in the case of some of the tools, there's
Speaker 2: just one firm that knows how to make them. And
Speaker 2: so you mentioned the lithography tools when it comes to
Speaker 2: advanced lithography, a SML and the Netherlands has 100% market
Speaker 2: share uh of the tools that are necessary to make
Speaker 2: cutting edge ships.
Speaker 1: I think there's one part in your book, you have
Speaker 1: this amazing analogy. As you say that the Carl Zeiss
Speaker 1: lens or mirror that is required to reflect the laser
Speaker 1: in the in the uh fat process for Eu V.
Speaker 1: It's like uh the, the perfection in that is like,
Speaker 1: you know, trying to hit a golf ball on the
Speaker 1: moon from here like the laser has to be that
Speaker 1: accurate or the pure
Speaker 1: on the class has to be like if there's one
Speaker 1: millimeter of impurity, it, it's like the size of Germany,
Speaker 1: that's the size of the mirror and that's a tolerance level,
Speaker 1: which is absolutely mind boggling. But I, I really like
Speaker 1: the way you portray it because I think we sort
Speaker 1: of understand the word complexity, we're really understanding it. And
Speaker 1: I think that sort of analogy really, really helped. Uh
Speaker 1: definitely it helped me.
Speaker 1: Um OK, so it's a truly globalized process, all sorts
Speaker 1: of companies have very specific and world dominating roles in it.
Speaker 1: So I take it you don't believe the Chinese can
Speaker 1: do it all by themselves.
Speaker 2: Well, I think it depends on, on what we mean. If,
Speaker 2: if we mean can China produce 2023 levels of technology
Speaker 2: self sufficiently at some point in the future? I think
Speaker 2: the answer is yes, they will be able to, the
Speaker 2: question is how far in the future will that be possible?
Speaker 2: And because the industry races forward very rapidly. If any
Speaker 2: country catches up to the cutting edge in 20 years time,
Speaker 2: it's a meaningless accomplishment because the cutting edge will be
Speaker 2: so far uh so far advanced. So I I think
Speaker 2: answering your question requires specifying the time horizon. Do I
Speaker 2: think China can indigenously develop cutting edge capabilities soon using
Speaker 2: solely domestically produced technology? I doubt it. Uh just because
Speaker 2: I don't think any country can do it uh
Speaker 2: soon. Uh And you know, if I look at the
Speaker 2: largest producers of uh in the semi hunter industry, the US,
Speaker 2: uh uh Taiwan, Japan, Korea, none of them have any
Speaker 2: sort of remotely plausible pathway over the next 10 years
Speaker 2: to be completely self sufficient ship making. And so it
Speaker 2: seems highly implausible to me that China which is today
Speaker 2: still a small player in revenue terms, um, has a
Speaker 2: plausible pathway of its own.
Speaker 1: I mean, this may be an unfair question because this
Speaker 1: happened just like last week. So the made 60 phone
Speaker 1: that Huawei came up with and just a couple of
Speaker 1: days ago, I saw that they're also increasing some foldable
Speaker 1: phone and these seem to have nine nanometer chips and
Speaker 1: then made by Ken uh or a K nine process
Speaker 1: or something like that. Um Is it still like a
Speaker 1: made in China phone or there is still a huge
Speaker 1: amount of design and other elements that are coming from
Speaker 1: a globalized supply chain process?
Speaker 2: Well, we're still learning more about the the chip inside
Speaker 2: of the Huawei phone. I think what we can pretty
Speaker 2: safely assume thus far is that uh it's clear that
Speaker 2: the pro the manufacturing process used to manufacture the chip
Speaker 2: is what's called a seven nanometer process. So this is
Speaker 2: a process that um TS MC first brought online
Speaker 2: uh about five years ago uh in Taiwan. Um It's
Speaker 2: a process that is now used in in mid and
Speaker 2: low range smartphones, newer smartphones will have uh tsm CS
Speaker 2: most advanced process, uh five nanometers
Speaker 2: uh in them. Um We don't know about the efficiency
Speaker 2: of the manufacturing yet. So Huawei's manufacturing partner, Smi um
Speaker 2: hasn't released any data nor do I think they will
Speaker 2: any time soon. So uh whether this chip is being
Speaker 2: produced at huge inefficiency or relatively efficient, we're still going
Speaker 2: to find out um what we do know is that it,
Speaker 2: it was uh produced largely using imported tools. Um because
Speaker 2: until recently, SMI was able to buy the most
Speaker 2: advanced as well as the sort of second generation most
Speaker 2: advanced tools from the US, from Japan uh and from
Speaker 2: the Netherlands. Uh And so it had purchased a large
Speaker 2: quantity of those tools and is now still able to
Speaker 2: use uh at least some of those. Uh and this
Speaker 2: ship was made largely using those tools. So, you know,
Speaker 2: in some ways, it's, it's certainly uh evidence of incremental
Speaker 2: progress in the ship industry. It's probably not evidence of
Speaker 2: catching up because TS MC is also moving forward. And
Speaker 2: so the gap between TS MC and
Speaker 2: China's capabilities, uh it doesn't appear to be decreasing. Um
Speaker 2: Is it e evidence of self sufficiency for China? Not
Speaker 2: really because again, the machines that were producing these chips
Speaker 2: were uh largely imported uh machines. So it's, it's, it's
Speaker 2: progress of a sort, but I, I wouldn't call it
Speaker 2: a breakthrough.
