With the U.S. imposing technology sanctions on China, the world’s electronics industry is facing turbulent times. After the sanctions, Huawei has slipped from its number one slot as a mobile phone supplier—which the company held during the second quarter of 2020—to number seven currently. Commenting on this slide, Huawei’s rotating chairman Guo Ping has said that the company’s battle is for survival right now. According to Reuters, Guo in a note circulated internally maintained that Huawei “will not give up and plans to eventually return to the industry’s ‘throne.’” On that count, Huawei is not only surviving but doing quite well. It is still the world leader in the telecom equipment market with a hefty 31 percent revenue share, which is twice that of its nearest competitors Nokia and Ericsson, and profits of nearly $50 billion in the first six months of 2021. But will Huawei be able to retain its market position without China catching up with the latest developments in chip manufacturing and design technologies?

It is not just the Chinese companies alone that are facing tough times. With growing chip wars between the U.S. and China, the global supply chain for electronic chips has been affected, leading to chip shortages across several sectors. Semiconductor chips are used in almost every product, from household equipment—microwave ovens and toasters—to the automotive and defense industries. The auto industry’s biggest bottleneck today is the chip shortage, which has badly hit their production. If the chip wars continue, the crisis of the chip shortage may affect other industries as well.

This crisis, meanwhile, has raised several questions: Is the crisis of the semiconductor industry the precursor to the fragmentation of the global supply chains? Will it lead to warring blocks, with the U.S. at one pole and China at the other? With this fragility of the supply chain, are we seeing the end of globalization as a paradigm?

The electronics industry is one of the most capital-intensive and research-and-development-intensive industries. No other industry has this characteristic. Power or steel plants are capital-intensive; pharmaceuticals are R&D-intensive. But no other industry is both. ASML, a little-known Dutch company that produces the lithographic machines for chip manufacturing, is worth more than Volkswagen, the world’s largest car manufacturer. This is due to the high R&D costs of ASML’s lithographic machines: it is the only company that can deliver the machines that the most advanced chips require. In order for a new fabrication facility to make the new generation of chips today, it will cost $20 billion, which is more than the cost of an aircraft carrier or a nuclear plant. Only two fabricators, Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung, have the capability to produce the most advanced chips that the industry uses.

The U.S. and China compete in areas such as artificial intelligence, computers, mobile networks and phones. The basic building block for all these technologies is semiconductor chips. The more circuity we can pack into a chip, the more computing power it has. The bulk of the market consists of older fabricators using 180 nm to 28 nm level technologies, with only 2 percent of the chips below the 10 nm level. The only fabricators that can make such chips are TSMC and Samsung, the world’s largest chip fabricators. Semiconductor Manufacturing International Corporation (SMIC) of China, the third-largest chip fabricator globally, has only recently moved from the 28 nm level to the 14 nm level. With Chinese government support, SMIC is investing in production lines that can go below 14 nm. Intel, once the world leader in chip manufacturing, is still stuck at the 14 nm level. However, it also has plans for developing the next generation of chips.

The U.S. has chosen the electronics/semiconductor industry as a battleground for its geostrategic competition with China. It believes that it has a significant technology lead and commands a major market share in this industry. China is a late entrant here. Though it has a comparable market share to that of the U.S., it still depends on certain core technologies. The U.S. and its allies—the European Union, Japan and South Korea—control these core technologies. That is why the U.S. has chosen Huawei and SMIC, two major Chinese players in the technology and the semiconductor industry respectively, as its target for sanctions. The U.S. has put more than 250 Chinese companies on the entities list, which require a special license to import equipment or components. However, it is not a blanket ban.

The U.S. is following up on its sanctions against Huawei and SMIC with a plan to bar China from what it calls “foundational technologies” under its 2018 Export Control Reform Act. The argument that the U.S. is building is a simple one: they are ahead of China in certain critical technologies required for advanced chip manufacturing; all they have to do to maintain this lead is to deny China access to these technologies; this will ensure the U.S. lead for the future and its dominance over the electronics industry.

John Verwey, an investment analyst who writes about semiconductor technology on his website Semi-Literate, discusses what can be considered a foundational technology in the electronics industry. At first sight, chip-making could appear as a foundational technology and the target of U.S. sanctions. This is what the U.S. did when it barred Huawei from buying the latest 7 nm scale chips from TSMC.

SMIC then tried to set up its fabrication line for 7 nm chips and needed to import extreme ultraviolet (EUV) lithography machines from ASML, each costing around $120 million to $150 million. These lithographic machines are the critical part of the production lines of chip fabrication. Though the EUV machines are from the Netherlands, they use software developed in ASML’s U.S. subsidiary and therefore they fall under the U.S. sanctions regime.

