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Inside China's Accelerating Bid for Chip Supremacy - YouTube
Channel: Bloomberg Quicktake: Originals
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Almost everything we use
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depends on silicon
semiconductors called chips.
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From your iPhones, your
fridge, your air filter.
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The most advanced supercomputers,
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the most basic toaster ovens.
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What's turning on your indicators,
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what's turning on your radio in your car.
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That's a chip.
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Today, about a trillion
chips are made a year
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or 128 for every person on the planet.
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And China's government
is lending the industry
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the same strategic importance
[33]
it gave to its atomic bomb program.
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It's arguably a lot more important
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because you are talking
about China becoming
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self-reliant on the technology that powers
[47]
all of mankind's future
scientific advances.
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The key semiconductor
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is the advanced logic chip.
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It's the most expensive and
complex piece of silicon
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that gives computers and
smartphones their intelligence.
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This is the microprocessor
designed by Apple,
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designed by Qualcomm,
[69]
are made by only a very few companies,
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and they're made on the very, very most
[74]
advanced manufacturing.
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Right now, there's one
company that's crucial
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when it comes to making
advanced logic chips:
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Taiwan Semiconductor
Manufacturing Company, or TSMC.
[89]
And it is a company that
makes customized chips
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for a lot of global tech companies,
[94]
including Apple and Nvidia and MediaTek.
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So when TSMC has a shortage,
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entire industries shut down.
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And this dependency on Taiwan
worries western countries.
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The other concern that
has been voiced by others
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is the fact that China claims Taiwan,
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which is a democratically
self-governing island.
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China has always said it
wants to take over Taiwan
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by force if necessary.
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But China's also worried
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since they too rely on Taiwan,
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which has strong ties to the
U.S., for their chip imports.
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The result of all this:
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multi-billion-dollar plans
by multiple countries
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in a race to dominate
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the mother of all
cutting-edge technologies.
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The transistors which give
chips their functionality
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are small, very small.
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The way to measure a
size in the chip industry
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is in nanometers.
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These are billionths of a meter.
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The current state of
the art is 5 nanometers.
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They are smaller than a virus.
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Very soon, we're going
to get to the point where
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these layers of materials
that we use to build up
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a transistor on a chip are
going to be an atom thick.
[182]
Once we get to that point, we
can't make them any smaller.
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The smaller transistors are
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the more you can fit into a chip,
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which in turn will offer
more computing power.
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But making these chips
has gotten so incredibly
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complicated and expensive
[198]
that it's difficult to keep up.
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That's why the number of manufacturers
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at the industry's cutting edge
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has fallen from over 25 in 2000,
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to just three.
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There are fewer and
fewer companies actually
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producing leading-edge silicon
for a very simple reason.
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You need $15, $20 billion to build
[219]
just one semiconductor factory,
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and that factory is
obsolete within five years.
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That means you need to
be running that plant
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24-7.
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It needs to be producing
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hundreds of millions of devices a year,
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and those devices need to be
selling at a very high premium,
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otherwise you're losing money.
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And there are really only a
few companies that understand
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the brutal, you know,
economics of the industry
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and that they can play that game and win.
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But now the American champion, Intel,
[250]
has shown signs of a slowdown.
[253]
Although it's dominated the
industry for the last 30 years,
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it's starting to fall
behind in manufacturing.
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And it's announced that,
like everyone else,
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it may start outsourcing
some of its work to TSMC.
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What's really changed
though over the last decade
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is that you've had what's called the birth
[272]
and the growth of foundries.
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These are companies that
specialize only in manufacturing
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and take designs from other companies
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and make them with the
best process technology.
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In the past, they couldn't
really keep up with Intel.
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But now, particularly TSMC
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and to a secondary extent Samsung,
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have actually got ahead.
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The net result of that is
that a company like Qualcomm,
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a company like Apple,
can design a processor,
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send that design around
the world electronically
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and have that design made
into a piece of silicon
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on a more advanced process.
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By volume, South Korea's Samsung
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actually makes more chips
than any other manufacturer.
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But the company mainly
focuses on memory chips
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rather than the custom-made logic chips
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that companies depend on TSMC for.
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Everybody wants TSMC
to do their best stuff
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because TSMC are better at it.
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It's simple as that.
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The economics and the
technology...they've won.
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Above 30% of the most advanced logic
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is done in those factories
in Hsinchu by TSMC engineers.
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Both Samsung and Intel
have recently announced
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multi-billion-dollar investments
in the foundry business,
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although they won't be a threat
to TSMC for years to come.
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But whether it's South Korea,
the United States or Taiwan,
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China's relationship with
all three is less than ideal.
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Not to mention a lot of the equipment
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and software provided to TSMC and Samsung
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to manufacture chips
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is made by U.S. companies.
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There are only a select few companies
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that can make these machines
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that scrape off these fine
patterns with ultra UV lasers.
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You know, this is science
fiction-level technology.
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Applied Materials here in
California, KLA-Tencor,
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lots of these companies
that you've never heard of
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are absolutely crucial in the supply chain
[400]
in making these machines
that then translate
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into these multi-billion-dollar
factories that make chips.
