{"id":110432,"date":"2018-12-10T22:52:43","date_gmt":"2018-12-11T02:52:43","guid":{"rendered":"https:\/\/stateofthenation2012.com\/?p=110432"},"modified":"2018-12-22T10:35:38","modified_gmt":"2018-12-22T14:35:38","slug":"the-new-arms-race-is-not-nuclear-but-much-more-dangerous","status":"publish","type":"post","link":"https:\/\/stateofthenation2012.com\/?p=110432","title":{"rendered":"The New ARMS RACE: It’s Not Nuclear But Much More Dangerous"},"content":{"rendered":"

\"\"<\/a><\/p>\n

The Real War Between the U.S. and China is for Control of the Global IT Matrix, Superiority of AI Technology and Computer Chip Supremacy<\/h2>\n

TMR<\/a> Editor’s Note:<\/strong> There’s a war raging under the radar that is more intense than any to come before it.<\/p>\n

Both sides know that whoever wins will dominate the planet for the foreseeable future.<\/p>\n

The arrest of\u00a0Meng Wanzhou, Chief Financial Officer and Vice Chair of Chinese telecoms giant Huawei is just one battle — an extremely fierce battle — that’s being fought at this very moment. See:\u00a0Here\u2019s Why Canada Arrested Chinese CFO for Trump Admin<\/a><\/p>\n

The ever-intensifying IT arms race is the final frontier for every side of this burgeoning yet hidden world war.<\/p>\n

Because of what’s truly at stake, every player on the global geopolitical chessboard BELIEVES that they face existential threats should they be outdone by their Big Tech opponents across the oceans.<\/p>\n

“Quantum Computing, Artificial\u00a0 Intelligence, Hypersonic Warplanes, Electronic Vehicles, Robotics, and Cyber-Security”<\/strong><\/em> are just of a few of the critical areas that are in play; the much more serious scientific breakthroughs and technological advancements are not even being discussed.<\/p>\n

Yes, this worldwide tech war is that serious and only going to get worse.\u00a0 Hence, we can expect many battles to break out into the open as never before like this:\u00a0China Outraged At Arrest Of Huawei CFO, Warns It Will \u201cTake All Measures\u201d<\/a><\/p>\n

The Millennium Report<\/a>
\nDecember 10, 2018<\/p>\n

N.B. The article posted below fleshes out the skeleton of this rapidly unfolding and epic international drama.<\/p>\n

\n

This is What The “Trade” War With China Is Really All About<\/h2>\n

ZeroHdege.com<\/p>\n

Forget soybeans, auto imports, iPhones, crude oil, and cheap Chinese gadgets. Also forget tariffs, duties, and subsidies. Even forget weapons.<\/p>\n

The real reason behind the US-China “trade” war has little to do with actual trade, and everything to do with what China’s president, Xi Jinping, said when he visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: \u201cNo matter how big a person is, he or she can never be strong without a sound and strong heart\u201d.<\/p>\n

What is really at the basis of the ongoing civilizational conflict between the US and China, a feud which many say has gradually devolved into a new cold war if few top politicians are willing to call it for what it is, are China\u2019s ambitions to be a leader in next-generation technology, such as artificial intelligence, which rest on whether or not it can design and manufacture cutting-edge chips, and is why Xi has pledged at least $150 billion to build up the sector.<\/p>\n

But, as the\u00a0FT notes<\/a>, China\u2019s plan has alarmed the US, and\u00a0chips, or semiconductors<\/strong>,\u00a0have become the central battlefield in the trade war between the two countries. And it is a battle in which China has a very visible Achilles heel.<\/strong><\/p>\n

Even with the so-called truce between the two sides signed last weekend, and which promptly unraveled after the Huawei CFO’s arrest was unveiled last week, Washington plans to ramp up export controls next year on so-called foundational technologies \u2014 those that can enable development in a broad range of sectors \u2014 and the equipment for manufacturing chips is one of the key target areas under discussion.<\/p>\n

