How the world’s most important industry ended up on a single island: Part I
From time to time, news headlines are saturated with mentions of Taiwan and its chip industry. These articles convince us that this story is of the utmost importance, but in today’s world, everything seems to be. They say: “Taiwan produces over 60% of the world’s semiconductors and over 90% of the most advanced ones.” But does anyone understand what it means? When the same publications say “There are Taiwanese microchips in your fridge!”, I was never sure what they were doing there and how to react. Does my fridge really need the most cutting-edge microchip technology? Why can’t any other country just produce more?
The book Chip War: The Fight for the World’s Most Critical Technology provides a comprehensive account of the history of chips, with its political drama, economic and military policy, and how all of these stories led to the complete failure of American politicians to influence the supply chain that they were seeking to diversify for decades. This book is incredibly easy to read. The narrative unfolds through the personal stories of key figures, painting a beautifully detailed picture of a world being changed by something so small as semiconductors. Even those who have no interest in technology would find the explanations easy to follow. After reading this book, I am definitely interested in learning more about the field.
There are two fascinating parts to this book. The first part explains the basic principles of functioning of modern electronics and the range of applications they have. It also covers the conditions in which technological breakthroughs are made and the numerous failed attempts to create such conditions with top-down orders. The second part is the story of business practices that are always deeply interconnected with countries’ foreign policy and military needs. It highlights how crucial the Cold War was (and is) to the establishment of modern electronics industry.
What is a semiconductor
A semiconductor is a switch. A computer operates using a combination of TRUE/FALSE inputs and logical operations. To perform mathematical calculations, computers translate these inputs into information they can operate with. This translation is achieved through the use of 1s and 0s, which are facts about whether there is electric current incoming. A crucial component in creating these binary sequences is the semiconductor, which acts as a switch controlling the flow of electric current. Semiconductors typically have three terminals, and the current flow depends on whether the third terminal is powered. When the third terminal is powered, the semiconductor amplifies the signal from the first terminal and allows it to pass through. On the other hand, when the third terminal is not powered, the semiconductor blocks the signal. These semiconductor switches constitute the physical building blocks for logical operations inside a computer.
[During WW2…] only 20 percent of American bombs fell within one thousand feet of their target. The war was decided by the quantity of bombs dropped and artillery shells fired, not by the knobs on the mechanical computers that tried and usually failed to guide them. More accuracy required more calculations.
But modern day transistors were not invented in their current form. During the Second World War, vacuum tubes performed the role of transistors. Here is a wonderful documentary on how they work. Vacuum tubes could close or open the electric circuit with other electric signal which made them infinitely more reliable than other attempts at creating a computer with mechanical elements. They made mundane but time-consuming calculations by a literal army of human calculators much faster and more reliable.
Vacuum tubes were a huge leap forward in the speed and reliability of calculations. They allowed computers to perform different operations by rewiring the tubes. Mechanical machines that were used before were constructed for one task only. Rewiring a room-sized computer every time to perform a logarithm instead of a square root was slowing down the process immensely and the faster one operation is processed, the more complex tasks can be computerised.
Vacuum tubes were also causing an unexpected problem: the light attracted bugs to the machines because they were basically lamps. This is how we got to the term “debugging”.
Soon, under pressure from heavy demand from the military and the impressive sums that defense contracts can bring, a few East-Coast physicists used the physical properties of semiconducting materials to create a better version of a vacuum tube.
Most materials either let electric current flow freely (like copper wires) or block current (like glass). Semiconductors are different. On their own, semiconductor materials like silicon and germanium are like glass, conducting hardly any electricity at all. But when certain materials are added and an electric field is applied, currents can begin to flow.
The quality of the material fits perfectly with the role of a transistor. The surge in computing power began.
The computer that eventually took Apollo 11 to the moon weighed seventy pounds (32 kg) and took up about one cubic foot of space, a thousand times less than the University of Pennsylvania’s ENIAC computer that had calculated artillery trajectories during World War II.
Building the semiconductor industry
The first semiconductors were developed by academics in the universities of the East Coast, particularly at MIT. The Pentagon was their primary customer, as no other entity in the world could afford their services. The space race and increased budgets for the Pentagon and NASA led to a surge in demand for semiconductors, resulting in initial production lines and a revolution in consumer electronics. There was nothing too expensive to beat the Soviets to the Moon.
These investments established the initial production lines, and the inventors set the course for mass manufacturing. The first device using semiconductors produced for commercial markets was a hearing aid, initially designed for NASA satellites.
It was the personal predictions of the significance of this invention that stimulated the accumulation education of specialists in garages, not in classrooms. In the early days, it was not obvious that new engineers or physicists should focus on something like the conducting properties of Germanium in their curricula. And receiving a scholarship to shrink the size of a transistor instead of developing something on the forefront of theory was impossible.
The ex-academics, now luminaries of US technological domination, realized that they could make real money if they distanced themselves from the government and focused on a consumer electronics revolution. Fairchild Semiconductors Inc. was founded in Southern California by Noyce, Moore, and a few others, which created the American startup culture and made Silicon Valley the center of world-changing technology. They were optimistic about the life-long project they were embarking on: Gordon Moore immediately became famous for his bold claim that Fairchild could double the number of components fitting on a silicon chip every year. This became known as Moore’s Law, and ever since, the industry has been striving to keep up with it.