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And the U.S. has leveraged its position
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to enact sanctions on China,
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banning the country from
using U.S. technology
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out of security concerns.
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So we're all familiar with
the example of Huawei,
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whose smartphone business
has basically been
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essentially obliterated by U.S. sanctions.
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Whether it's software, whether
it's actual chip components,
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materials that go into chips
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or equipment that you
use to fabricate chips,
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all of that is technically banned.
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The American tech embargo
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began as an effort against
Huawei over national security,
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but bans and restrictions
now affect at least 60 firms.
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These include SMIC,
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China's chip champion, which
has been put on a blacklist.
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At the end of 2020,
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TSMC sales to Chinese clients
dropped by roughly 70%.
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And for the first time ever,
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Huawei reported a drop in revenue.
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I think China's rise as a
superpower in technology
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is regarded as a threat
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to very fundamental American interests.
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They are military foes,
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and the last thing Washington wants
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is also to see a technological
foe with the wherewithal
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or the capabilities to
wage technological warfare
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on the United States.
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But U.S. sanctions might not be
[505]
such a simple solution.
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China is the largest purchaser
of chips in the world,
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as well as a manufacturer
of less sophisticated chip
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for companies like Qualcomm
and other American companies.
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Bear in mind that a lot
of American businesses
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rely on China for growth.
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So there is very strong
pushback from the private sector
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to allow the flow of American
technology to China to resume.
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But if you look at the overall picture,
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I think the Biden administration shares
[538]
the Trump administration's objectives
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in curtailing China's rise
as a technological power.
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And that's because that
would have ramifications
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for really long-term strategic goals.
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We're investing aggressively in areas
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like semiconductors and batteries.
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That's what they're doing and others.
[557]
So must we.
[560]
But cutting China out
completely isn't an option.
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Since much of the world depends on China
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to manufacture most of their
electronics like iPhones.
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A chip designed, say by Apple
in Cupertino in California,
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will be made in Taiwan,
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then packaged into something
that's going to end up
[579]
in an iPhone in the Philippines.
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That chip then makes its way to China
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where it gets plugged into an iPhone.
[587]
That iPhone then gets on a
plane and gets sold in Europe,
[590]
or maybe even comes back to Cupertino
[592]
and get sold in the Apple store.
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So the semiconductor supply chain
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is arguably one of the most complex
[599]
and widely geographically spread
supply chains in the world.
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From Beijing's perspective,
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U.S. sanctions are a way to keep China
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at the bottom end of the supply chain,
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forever stuck as a
low-tier manufacturing hub.
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That's why China is determined
to become self-sufficient
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and is shifting into its highest gear.
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During its annual NPC meeting in 2021,
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President Xi Jinping pledged $1.4 trillion
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to accelerate their tech industry
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and become totally independent
from foreign technology.
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One of the announcements
that we've seen come out
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since the NPC has been SMIC,
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China's top chipmaker,
[647]
signing an agreement to build
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a $2.5 billion semiconductor foundry,
[652]
or manufacturing plant
with Shenzhen's government.
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And I think you'll see more of those
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private-public partnerships,
[659]
where a private giant
or entity, such as SMIC,
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drives more efficient private capital
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into national objectives.
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SMIC, or
[671]
Semiconductor Manufacturing
International Corporation,
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is China's largest foundry.
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Although it's still decades
behind Taiwan's TSMC,
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China has shown its ability to throw money
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and human resources at the
development of mega projects.
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But the chip industry
isn't quite the same thing.
[692]
There have been numerous failures
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in terms of China's domestic
chip development effort.
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SMIC is an example of a success
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but have been plenty more that
have fallen by the wayside.
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Literally hundreds of
much smaller corporations
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that you and I have never heard of
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that raised capital but ultimately failed
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to deliver on its goals.
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TSMC has shown
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it takes much more than
capital and human resources.
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It takes time.
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So TSMC was founded in 1987.
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And it has spent more than 30 years
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in developing and creating its
own manufacturing technology.
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It is just not very
likely that you can create
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a comprehensive semiconductor
ecosystem overnight.
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And unlike the U.S. or China,
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Taiwan's economy is largely
built around semiconductors.
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TSMC is located in the
small town of Hsinchu,
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which hosts a whole ecosystem
of other well-established
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chip manufacturing and
packaging companies.
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And the industry also
attracts Taiwan's best talent.
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One of Taiwan's best-paying industries
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is the semiconductor industry.
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So with that incentive,
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a lot of school children would see
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the electrical engineering
or anything that's related
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to the semiconductor
manufacturing as their top choice
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when they decide on which
university departments
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they want to go to.
[791]
So in the U.S. you have students
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choosing to study computer science
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or other subjects that would
be more related to the skills
[799]
that big tech companies like
Google or Amazon require.
[806]
Likewise in China,
[808]
students are much more likely
to be attracted by companies
[810]
like Tencent, Baidu and
Alibaba, or make their own app.
[817]
One of the things that Chinese officials
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in recent years have been stressing
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it's fine to build a world's
best food-delivery app.