This is a concern for China as the $412 billion global semiconductor industry rests on the shoulders of just six equipment companies, with three of them based in the US. Together, these companies make nearly all of the crucial hardware and software tools needed to manufacture chips,\u00a0meaning an American export ban would choke off China\u2019s access to the basic tools needed to make their latest chip designs.<\/strong><\/p>\n

“You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,\u201d said Brett Simpson, the founder of Arete Research, an equity research group. “If you fight a war with no guns you\u2019re going to lose. And they don\u2019t have the guns.”<\/p>\n

To observe China’s reliance on foreign products, look no further than the\u00a0over $300 billion in semiconductor equipment\u00a0<\/a>China has imported over just the past 12 months.<\/p>\n

To be sure, under Beijing\u2019s auspices, Chinese chip companies have made enormous gains in semiconductor design as well as chip testing and packaging, in an attempt to catch up to the US. Several private and state-owned Chinese companies \u2014 Intel-backed Tsinghua Unigroup, Cambricon Technologies and Huawei\u2019s HiSilicon among them \u2014 have already begun to venture into designing the leading edge chips capable of AI applications.<\/p>\n

But, as the FT, notes, the real difficulty is not in designing the chips, but in making them: “From a design perspective, Chinese companies are at least on par with anyone else in the world,\u201d said Risto Puhakka, president of VSLI Research. \u201cWhere they have a challenge is if they decide to make a very cutting-edge chip.”<\/p>\n

The country’s recent scramble, amid the push for China 2025 strategic plan, to become technologically self-sufficient in chip production is clearly visible in the next chart, showing the big spike in recent imports of equipment for semiconductor manufacturing.<\/p>\n

Still, as Chinese semiconductor plants try to catch up, they have few choices when outfitting or upgrading their chip foundries. The reason: only a few equipment suppliers remain after a decade of consolidation.<\/p>\n

Foremost among them is the Netherland\u2019s ASML, which makes the photolithography machines that print and etch designs on to silicon wafers. It is the only supplier of the extreme ultra violet (EUV) lithography machines needed to make a 7-nanometre processor, the industry\u2019s current gold standard.<\/p>\n

Over in the US, Lam Research and Applied Materials as well as Japanese company Tokyo Electron dominate the market for equipment that can deposit billions of transistors and other active components on to a single chip. Another US company, KLA Tencor, sells much of the technology used in testing and monitoring the quality of chip production.<\/p>\n

It is China\u2019s reliance on these companies, more than any down swing in the stock market, that has made it vulnerable.<\/p>\n

\u201cFirms like Applied Materials, Lam Research and KLA-Tencor made 10 to 20 per cent of their revenues in China in 2017, a share which is expected to rise in 2018,\u201d said Dan Wang, an analyst at Beijing research group Gavekal Dragonomics. \u201cChina is a large and growing market for them, and these companies don\u2019t want export controls that are too restrictive.\u201d<\/p><\/blockquote>\n

What would happen if the trade war escalates to prevent China from catching up with the US technologically?<\/p>\n

Under current laws, an export ban on semiconductor equipment would mean both foreign companies, such as Samsung and Intel with foundries located in China, as well as wholly owned Chinese foundries would be unable to buy American equipment, though foreign companies are likely to be able to apply for waivers.<\/p>\n

\u201cOne of the ideas of export controls is to prevent the release of the tech to certain foreign nationals from China: as an example, that could mean to a Chinese national wherever they are located, or to anyone within the physical geographic region of China,\u201d said Anthony Capobianco, a partner at Hogan Lovells in Washington DC.<\/p>\n

A US ban would also impact non-American chip equipment suppliers, because of the integration of what is a highly specialised supply chain: \u201cASML cannot do without Applied Materials and the other way around. If you take even one out of the value chain, that may hamper Chinese fabs,\u201d said a former ASML executive.<\/p>\n

Puhakka of VSLI Research said: \u201c[These equipment suppliers] have the research and development, the trade secrets in metallurgy, the recipes: all of that knowledge base is 40 years old.\u201d said VSLI Research\u2019s Mr Puhakka.<\/p>\n