Speaker 1: Tell me a little bit about the term that you
Speaker 1: use inefficiency or efficiency. So I think there the yield
Speaker 1: of semiconductor is like a very important part of the
Speaker 1: bottom line of any manufacturing process. So give us a
Speaker 1: sense of, you know what kind of yield is needed
Speaker 1: and how complex it is the process of getting decently
Speaker 1: efficient yield out of a semiconductor production.
Speaker 2: Yeah, you yield is the key variable in it. That
Speaker 2: that just means the share of chips you produce that
Speaker 2: actually work. Um And because chips are so complex at
Speaker 2: the cutting edge, uh it is very, very, very easy
Speaker 2: to make errors in the manufacturing process that cause a
Speaker 2: chip not to work. And there are ways you can
Speaker 2: try to make your chip more or less resilient to
Speaker 2: having errors. But whenever any company brings online, a new
Speaker 2: manufacturing process more advanced with smaller transistors, there's always a
Speaker 2: very uh significant learning curve that has to be overcome
Speaker 2: and yields always start low and then they're always intended
Speaker 2: to end uh very high in the 90% level um
Speaker 2: uh as close to 100 as possible. Um And the, the,
Speaker 2: the pro the process of improving yields is therefore critical
Speaker 2: to financial viability for companies. And so a key question
Speaker 2: in your ability to
Speaker 2: price uh effectively, if you're a chip maker is what
Speaker 2: yield you could produce at. Because if you're producing a 50% yield.
Speaker 2: In other words, you gotta spend um amount of, you know, you,
Speaker 2: you need to, you need to, to fund the production
Speaker 2: of twice as many chips as you actually get. In
Speaker 2: terms of working chips, you're gonna be a lot less
Speaker 2: competitive than a company with 90% yield. Uh And so we,
Speaker 2: we don't have good data uh about yields from companies.
Speaker 2: They're very secretive about their yield data. Um But we
Speaker 2: know that the the leading chip makers
Speaker 2: uh end up with very high yields uh in the 90%
Speaker 2: range um for their, their, their mature processes. And so
Speaker 2: if you look at the new Huawei phone, you know,
Speaker 2: a fundamental question is, what's the yield? And I don't
Speaker 2: think we're gonna know the answer to that question any
Speaker 2: time soon. But any assessment of how viable a processes
Speaker 2: is or not has to uh has to try to
Speaker 2: get us a sense of the yield.
Speaker 1: So Chris, you mentioned that the Huawei phone uh could have,
Speaker 1: you know, homegrown processors, but the machine tools, the critical
Speaker 1: component of preparing that semiconductor are all imported. Um So
Speaker 1: give us a sense of state of sanctions in play
Speaker 1: right now. Are we saying that China is restricted from
Speaker 1: importing any lithography machines going forward or is the idea that,
Speaker 1: you know, they'll just get stuck in whatever they were
Speaker 1: allowed to import and
Speaker 1: they can keep on importing that but nothing else after that.
Speaker 2: So over the past uh year, the US, Japan and
Speaker 2: the Netherlands have each released a set of controls which
Speaker 2: have uh basically tried to stop China from buying new
Speaker 2: tools that could be used at sub 16 or 14
Speaker 2: nanometer production. So China has been able in the pass
Speaker 2: to buy lots of tools and has bought huge volumes
Speaker 2: of tools that used for 14 nanometers, 10 nanometers and
Speaker 2: seven is the the note after that which is the
Speaker 2: note that the Huawei phone was uh produced on
Speaker 2: and so until recently and actually the the Dutch regulations
Speaker 2: don't come into force until the end of this year.
Speaker 2: So it's still the case that um that Chinese buyers
Speaker 2: can buy uh certain tools from the Netherlands. But once
Speaker 2: all these restrictions are enforced, the uh the the net
Speaker 2: effect will be to limit China's purchase of Chinese firms
Speaker 2: purchase of any new tools that can be used primarily
Speaker 2: for sub 14 nanometer
Speaker 2: uh production. Now most chips by volume are actually produced
Speaker 2: at larger geometries. In other words, older manufacturing technologies at
Speaker 2: 40 nanometers or 100 and 30 nanometers. But in dollar terms,
Speaker 2: the most expensive chips are the ones that are produced
Speaker 2: at more advanced technologies. And so inside your smart,
Speaker 2: the main application processor is produced at something pretty close
Speaker 2: to cutting edge inside your PC. Inside data centers, the
Speaker 2: key chips are uh are are are also pretty close
Speaker 2: to the cutting edge. And so for a lot of
Speaker 2: key technology areas, there are huge performance gains to be
Speaker 2: had by producing on a cutting edge technology or something
Speaker 2: very close to it.
Speaker 1: So the implications of this could be rather dire for
Speaker 1: China's medium term outlook. So for the time being, they
Speaker 1: can produce some chips and get on with it. But
Speaker 1: in terms of pushing
Speaker 1: gps that you need to train A I models or
Speaker 1: if you want to run the next generation of data
Speaker 1: centers or develop the next generation of weapons, um they're
Speaker 1: basically doomed to failure.
