Computer chips are the core of the digital economy, and their increasing capabilities support technologies like generative artificial intelligence that promise to change the face of many sectors.

The vital role of chips became clear when the coronavirus pandemic disrupted chip production in Asia, throwing technology supply chains into disarray.

It’s no wonder, then, that these devices have become the focus of intense competition between the world’s great economic powers, as the United States has imposed a set of restrictions aimed at thwarting China’s ambitions in the semiconductor sector and ensuring American dominance in leadership in that vital field. The focus on chips is likely to continue under the new administration of US President-elect Donald Trump, which seeks to support capabilities and manufacturing in the United States, according to Bloomberg.



Why are chips so important?

Chips are the necessary component to process and absorb the massive amounts of data that have become a rival to oil for the status of the lifeblood of the economy.

Chips—short for semiconductors, or integrated circuits—are made by adding materials to silicon wafers, and have a variety of uses. There are memory chips that store data, which are simpler to build than other types and are traded like commodities. There are logic chips that run software and act as the brain of the device, which are more complex and more expensive.

Getting chips like Nvidia’s H100 AI accelerator has become a matter of national security and the fortunes of giants like Alphabet Inc’s Google and Microsoft Corp., as they compete to build giant data centers and advance what is seen as the future of computing.



Even the devices we use in our daily lives increasingly rely on chips. Every push of a button in a car full of small specialized gadgets needs simple chips to translate that push into electronic signals, and all electrically powered devices need chips to convert and regulate the flow of electricity.

Why is there competition in chip manufacturing?

Most of the leading semiconductor technology is developed in the United States, however, Taiwan and South Korea currently dominate chip manufacturing.

On the other hand, China is the world's largest market for these electronic components, and its desire to increase local manufacturing of the chips it uses has increased, which has focused Washington's attention on the sector as part of its efforts to limit the progress of its Asian competitor and address what it describes as concerns related to national security.

The United States has imposed export restrictions and import tariffs to contain China’s ambitions, and is dedicating a huge chunk of government funding to bringing physical chip production back home, aiming to reduce what it sees as a dangerous dependence on a few factories in East Asia. A number of other countries, including Germany, Spain, India and Japan, are following suit.

The Biden administration is considering further restrictions on the sale of semiconductor-making equipment, as well as artificial intelligence chips, to China, in an escalation of Washington’s crackdown on Beijing’s technology ambitions, according to people familiar with the matter. The restrictions could be announced as early as early December.

Who controls the supply?

Chipmaking has become increasingly risky and exclusive. A new factory costs more than $20 billion, takes years to build, and must run 24 hours a day to turn a profit. The scale of production has left just three companies with the cutting-edge technology: Taiwan Semiconductor Manufacturing Co., Ltd., Samsung Electronics Co., Ltd., and Intel Corp., Ltd., in the United States.

TSMC and Samsung act as so-called “foundries,” outsourcing manufacturing to companies around the world.

The world's biggest tech companies rely on access to top manufacturers, most of which are based in Taiwan, and while Intel has previously focused on manufacturing to meet its own needs, it is now looking to compete with TSMC and Samsung in contract manufacturing.

At the bottom level, there is a huge sector that produces what are called “analog chips.” Texas Instruments and STMicroelectronics are among the biggest producers of this type of component, which can perform tasks such as modifying electricity inside smartphones, controlling temperatures, and converting sound into electrical pulses. This is an area that China is targeting, pouring huge investments into in order to increase production and capture market share, despite being barred from doing so.