“This is not about money. This about the knowledge base . . . and that knowledge base is not moving” he added, delineating China’s core dilemma.<\/p>\n

* * *<\/p>\n

Still, slowly China is catching up and some mainland companies are starting to produce their own chip-making equipment. At the head of the pack are Shanghai-based AMEC, which makes both wafer fabrication and packaging equipment for 28nm chips, Shanghai Micro Electronics Equipment, which is creating chip-etching lithography machines, and CETC, the state defence company, which announced a 28nm ion implanting device this August.<\/p>\n

But what matters in the global technological arms race is that\u00a0no Chinese company is close to being able to offer equipment that can produce the current target size of 7nm chips.\u00a0<\/strong>SMEE\u2019s machines can only match what ASML was able to do about 15 years ago. Today\u2019s most basic smartphones require chips that are between 14nm and 16nm in size, but the smallest chips offered by China\u2019s biggest manufacturer, SMIC, is 28nm.<\/p>\n

And if the US cuts them off from purchasing foreign equipment, Chinese plants will also miss out on accumulating operational experience. \u201cBasically, it\u2019s a double whammy,\u201d said Mr Simpson from Arete Research.<\/p>\n

\u201cYou\u2019ve got two big bottlenecks. You need to get the equipment into your fabs [plants] and secondly, you\u2019ve got to know how it runs and the intellectual property process to make use of that equipment,\u201d<\/strong>\u00a0he explained.<\/p><\/blockquote>\n

Of course, being behind doesn’t mean China would give up, and if faced with US export controls, Chinese-owned plants could simply continue producing lower-end semiconductors, such as analogue chips, used in everything from industrial robots to electric vehicles.<\/p>\n

However, out of reach in the medium term would be making the most advanced chips able to support AI functions or 5G telecommunication networks. Leading edge chips are also where sales and margins are highest. TSMC expects revenue from sales of advanced chips 28nm and smaller to rise to as much as 70% by this year, up from 42% only four years ago.<\/p>\n

The risk is that an overly aggressive posture would backfire, and force China to become entirely self sufficient, because in the long term, analysts said, a US export ban would likely cement Beijing\u2019s resolve to cultivate a wholly home grown semiconductor industry along every step, from design to fabrication to packaging.<\/p>\n

\u201cIn the short term, US export controls can seriously set back Chinese progress on semiconductors. In the longer term, it\u2019s hard to say if China will be permanently set back,\u201d said Gavekal\u2019s Wang, noting that fear of US export controls helped marshal the resources that shaped Japan\u2019s most dominant semiconductor equipment players.<\/p>\n

\u201cThe more tightly the US controls these goods, the more important it becomes for China to make these goods itself.\u201d<\/p>\n

At the end of the day, however, it is a simple question of money, because if China is willing to throw enough money at the problem, the solution will come. And as we\u00a0showed back in May<\/a>, China has every intention of not only matching, but surpassing total US military spending – springing the biggest\u00a0Thucydides Trap\u00a0<\/a>ever witnessed in civilization – and in light of the importance of an autonomous, self-reliant semiconductor industry, one can argue that much of this spending will go toward beating the US where it truly matters…<\/p>\n

\"\"<\/a><\/p>\n

… in the technological arms race.<\/p>\n

Because remember what Bank of America’s Michael Hartnett\u00a0said half a year ago<\/a>: for all the talk of the escalating confrontation between the US and China, the “trade war” of 2018 should be recognized for what it really is:\u00a0“the first stage of a new arms race between the US & China to reach national superiority in technology over the longer-term via Quantum Computing, Artificial\u00a0 Intelligence, Hypersonic Warplanes, Electronic Vehicles, Robotics, and Cyber-Security.”<\/em><\/strong><\/p>\n

Which is why, at this point delaying Beijing may be the best option for the US which is slowly but surely losing its one insurmountable technological advantage. But while that may win the short-term battle, will it merely lead to an even faster victory for China in the war, first trade and eventually, real.<\/p>\n

___
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