Speaker 2: Well, II I think I would, I would differentiate first
Speaker 2: between the the restrictions on tools used to produce ships
Speaker 2: below 14 nanometers
Speaker 2: um and the restrictions on specific chips themselves. So the US,
Speaker 2: Japan and the Netherlands have restricted tools used for sub
Speaker 2: 14 nanometers, but they haven't restricted the transfer of chips
Speaker 2: to China, sub 14 nanometers. And so today, China imports
Speaker 2: almost all of its sub 14 nanometer chips from Taiwan,
Speaker 2: from Korea, from the US uh from from elsewhere, which
Speaker 2: is the reason that China spends as much money each
Speaker 2: year importing chips, it spends importing oil,
Speaker 2: it's largely smartphone processors, PC processors. And so it's actually
Speaker 2: not much of a change to China's chip buying patterns
Speaker 2: to have it keep buying chips from abroad. Um In
Speaker 2: so far as the regulations uh by limiting China's domestic
Speaker 2: production force China to buy chips uh abroad. There are
Speaker 2: also as you mentioned, specific US rules that ban the
Speaker 2: transfer of GP US or chips used to train A
Speaker 2: I systems to China.
Speaker 2: Uh but these are very, very specific rules governing just
Speaker 2: one type of chip. And so the US has via
Speaker 2: its rules kept wide open the transfer of any chip
Speaker 2: for smartphones, any chip for autos, any chip for P CS.
Speaker 2: Um almost all types of chips except GP US. So
Speaker 2: China can still buy very advanced ships from abroad for smartphones.
Speaker 2: The only restriction is when it comes to the chips
Speaker 2: that are used to train A I systems. And those
Speaker 2: are the chips called GP US that are largely produced
Speaker 2: by NVIDIA.
Speaker 1: Would the state of sanctions remain where they are or
Speaker 1: the net is about to get tighter.
Speaker 2: Well, I think a lot depends on um first off
Speaker 2: uh the direction of of us politics US has an
Speaker 2: election uh next year which could bring policy change. Um
Speaker 2: but second Chinese policy um as well, I think, you know,
Speaker 2: one of the key questions, the key uncertainties is
Speaker 2: what cost China is willing to bear to pursue its
Speaker 2: self-sufficiency drive. And we've seen the Chinese government spend tens
Speaker 2: of billions of dollars a year from 2014 to present
Speaker 2: towards self sufficiency. I think uh that rate will certainly
Speaker 2: continue it. But I wonder if it will even intensify
Speaker 2: and if China is willing to spend more money on
Speaker 2: self sufficiency. In other words, produce more chips at a
Speaker 2: very inefficient manner domestically, you could end up buying fewer
Speaker 2: chips from abroad.
Speaker 2: And if China starts buying fewer chips from abroad, it
Speaker 2: also loses some of its leverage because right now, one
Speaker 2: of the factors limiting foreign restrictions on China is that
Speaker 2: foreign and chip firms still sell a lot of chips
Speaker 2: to China. But if they begin to be restricted from
Speaker 2: market access by China's self sufficiency drive, then you'll have
Speaker 2: less lobbying in Washington, in Tokyo uh in European capital
Speaker 2: saying be careful with your restrictions, you're gonna hurt our
Speaker 2: market because if that market's already declining, that'll become much
Speaker 2: less powerful
Speaker 2: argument. And that's I think a very tricky balance for China.
Speaker 2: It wants self sufficiency for sure, but it also values
Speaker 2: the fact that because its market is valuable, it gives
Speaker 2: it some bargaining power in its relations with the West.
Speaker 1: It's, it's really fascinating, right? So if I don't have
Speaker 1: an advanced domestic industry, interdependence remains uh but the moment
Speaker 1: I progress interdependence, we can and maybe there is sanctions
Speaker 1: at that point, but it's too late because I am independent.
Speaker 1: Um Chris, your book showcases uh TSM CS singular role
Speaker 1: in the manufacturing of the world's most advanced chips. Um
Speaker 1: And you mentioned earlier as well that there are other
Speaker 1: single nodes of vulnerability. A smo being another one. So
Speaker 1: how risky it is. Is it for like one company
Speaker 1: at this day and age being responsible for 100% of
Speaker 1: something that the world needs critically?
Speaker 2: Well, I don't think anyone designing a supply chain would
Speaker 2: have opted in uh to a system of complete vulnerability,
Speaker 2: complete reliance on a single firm. Like we're all reliant,
Speaker 2: for example, on a S MLS lithography machines, I think
Speaker 2: everyone would prefer a competitive market. Certainly the buyers of
Speaker 2: lithography
Speaker 2: machines would prefer a competitive market right now. They're price takers.
Speaker 2: Um But I think there's particular concern around uh TS
Speaker 2: MC because of the risks to Taiwan. Uh that I
Speaker 2: think most people assess have grown somewhat in, in recent years.
Speaker 2: The, the, the Taiwan question I think is, is important,
Speaker 2: not just because of TSM CS dynamic as being the
Speaker 2: central player of in producing advanced ships, but also because
Speaker 2: it has become this critical producer of advanced ships precisely
Speaker 2: as the us ability to credibly defend Taiwan has deteriorated.
Speaker 2: I think that's the second half dynamic. It's not just
Speaker 2: a chip story, it's also a story of the military
Speaker 2: balance shifting in Taiwan's favor. And so for most of
Speaker 2: the last 50 years, uh tech executives, investors, um electronics
Speaker 2: firms didn't have to think that hard about the military
Speaker 2: balance because it was obvious if there were a war,
Speaker 2: everyone knew who would win, everyone knew which would win.
Speaker 2: Beijing and Washington and Taipei everywhere.