The U.S. sanctions mean that ASML cannot sell the EUV lithography machines to China, though it can sell other lithographic machines for lower-end chip production, keeping China out of the high-end under-10-nm technology, and, therefore, a generation or two behind the market leaders.

This brings us to the question of how to define foundational technology. Though chips are the key driver of electronics, they are not as foundational as the machines that produce them. A country at the cutting edge of technology needs to master the technology of chip production and the machines that run such production lines. That is why ASML’s lithography machines are the bottleneck for China.

What then drives the advances in key technologies of the machines and chip production? As Marxists know, knowledge drives the productive forces—in this case, the advances in chip design. This knowledge is captured in the software design tools and the lithography machines. They are both highly knowledge-intensive and require people with very specialized skills.

The U.S. and its universities are still the major source of knowledge development, the key to the advances in this sector. But here is the long-term problem facing the nation: The research programs of the U.S. universities are mostly staffed by international students, with the bulk of them from China, India and other developing countries. Many of them stay back in the U.S. and provide the human power required for the advances in knowledge that the U.S. has today.

If Chinese students and researchers are not welcome in the U.S., this source of knowledge development will weaken. Unfortunately, countries like India do not have high-quality education institutions and research laboratories to be a substitute for the stream of Chinese students who enter U.S. universities. China has invested heavily in its universities and research institutions and produces more PhDs in science and technology today than the U.S. It is also building a pipeline of innovations from the universities/research institutions to the technology industry.

China is the biggest market for the U.S. semiconductor industry’s chip designs and design software. The U.S. companies also design high-end chips, which are then manufactured in Taiwan and China. In the short run, the U.S. sanctions will damage China’s advanced chip production and the production of electronic devices based on such chips. But it will also mean that the U.S. companies will lose a significant part of the revenues that they now receive from the Chinese market from the sale of their design tools. It will also lead to a loss of revenue for advanced chips that the U.S. companies like Qualcomm and Nvidia design and then manufacture in Taiwan’s TSMC.

For the high-tech U.S. companies, the loss of this income means less money for their R&D and the slow erosion of the country’s position as the global knowledge hub. Suppose the U.S. companies lose the Chinese market and, therefore, a significant part of their revenues. In that case, it will seriously affect their ability to compete in the future. In the short run, they may gain, as they are doing with Huawei losing its number one spot in smartphones. But still, the loss of revenues will mean less ability to produce the knowledge that gives the U.S. its edge in technology. Less money in research means an eventual loss of leadership because, unlike other countries, the U.S. increasingly does not produce the chips or the machines, but the knowledge that goes into both of them.

This is what the U.S. semiconductor industry has argued in its submission to the U.S. Department of Commerce. If the U.S. companies delink from the Chinese market, it will mean a significant loss of revenue for them. In the long run, it will lead to a loss of U.S. leadership in electronics. Already, the U.S. sanctions have led the Chinese companies to remove the U.S.-designed components from their product lines. Sanctions are double-edged: they hit Huawei and other Chinese companies and their U.S. suppliers.

How long will China take to erase the lead in semiconductor technologies that the U.S. and its allies have? Analysys Mason, a leading consulting company, says in its May 2021 report that China will be able to attain self-sufficiency in semiconductors in three to four years. The Boston Consulting Group and Semiconductor Industry Association have modeled the impact of breaking up the global supply chain of China and the U.S. delinking their supply chain and markets. The model predicts that with such a policy, the U.S. would still lose its leadership to China. According to the Semiconductor Industry Association, the only way that the U.S. can preserve its lead is to export to China, except in the strategic military sector. The U.S. can then use its profits from these exports for developing a new generation of technologies. Of course, the loss for not exporting in the strategic sector must be compensated with hefty subsidies from the U.S. government.

Meanwhile, India missed the semiconductor manufacturing bus when it decided not to rebuild Semiconductor Complex Limited its premiere chip-making facility in the city of Mohali, after it was destroyed in a mysterious fire in 1989. Its policymakers decided that India should leverage its strength in software and systems and not worry about manufacturing chips. Vinnie Mehta, formerly the executive director of the Manufacturers’ Association for Information Technology (MAIT), had said to Mint, “A nation without silicon (technology) is like a person without [a] heart.” That heart is still missing in India’s technology ecosystem.

If the U.S. wants to retain its position of being a world leader in the electronics industry, it has to match China by investing in the generation of knowledge for future technologies. Why, then, is the U.S. taking the sanctions route? Sanctions are simpler to implement; building a society that values knowledge is more difficult. This is the pathology of late capitalism.

- Prabir Purkayastha is the founding editor of Newsclick.in, a digital media platform. He is an activist for science and the free software movement.

This article was produced in partnership by Newsclick and Globetrotter.