[825]
But at the same time you need also
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to be able to attract talent
into areas, such as AI,
[833]
quantum computing, basic
scientific developments,
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what we call the hard
sciences or hard tech.
[842]
To counter the lack of
talent in the field,
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China's been recruiting
talent from abroad,
[847]
which has been controversial
in Taiwan and the U.S.
[850]
considering China's history of
taking intellectual property.
[854]
China has been hiring
aggressively from Taiwan
[858]
over the past few years.
[860]
And what the U.S. may be concerned
[862]
is these people may bring
their know-how to China
[866]
and help China build up
a semiconductor industry
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more swiftly and more effectively.
[874]
And there is actually a
well-known IP theft case.
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The U.S. memory maker
Micron has sued Taiwan's UMC
[883]
and a number of engineers.
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Micron alleged that some
of these engineers formally
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have some know-how from Micron
to help UMC's Chinese partner
[894]
to build up their memory chips in China.
[899]
But all these resources and talent
[901]
still don't necessarily equal success.
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To make a profit, companies like TSMC
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have a huge amount of orders
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from a diverse number of clients,
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and that also takes years to build up.
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So, if Taiwan was suddenly cut off,
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by a China invasion, for example,
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there is no TSMC replacement.
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Let's say if Apple decides
to find another partner,
[930]
it will take years for them
to get this other chipmaker
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to be ready, if at all.
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So without TSMC,
[940]
you will not be able to
have chips in your iPhones,
[944]
and you will not have chips
for your F-35 fighter jets
[949]
that the U.S. flies.
[952]
So it will be a very different
world we are talking about
[956]
without TSMC in it.
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This choke point came to light
[964]
during the pandemic when a chip shortage
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cost the auto industry
billions of dollars.
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Yeah, the pandemic has
been a fascinating story
[975]
and arguably
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a turning-point moment for
the semiconductor industry.
[980]
Dial the clock back a
year ago to early 2020,
[984]
and the forecasts were dire.
[987]
Economic activity around
the world in the pandemic
[989]
was going to come crashing down,
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and that was going to kill
demand for semiconductors.
[994]
What really happened though
[996]
was as we were locked in our homes,
[998]
studying and working from home,
[1001]
we felt an increasing need
for the electronic services,
[1005]
for the electronic devices
[1006]
that had been around us all the time
[1008]
but we felt much more
intense need for them.
[1011]
And that had a knock-on huge effect
[1012]
in creating demand for semiconductors.
[1016]
Roll the clock forward
to where we are now,
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demand has come surging back.
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And it's come surging
back in sectors where
[1022]
it really wasn't expected to.
[1023]
For example, the automotive
industry, which thought that
[1026]
essentially the world was ending,
[1028]
that there was no demand for cars
[1030]
and they were going to
have to shut plants down.
[1032]
They are having to shut plants down
[1033]
because they can't get enough chips.
[1036]
This prompted the U.S. to sign deals
[1038]
with TSMC and Samsung
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to build factories on their own turf.
[1045]
If we see what's being billed as a
[1048]
an electronic Cold War fully materialize,
[1052]
that China goes its own way in technology,
[1054]
that Europe and the U.S.
go in another direction,
[1056]
then perhaps it makes
increasingly more economic sense
[1060]
to have facilities here.
[1067]
The biggest economic choke point
[1069]
of the 20th century may
have been oil passing
[1072]
through the Strait of Hormuz,
[1074]
but now it's microscopic
silicon transistors
[1077]
manufactured in Taiwan.
[1079]
But while the U.S. and China
[1081]
are fighting for control
of the technology,
[1084]
they still depend on each
other for the most part.
[1088]
The trade war really is a case of
[1090]
be careful what you wish for.
[1092]
The chip industry brought
attention to itself and lobbied
[1095]
for action against China
for years, on IP protection.
[1099]
Now that it's happened,
[1101]
they're not happy with the situation.
[1103]
Why are they not happy
with that situation?
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Because they depend
upon the Chinese market.
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It's the fastest-growing, biggest market.
[1110]
They need to be able to
sell chips into China.
[1113]
Right now, China needs them.
[1115]
China needs what they're producing.
[1117]
Massive wake-up call for China,
[1119]
massive call to them
[1122]
to show that they need to be independent.
[1125]
The worst-case scenario for the U.S.,
[1127]
is that China makes that leap.
[1129]
That this next five-year plan
[1131]
or the five-year plan after
that finally hits home,
[1134]
Chinese chip manufacturers emerge
[1136]
and become competitive to
Intel, to Nvidia, to Broadcom,
[1139]
to what Apple can produce inside.
[1143]
The worst-case scenario,
[1145]
at least from a globalist's point of view,
[1147]
is bipolarization of the world,
[1150]
where you have U.S. and China
and countries around the world
[1154]
lining up behind one or the other.
[1157]
It's not good for a lot of things,
[1160]
just starting simply with global trade.
[1163]
But if I may be allowed to
wax lyrical for a second,
[1166]
it ain't good for the
advancement of humankind.
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