Speaker 2: Today. If there were a war, there's a lot of
Speaker 2: uncertainty about what the outcome would be. And I think
Speaker 2: that has inspired uh an increased sense of uncertainty about
Speaker 2: whether China might be willing to escalate. And if so
Speaker 2: what the ramifications would be for the supply chain. And
Speaker 2: so that's really the reason why we're talking about uh
Speaker 2: Taiwan risk is that the military balance has shifted dramatically
Speaker 2: in China's favor.
Speaker 1: Right. Yeah, I don't see anybody forcing a SML to
Speaker 1: start making lithography missions elsewhere because is not seen as
Speaker 1: a note of vulnerability out. There are these, you know,
Speaker 1: terrific chapters in your book where you sort of talk
Speaker 1: about the war game scenarios around which China Taiwan, uh
Speaker 1: the situation can unravel. And I think that was also
Speaker 1: very instructive. Ok. I want to come back to something
Speaker 1: we talked about earlier, Gordon Moore and his incredible Christian
Speaker 1: call 55 years ago that, you know,
Speaker 1: chip speed processing speed can double 18 to 24 months.
Speaker 1: How long can that last Chris?
Speaker 2: Well, I, nobody knows the answer to that question. Even
Speaker 2: the smartest people in the industry are just speculating. I
Speaker 2: think we can say a couple of things.
Speaker 2: One is that since the 19 eighties, Moore's law's death
Speaker 2: has been regularly predicted and it's always been wrong.
Speaker 2: In the 19 eighties. There were very distinguished computer uh
Speaker 2: engineers who were highly confident that Morris Law would come
Speaker 2: to an end that they were completely wrong in the
Speaker 2: early two thousands. Gordon Moore himself said that he couldn't
Speaker 2: fathom ways that the industry could keep Mori's law alive
Speaker 2: for more than
Speaker 2: and here we are two decades later. Uh and it's
Speaker 2: still alive. So I think we should be very cognizant
Speaker 2: of the fact that past predictions of Moore's Law's failure
Speaker 2: have always been wrong. Uh And that should I think
Speaker 2: sensitize us to the fact that there are lots of
Speaker 2: smart people trying to find ways to keep it alive.
Speaker 2: I think also it's the case that we, we have
Speaker 2: a pretty clear line of sight.
Speaker 2: If you look at the road maps uh that have
Speaker 2: been put out by TS MC or Intel uh over
Speaker 2: the next decade, how we're gonna get at least another
Speaker 2: decade of transistor shrinkage beyond that point, nobody knows. But
Speaker 2: it's always been the case that more than a decade out,
Speaker 2: nobody knows. It's just too far out to, to, to
Speaker 2: realistically plan,
Speaker 1: right? Certainly will be the place. No, no, please go ahead.
Speaker 2: Well, II I it, it certainly will be the case
Speaker 2: that at some point you can't string transistors any further.
Speaker 2: We're already measuring them in terms of nanometers. Uh Soon
Speaker 2: we'll be in the Angstrom era uh defining them in
Speaker 2: terms of angst drums. We'll have to invent I think
Speaker 2: new terminology to measure the uh minute distances by the
Speaker 2: end of the decade. Uh But at some point, we'll
Speaker 2: hit real physical limits. But even at that point, I
Speaker 2: think the the past decade has actually given us a
Speaker 2: lot of new technique
Speaker 2: to provide better semiconductors um with the same size transistors. So,
Speaker 2: for example, there's new ways to design semiconductors and GP
Speaker 2: U is the best example. What makes GP U a
Speaker 2: great chip for A I is not that the transistors
Speaker 2: are any smaller than the chip inside of your iphone.
Speaker 2: It's that they, they're designed in a different way. And
Speaker 2: so I think we're still in the very early stages
Speaker 2: of exploring ways chip design can produce uh performance enhancements.
Speaker 2: And then second, there's a whole new trend in the
Speaker 2: industry called advanced packaging,
Speaker 2: which sounds very boring, but actually, it is going to
Speaker 2: be revolutionary in terms of letting us put different types
Speaker 2: of chips together in different ways, which will provide huge
Speaker 2: performance improvements in terms of speed of data transfer, in
Speaker 2: terms of managing heat dissipation, huge issue when you've got
Speaker 2: lots of electrons flying around.
Speaker 2: Um and also in terms of cost, letting you combine,
Speaker 2: for example, a low cost ship and a high cost
Speaker 2: ship in a way that brings down your overall device cost.
Speaker 2: And so we're in the early stages of of this
Speaker 2: trend as well. And so when I look at the
Speaker 2: trajectory we have of at least another decade of shrinking
Speaker 2: transistors further lost the design renaissance is underway. Plus the
Speaker 2: advanced packaging shifts. I'm pretty optimistic that we've got a
Speaker 2: long pathway for further advances.
Speaker 1: So even if the exponential increase in the number of
Speaker 1: transistors per chip stops, we can probably have computing power
Speaker 1: per chip continue to increase.
Speaker 2: And that's right. That's exactly right.