Fairchild was incredibly successful in cutting costs and expanding the computer market. The media immediately picked up on how groundbreaking their work was, and people were excited. The decision to distance themselves from public financing and position themselves as independent startups was crucial. Other companies, which had defence contracts as their only source of income, spent ten times as much maintaining staff of researchers who produced pretty projects and were great at communicating within the bureaucratic machine but never developed anything like what Fairchild would show in the next decade.
Annual U.S. computer sales grew from 1,000 in 1957 to 18,700 a decade later. By the mid-1960s, almost all these computers relied on integrated circuits. In 1966, Burroughs, a computer firm, ordered 20 million chips from Fairchild — more than twenty times what the Apollo program consumed.
However, the owner of Fairchild had an irrational belief that the employees of the company (our genius physicists in search of fortunes and fame) should not own the stock of the company they work for. It sounded too much like socialism in the political climate of the 1960s. This provoked a break off into another company when the inventors saw their own success and that they weren’t being proportionately compensated. This gave the start to competition in the Silicon Valley.
Semiconductors in Japan and USSR
After the United States, the first countries to enter the semiconductor market were Japan and the USSR. They quickly recognized that semiconductors were a key component of technological progress and a battlefield of the Cold War. As a matter of defense policy, the industry was taken under government control, but the approaches to state micromanagement of the industry’s shaping were different. Japan captured the market, giving Americans nightmares of a cyberpunk future ruled by Japanese mega-corporations, while the Soviet industry never caught up with the United States and eventually disintegrated.
In the USSR, the establishment of research institutes and production facilities was a natural part of the Arms Race. Soviet officials were expected to go into semiconductors because Americans did. Computers were an important military technology. For example, the advanced computing capabilities of the missiles enable them to compare the target’s terrain map to the terrain map seen by the missile in real time. This allows for trajectory corrections during flight and precise strikes. The increased accuracy of these missiles enabled the US to hit targets with fewer missiles than before. Previously, the Soviet Union was able to produce just as many weapons and soldiers as their enemies. However, technological advancements have rendered this strategy obsolete. To balance out a single American precision missile, they would have to produce an increasing number of ordinary rockets before the technological gap became too wide to compete at all. The road to defeat in the Cold War was clear to the minds in Moscow.
In the spirit of Soviet gigantism, the Soviet government built an entire city in the early 1960s to encourage engineers to work on transistors in the most comfortable conditions on the planet. Their children could go to the best schools and their partners could shop at the best-supplied stores.
Secret services played a significant role in Soviet R&D. In the late 1950s, American universities opened exchange programs for Russian students to facilitate technological exchange and recruit them to join the capitalist side. Of course, many “students” turned out to be KGB agents with little to no interest in semiconductors. However, these spies were useless as they were mostly underqualified to understand what they were seeing. Even if Moscow had sent its best specialists, they would have had no chance of replicating American technology without insider knowledge. Similar tours to fabrication sites were given to Japanese competitors, who were shocked that visitors were allowed to take pictures. American guides explained that no picture they could take would allow them to reverse engineer the last generation machinery used for transistor manufacturing. Indeed, fabrication sites (fabs) were equipped with the most expensive and complex machines of their day.
The Soviet strategy forced the industry to poorly copy every American step at a larger cost. While the US enjoyed all the benefits of globalization and free access to the market of ideas, the USSR kept the semiconductor industry secretive and heavily bureaucratized.
Rather than trying to copy American technology, Japan focused on integrating into American supply chain and make products on the base of already developed technology cheaper and better. Japanese firms either breached intellectual property laws outright and manufactured American products at a lower cost, or they focused on transforming American innovation into real consumer products. For example, the first product to capture the global market to come out of Japan was a simple calculator on very basic chips, yet it was the most amazing calculator you could find that was also absurdly cheap. 70% of the calculators sold world wide were Japanese.
Throughout the 1960s, Japanese firms paid sizeable licensing fees on intellectual property, handing over 4.5 percent of all chip sales to Fairchild, 3.5 percent to Texas Instruments, and 2 percent to Western Electric. U.S. chipmakers were happy to transfer their technology because Japanese firms appeared to be years behind.
The Japanese government gave significant support to its electronics industry; however, it never micromanaged it. The state provided tax breaks and favorable monetary conditions to help mega corporations flood foreign markets with Japanese goods, pushing out the competition. Tax breaks allowed Japanese firms to invest heavily in advanced manufacturing facilities at lower cost than their American counterparts, resulting in a competitive advantage. Consequently, many American companies shifted production to Japan or signed production contracts with Japanese firms. Moreover, the Japanese government intentionally kept the value of the yen lower than it might have been otherwise, making Japanese goods more affordable for foreign consumers.
Thoughts
This story illustrates not only the soft-budget constraint effect (when the increased support of the state and security in future financing can cripple the incentive to innovate), but also how technological progress is not generated by the reputable academics. The significant increase in computer power occurred when talented physicists left university labs where they are working for immaterial credentials and illusory respect of colleagues that often require compromising one’s integrity.
I see more and more stories that confirm the idea that technological progress should not be credited to modern scientific community and definitely not the academia as an institution, but to the environments that train people in particular skills and market competition that creates a monetary motivation to think of ways to improve people’s lives. The gigantic Soviet research centers with bottomless budgets did not produce any innovation that matters. But the Japanese firms looking to conquer the consumer market were the real inventors of many devices we take for granted today. Afterall, when we imagine the worlds of the future, we don’t picture worlds with libraries of click-bait articles but worlds with real standard of living advances (even in a form of amazing calculators).
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