Speaker 1: Right. You know, you thanks to your book. I mean,
Speaker 1: I'm doing stuff that I've never done before. I now
Speaker 1: go to the IBM website and they have this newsletter
Speaker 1: from their scientists about to your point about chip design
Speaker 1: and issues related heat dissipation. So, yeah. Um I have
Speaker 1: no idea exactly what they're talking about, but it's nonetheless
Speaker 1: sort of energizing to see that there's all sorts of
Speaker 1: thinking going on for the next and the next next
Speaker 1: uh generation of frog
Speaker 1: um Chris, we talked about military uh issues earlier. I
Speaker 1: want to bring that back. Uh Even in your book,
Speaker 1: uh from the very beginning when rockets were being developed,
Speaker 1: uh military uh experts saw the application of chips in
Speaker 1: the guidance system and you have this uh really cool
Speaker 1: chapter in your book where you talk about the early
Speaker 1: nineties during the Gulf War. First time we saw the
Speaker 1: application of, you know, advanced guidance systems.
Speaker 1: Um So military applications are always, always at the forefront
Speaker 1: of ship demand. Is that a good thing?
Speaker 2: Well, I, I don't know if it's a good thing.
Speaker 2: I think it's an inevitable thing. I think uh it
Speaker 2: is inevitable today that militaries are going to try to
Speaker 2: acquire whatever edge they can. Um And today that means
Speaker 2: developing systems that are more autonomous
Speaker 2: uh autonomous systems are a key focus of all of
Speaker 2: the world's major militaries and deploying A I to defense
Speaker 2: and intelligence systems we already see in the Russia Ukraine War.
Speaker 2: Plenty of uh of examples of ways that A I
Speaker 2: is is being used. For example, militaries have computer vision
Speaker 2: algorithms in their intelligence systems. So
Speaker 2: take a satellite photo and differentiate what's a tank and
Speaker 2: what's a truck, not like be done automatically. That's, that's
Speaker 2: pretty simple. Um But uh more decisions about um communications.
Speaker 2: For example, if your adversary is jamming your frequencies of
Speaker 2: your communication system, can you use an A I to
Speaker 2: rapidly jump between frequency in a way that's faster than
Speaker 2: your adversary system?
Speaker 2: Uh These are some of the use cases of, of a, of,
Speaker 2: of A I and military contacts. And then I think
Speaker 2: if you look at the role that drones have played
Speaker 2: in the Russia Ukraine war again, that provides a very clear,
Speaker 2: I think worrisome but clear pathway for how militaries will
Speaker 2: begin to deploy increasing degrees of autonomy in drones as well.
Speaker 2: And so we're gonna, I think have a very complex
Speaker 2: ethical debates over the next
Speaker 2: several decades about in what ways are we comfortable deploying
Speaker 2: autonomy in military systems? But just as we're running at
Speaker 2: autonomous cars and just as autonomy is coming to all other,
Speaker 2: the range P applications. So too, it's already coming to
Speaker 2: military systems. Uh And there is a, I think very
Speaker 2: real race between the world's leading militaries and above all
Speaker 2: between China and the US to harness this technology for
Speaker 2: defense purposes.
Speaker 1: So robot soldiers here we come. Um Yeah, when I
Speaker 1: see those Boston dynamics videos of those, you know, somersaulting
Speaker 1: uh robots. The first thing I don't think initially everybody
Speaker 1: said that that's like the next, you know, guy who's
Speaker 1: shelving stuff at the Amazon warehouse. But to me, it
Speaker 1: was more like somebody holding an AK-47 and, you know,
Speaker 1: joining the front. Um Chris, you know, I mean, this
Speaker 1: is just a stream of consciousness observation while the Ukraine
Speaker 1: conflict shows all sorts of cutting edge application,
Speaker 1: it still looks like a very first world war type
Speaker 1: of uh terrain. When we look at the videos trenches
Speaker 1: and something called dragon's teeth, which is basically, you know,
Speaker 1: concrete boulders to stop tanks from going over. Um So
Speaker 1: it seems like, you know, we have a lot of
Speaker 1: shiny new toys. Uh but the adaption of them, the
Speaker 1: full usage of them, it takes a while, right? I mean,
Speaker 1: would you agree if I say that the sort of
Speaker 1: compute power that we have right now, even the existing
Speaker 1: computer power, forget about the stuff that's coming. We're barely
Speaker 1: using a fraction of that.
Speaker 2: I, I think that's right. II I think when you
Speaker 2: look at the Russian Ukraine war, it's easy to miss
Speaker 2: a lot of the ways in which computing has actually
Speaker 2: been pretty decisive. Um So for example, there's, there's the
Speaker 2: whole cyber war that didn't happen.
Speaker 2: Um We collectively expected that Russia would launch devastating cyberattacks
Speaker 2: and knock out Ukraine's cyber infrastructure ali accounts, but that
Speaker 2: didn't happen
Speaker 2: in no small part because Ukraine was defended by Google
Speaker 2: and Microsoft and some of the key Western tech giants and,
Speaker 2: and their computing capabilities are key to cyber defenses. And it,
Speaker 2: you know, we've talked about autonomy and uh in, in
Speaker 2: many parts of the economy, well, autonomy in both cyber
Speaker 2: offense and cyber defense is coming soon, it's actually already
Speaker 2: already arrived. And so uh that will be a AAA
Speaker 2: new frontier of the application of, of A I. When
Speaker 2: it comes to the intelligence that Ukraine has received from
Speaker 2: the West,
Speaker 2: we've already uh we've got many examples of um Ukraine
Speaker 2: receiving very accurate targeting data from the West and Signals
Speaker 2: Intelligence is one of the early use cases uh of
Speaker 2: the application of A I to military systems. And so
Speaker 2: we don't have uh great visibility into all of the
Speaker 2: specific platforms that the US is using to uh give
Speaker 2: Ukraine uh targeting data, for example, for its high on rockets.
Speaker 2: But I don't think you can
Speaker 2: um safely. Uh I think you have to assume that
Speaker 2: uh there's a whole lot of computing uh involved in
Speaker 2: the very rapid identification of targets uh transmission of those targets,
Speaker 2: Ukrainian forces and the Ukrainians uh our system, if you
Speaker 2: just press a button and the rocket flies automatically it
Speaker 2: hit its targets. So those are just two ways in
Speaker 2: which computing is made.
Speaker 2: I think a real difference on the battlefield. But you know,
Speaker 2: I think you're right that, uh, in some ways this
Speaker 2: is a 21st century war, in other ways, it's 1/19
Speaker 2: century war. Uh, and I, I think that speaks to the, uh, the,
Speaker 2: the fact that regardless of the technologies or in some
Speaker 2: ways because of the technologies, uh, warfare remains a very
Speaker 2: brutal business.
Speaker 1: Yeah, absolutely. So, we've sort of almost naturally progressed to
Speaker 1: talking about Ukraine. That was supposed to be my final question.
Speaker 1: And I think many fans of Chip War may not
Speaker 1: be aware that your core expertise include Russia and Cold
Speaker 1: War history. And you've written several books on Putin and
Speaker 1: Imperial Russia. I'd love to do a separate podcast one day,
Speaker 1: Chris with just talking about Russia because there's like so
Speaker 1: much to talk about, particularly the historical context that you
Speaker 1: have written so articulately about. But, uh, just give me
Speaker 1: a sense, uh, we've talked just a little bit about
Speaker 1: the
Speaker 1: technology around the Ukraine conflict. But as a historian, you know,
Speaker 1: what's your take on the course the conflict has taken
Speaker 1: and what would be a path to resolution?
Speaker 2: Well, I think the the key driver of, of the
Speaker 2: conflict is, is a question about where does Russia's sphere
Speaker 2: of control end? I think the, the Russian view which
Speaker 2: President Putin has articulated is that Ukraine is an, ought
Speaker 2: to be in Russia's sphere of control. And the Ukrainian
Speaker 2: view and the Western view is that Ukraine should be
Speaker 2: able to make its own choices about whether it wants
Speaker 2: to be part of the Russian sphere. I mean, that's
Speaker 2: the core of disagreement that has led to uh the conflict.
Speaker 2: And I think
Speaker 2: there's no pathway in sight for that issue to be resolved.
Speaker 2: And people speculate, welcome, you know, this territorial settlement, that
Speaker 2: territorial settlement
Speaker 2: resolve the conflict. But I think the core question is
Speaker 2: um is Russia going to continue uh fighting to keep
Speaker 2: Ukraine or try to keep Ukraine in its sphere or
Speaker 2: is it willing to let Ukraine not be uh in
Speaker 2: its sphere? And that's, I think the key uncertainty that
Speaker 2: uh we just don't know uh Russia's willingness to fight
Speaker 2: on to pursue that aim. And the Ukrainians will say
Speaker 2: we're not going to do a cease fire now because
Speaker 2: if we do, the Russians will start fighting again after
Speaker 2: rebuilding for a couple of years. And
Speaker 2: you know, I understand why they think that because that's
Speaker 2: been the track record of, of recent history, there was
Speaker 2: a cease fire in 2014, the Russians rebuilt and uh
Speaker 2: attacked again. And so I, I think that that that
Speaker 2: key question of, of ultimately, is Ukraine an independent country
Speaker 2: or not? And does Russia recognize it is independent or not?
Speaker 2: That's what's at stake? Uh And I don't see right
Speaker 2: now um any clear pathway to
Speaker 2: getting a resolution of, of that question that both Ukraine
Speaker 2: and Russia could agree on,
Speaker 1: right. Um gosh, uh not the most hopeful uh you know, prognosis.
Speaker 1: And Chris, we, uh I, I was talking to a
Speaker 1: friend of mine, she's Russian and she just came back
Speaker 1: from Moscow and she said that you don't really feel
Speaker 1: that there's a war going on. Uh when you walk
Speaker 1: the streets of Moscow and when you go to electronic
Speaker 1: stores that used to be, say,
Speaker 1: you know, filled with Apple and Microsoft products, now they're
Speaker 1: filled with uh made in China electronics products and they
Speaker 1: look really good and they're shiny and people are buying
Speaker 1: those things. So this sort of, you know, pivot toward
Speaker 1: Chinese tech. I mean, can Russia sort of, you know,
Speaker 1: withstand Western sanctions substantially better because of that.
Speaker 2: Well, I don't really think the, the pivot to Chinese
Speaker 2: tech is the key to Russia's withstanding of sanctions. I
Speaker 2: I think the key is Russia's oil exports. Um That's
Speaker 2: been the key and I think we've learned over the
Speaker 2: course of the last 18 months of war. Um several
Speaker 2: key things. Um One is that the Russian war effort
Speaker 2: has been very stimulative for the economy.
Speaker 2: Um So the Russian government is, is running a pretty
Speaker 2: large budget deficit now. Um but that is produced a
Speaker 2: sort of Keynesian impact on the Russian economy,
Speaker 2: uh which I think ought to have been expected. But
Speaker 2: most people myself included didn't fully uh expect in the
Speaker 2: early days of the war. And so rather than unemployment
Speaker 2: or declining incomes. We actually have very rapid income growth
Speaker 2: driven by very low unemployment in Russia because of labor
Speaker 2: shortages now. So that's, that's one surprise to the war.
Speaker 2: I think the second surprise that is about the West's
Speaker 2: willingness to impose sanctions because one of the really striking
Speaker 2: acts of the war is that
Speaker 2: uh the West at first started to impose very tough
Speaker 2: oil sanctions on Russia and then immediately walked them all
Speaker 2: back through the price cap scheme. Um And so now
Speaker 2: Russian oil exports are basically unchanged since before the war.
Speaker 2: Um precisely because the West has collectively decided that it
Speaker 2: doesn't actually want to sanction Russian oil exports. It wants
Speaker 2: more Russian oil exports to keep prices as low.
Speaker 2: That is possible. And so if you look at the
Speaker 2: Russian economic situation, that's the key dynamic is that a,
Speaker 2: the domestic economy is being supported by deficit spending domestically
Speaker 2: and b the external accounts are um they look relatively
Speaker 2: stable because oil exports and prices fall on oil. But
Speaker 2: uh volumes are uh almost as high as ever,
Speaker 1: right? But uh I wanna stick with that tech issue.
Speaker 1: I agree with you. I agree that the oil export
Speaker 1: revenues are basically what's driving, you know, Russia's resilience. And
Speaker 1: of course, you know, if they want to buy stuff
Speaker 1: from China, they still have to pay and uh and
Speaker 1: then that's where the revenue is coming from. But going
Speaker 1: back to the tech issue, um
Speaker 1: the, the view is that, you know, if you don't
Speaker 1: have access to Western technology, if the Apple I OS
Speaker 1: is not, you know, upgrading and you're not getting the
Speaker 1: Microsoft 3 65 support that day to day commerce and
Speaker 1: inventory management. Everything sort of comes to a standstill,
Speaker 1: but clearly, that's not the case for Russia. So I'm
Speaker 1: assuming that they're not getting those regular updates from Western tech.
Speaker 1: And still, I don't hear any logistics failure or any
Speaker 1: difficulty in running power plants or for that matter, running
Speaker 1: the military in the case of Russia. So it's basically
Speaker 1: what smuggling is that is that the way they're sort
Speaker 1: of keeping themselves going.
Speaker 1: Well, I think for, for
Speaker 2: software tools, uh there, it's always been relatively easy to
Speaker 2: pirate software tools and, and rush actually has been a
Speaker 2: big market for Pirated software. And so if you can't
Speaker 2: get the latest IO I OS update, you just use
Speaker 2: the old version, it's slightly more vulnerable to being hacked
Speaker 2: your performance declines over time.
Speaker 2: Um But that's, that's pretty manageable. Um I think for,
Speaker 2: for enterprise software, one of the surprising things has been
Speaker 2: how long many enterprise software firms kept servicing Russian customers.
Speaker 2: Um
Speaker 2: And uh there's, it's been a, a matter of some debate,
Speaker 2: I think in the West as well. That was the
Speaker 2: right approach, but many enterprise software companies, um, essentially kept
Speaker 2: Russian clients um, up to date with functional software for
Speaker 2: a very long time, some even up to the present
Speaker 2: uh day. So I, I think on the software side,
Speaker 2: Russia has actually had very few difficulties um in accessing
Speaker 2: maybe for certain niche types of industrial software. But generally speaking,
Speaker 2: it hasn't, doesn't appear to have been a problem um for,
Speaker 2: for tech components,
Speaker 2: you know, there have been open discussions in the Russian
Speaker 2: press about certain types of component shortages. Um but the
Speaker 2: Russian manufacturing base is actually relatively small um outside of
Speaker 2: the auto sector which has gotten uh clobbered by um
Speaker 2: by sanctions of export controls. The other big sector for
Speaker 2: manufacturing is the military.
Speaker 2: Um And the military has got the budget, it needs
Speaker 2: to uh import components um from abroad. It probably does
Speaker 2: sort of an inefficient manner. It probably faced supply chain
Speaker 2: difficulties due to sanctions, but it's been able to import
Speaker 2: at least some volume because we know that multi production continues.
Speaker 2: Um And so I think those are kind of the
Speaker 2: autos in the in the the defense industry, the two
Speaker 2: sectors of Russian manufacturing that are most reliant on uh
Speaker 2: foreign components.
Speaker 1: But there's no area of sort of symbiosis that there
Speaker 1: are certain areas of tech excellence in Russia that China
Speaker 1: can exploit or vice versa.
Speaker 2: I there are a, a small number of discrete examples.
Speaker 2: One could point to um specific computer vision firms that
Speaker 2: have been invested in by Chinese firms, but they're extraordinarily
Speaker 2: small in number. I think that the tech dependence is
Speaker 2: almost exclusively unidirectional Russia is becoming dependent on China.
Speaker 1: OK. Totally different question. So I'm talking to you from Singapore. Actually,
Speaker 1: I don't know where in the world you are right now, Chris,
Speaker 1: where are you?
Speaker 2: I'm, I'm today in Wyoming.
Speaker 1: Oh My. OK. Uh I thought you were like in
Speaker 1: China or something. Uh OK. So um I'm talking to
Speaker 1: you from Singapore, Singapore over the last 50 years have
Speaker 1: had a manufacturing footprint with respect to chips and semiconductors
Speaker 1: and so on. Uh any sense of the excellence of
Speaker 1: production in Singapore vis a vis a Korea, Japan and
Speaker 1: so on.
Speaker 2: Well, I think in terms of cutting edge production, the
Speaker 2: the cutting edge has been in recent years in Taiwan
Speaker 2: and Korea uh in the US, not in Singapore, but
Speaker 2: there's a very uh substantial manufacturing base in Singapore. And
Speaker 2: just because something is not cutting edge doesn't mean it's
Speaker 2: not excellent. Um indeed, there are lots of very profitable
Speaker 2: uh companies that do non cutting edge chip making often
Speaker 2: with unique mix signal or analog or radio frequency
Speaker 2: requirements as well. Uh And so III I would say
Speaker 2: that Singapore's chip making has not been cutting edge, but
Speaker 2: I wouldn't say that that means it has been excellent.
Speaker 2: Um because there are many different ways you can actually
Speaker 2: define what's a profitable business. What's a um what's a,
Speaker 2: a technologically viable uh uh product? And I think Singapore
Speaker 2: is likely to remain an important hub of chip making.
Speaker 2: Uh and also uh a hub of assembling some of
Speaker 2: the tools that are used to make chips,
Speaker 1: right? OK. So final question since you mentioned Korea, uh
Speaker 1: when people sort of, you know, dissect it through the
Speaker 1: uh Huawei phone. So one of the things that both
Speaker 1: mentioned that there are some Korean parts in it, I
Speaker 1: think he, right, that's the company that produces those things.
Speaker 1: Um So yes, Taiwan is at the absolute, you know,
Speaker 1: singular you know, security with respect to cutting it chips
Speaker 1: just gives a sense of how things are in Korea.
Speaker 1: Perhaps also in Japan.
Speaker 2: Korea is really critical as a producer of memory chips. Now,
Speaker 2: there's two types of memory chips, both of which are
Speaker 2: produced at the cutting edge in Korea. There's a number
Speaker 2: of firms that produce cutting edge memory chips. Um uh
Speaker 2: one in the US, uh one in Japan and, and
Speaker 2: two in Korea, primarily um memory Chis are basically a commodity,
Speaker 2: you can more or less swap out one company's memory
Speaker 2: Chis for another.
Speaker 2: And as a result, there's not nearly as much differentiation
Speaker 2: between uh the firms and the pricing dynamics are also
Speaker 2: quite different profitability is uh generally lower. Um But Korea
Speaker 2: is by far the world's largest producer of uh memory
Speaker 2: chips and Korean firms, Samsung and Hex are are absolutely
Speaker 2: critical suppliers of of of memory chips when it comes
Speaker 2: to Japan, Japan is actually not primarily important as a
Speaker 2: chip maker. There, there are chips made in Japan, especially
Speaker 2: for auto and industrial uses. Um But Japan is is
Speaker 2: really unique as a producer of highly specialized chemicals used
Speaker 2: in ship making and also some of the machine tools
Speaker 2: needed to manufacture advanced ships. And that's really where Japanese
Speaker 2: firms have uh pretty unique uh market positions.
Speaker 1: I remember during the Fukushima earthquake and tsunami, uh this
Speaker 1: is a power plant issued that there were that one
Speaker 1: note of vulnerability that there were some chips that were
Speaker 1: made for navigation systems which were not coming in. And
Speaker 1: as a result, Thailand's auto production came to a standstill.
Speaker 1: Uh And that was the first time I sort of
Speaker 1: started thinking about these, you know, nodes of vulnerability.
Speaker 1: Um Chris uh I believe in your book, you had
Speaker 1: mentioned as far as the memory chips, you know, the,
Speaker 1: the DRS and the NANS are concerned that is one
Speaker 1: area where the Chinese can probably eat Korea's lunch.
Speaker 1: Well, it's, it's,
Speaker 2: it's probably true if China can get access to the
Speaker 2: tools needed to make those ships. And until recently, China
Speaker 2: could uh now, however, uh those tools are restricted, uh
Speaker 2: Chinese firms can't purchase them. And actually the leading Chinese
Speaker 2: memory producer, a company called YMTC is uh is uh
Speaker 2: under additional us sanctions in addition to the the broad ones.
Speaker 2: And so actually,
Speaker 2: um I think one could argue that Korean firms have
Speaker 2: seen a potential major competitor really uh impacted by these
Speaker 2: controls in a way that might protect their market share
Speaker 2: uh for some time to come. So there are lots
Speaker 2: of unexpected um knock on effects of the controls that
Speaker 2: have interesting implications uh for for a number of different countries.
Speaker 2: But Korea being one of them,
Speaker 1: lots of unexpected knock on effects. I think that's a
Speaker 1: very good way to sort of summarize the the world,
Speaker 1: the chip war dynamic. Uh Chris, I, I really appreciate
Speaker 1: your time and thank you so much for your insights.
Speaker 2: Well, thank you for having
Speaker 1: me. Fantastic time with the uh talking about this and
Speaker 1: great job with the book. Uh Kobe Time is for
Speaker 1: information only and does not represent any trade recommendations. All
Speaker 1: 108 episodes of the podcast are available on youtube and
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Speaker 1: for our research publications, webinars and live streams, you can
Speaker 1: find them all by Googling devious research library. Have a
Speaker 1: great day.