depends on silicon semiconductors called chips.

From your iPhones, your fridge, your air filter.

The most advanced supercomputers,

the most basic toaster ovens.

What's turning on your indicators,

what's turning on your radio in your car.

That's a chip.

Today, about a trillion chips are made a year

or 128 for every person on the planet.

And China's government is lending the industry

the same strategic importance

it gave to its atomic bomb program.

It's arguably a lot more important

because you are talking about China becoming

self-reliant on the technology that powers

all of mankind's future scientific advances.

The key semiconductor

is the advanced logic chip.

It's the most expensive and complex piece of silicon

that gives computers and smartphones their intelligence.

This is the microprocessor designed by Apple,

designed by Qualcomm,

are made by only a very few companies,

and they're made on the very, very most

advanced manufacturing.

Right now, there's one company that's crucial

when it comes to making advanced logic chips:

Taiwan Semiconductor Manufacturing Company, or TSMC.

And it is a company that makes customized chips

for a lot of global tech companies,

including Apple and Nvidia and MediaTek.

So when TSMC has a shortage,

entire industries shut down.

And this dependency on Taiwan worries western countries.

The other concern that has been voiced by others

is the fact that China claims Taiwan,

which is a democratically self-governing island.

China has always said it wants to take over Taiwan

by force if necessary.

But China's also worried

since they too rely on Taiwan,

which has strong ties to the U.S., for their chip imports.

The result of all this:

multi-billion-dollar plans by multiple countries

in a race to dominate

the mother of all cutting-edge technologies.

The transistors which give chips their functionality

are small, very small.

The way to measure a size in the chip industry

is in nanometers.

These are billionths of a meter.

The current state of the art is 5 nanometers.

They are smaller than a virus.

Very soon, we're going to get to the point where

these layers of materials that we use to build up

a transistor on a chip are going to be an atom thick.

Once we get to that point, we can't make them any smaller.

The smaller transistors are

the more you can fit into a chip,

which in turn will offer more computing power.

But making these chips has gotten so incredibly

complicated and expensive

that it's difficult to keep up.

That's why the number of manufacturers

at the industry's cutting edge

has fallen from over 25 in 2000,

to just three.

There are fewer and fewer companies actually

producing leading-edge silicon for a very simple reason.

You need $15, $20 billion to build

just one semiconductor factory,

and that factory is obsolete within five years.

That means you need to be running that plant

24-7.

It needs to be producing

hundreds of millions of devices a year,

and those devices need to be selling at a very high premium,

otherwise you're losing money.

And there are really only a few companies that understand

the brutal, you know, economics of the industry

and that they can play that game and win.

But now the American champion, Intel,

has shown signs of a slowdown.

Although it's dominated the industry for the last 30 years,

it's starting to fall behind in manufacturing.

And it's announced that, like everyone else,

it may start outsourcing some of its work to TSMC.

What's really changed though over the last decade

is that you've had what's called the birth

and the growth of foundries.

These are companies that specialize only in manufacturing

and take designs from other companies

and make them with the best process technology.

In the past, they couldn't really keep up with Intel.

But now, particularly TSMC

and to a secondary extent Samsung,

have actually got ahead.

The net result of that is that a company like Qualcomm,

a company like Apple, can design a processor,

send that design around the world electronically

and have that design made into a piece of silicon

on a more advanced process.

By volume, South Korea's Samsung

actually makes more chips than any other manufacturer.

But the company mainly focuses on memory chips

rather than the custom-made logic chips

that companies depend on TSMC for.

Everybody wants TSMC to do their best stuff

because TSMC are better at it.

It's simple as that.

The economics and the technology...they've won.

Above 30% of the most advanced logic

is done in those factories in Hsinchu by TSMC engineers.

Both Samsung and Intel have recently announced

multi-billion-dollar investments in the foundry business,

although they won't be a threat to TSMC for years to come.

But whether it's South Korea, the United States or Taiwan,

China's relationship with all three is less than ideal.

Not to mention a lot of the equipment

and software provided to TSMC and Samsung

to manufacture chips

is made by U.S. companies.

There are only a select few companies

that can make these machines

that scrape off these fine patterns with ultra UV lasers.

You know, this is science fiction-level technology.

Applied Materials here in California, KLA-Tencor,

lots of these companies that you've never heard of

are absolutely crucial in the supply chain

in making these machines that then translate

into these multi-billion-dollar factories that make chips.

And the U.S. has leveraged its position

to enact sanctions on China,

banning the country from using U.S. technology

out of security concerns.

So we're all familiar with the example of Huawei,

whose smartphone business has basically been

essentially obliterated by U.S. sanctions.

Whether it's software, whether it's actual chip components,

materials that go into chips

or equipment that you use to fabricate chips,

all of that is technically banned.

The American tech embargo

began as an effort against Huawei over national security,

but bans and restrictions now affect at least 60 firms.

These include SMIC,

China's chip champion, which has been put on a blacklist.

At the end of 2020,

TSMC sales to Chinese clients dropped by roughly 70%.

And for the first time ever,

Huawei reported a drop in revenue.

I think China's rise as a superpower in technology

is regarded as a threat

to very fundamental American interests.

They are military foes,

and the last thing Washington wants

is also to see a technological foe with the wherewithal

or the capabilities to wage technological warfare

on the United States.

But U.S. sanctions might not be

such a simple solution.

China is the largest purchaser of chips in the world,

as well as a manufacturer of less sophisticated chip

for companies like Qualcomm and other American companies.

Bear in mind that a lot of American businesses

rely on China for growth.

So there is very strong pushback from the private sector

to allow the flow of American technology to China to resume.

But if you look at the overall picture,

I think the Biden administration shares

the Trump administration's objectives

in curtailing China's rise as a technological power.

And that's because that would have ramifications

for really long-term strategic goals.

We're investing aggressively in areas

like semiconductors and batteries.

That's what they're doing and others.

So must we.

But cutting China out completely isn't an option.

Since much of the world depends on China

to manufacture most of their electronics like iPhones.

A chip designed, say by Apple in Cupertino in California,

will be made in Taiwan,

then packaged into something that's going to end up

in an iPhone in the Philippines.

That chip then makes its way to China

where it gets plugged into an iPhone.

That iPhone then gets on a plane and gets sold in Europe,

or maybe even comes back to Cupertino

and get sold in the Apple store.

So the semiconductor supply chain

is arguably one of the most complex

and widely geographically spread supply chains in the world.

From Beijing's perspective,

U.S. sanctions are a way to keep China

at the bottom end of the supply chain,

forever stuck as a low-tier manufacturing hub.

That's why China is determined to become self-sufficient

and is shifting into its highest gear.

During its annual NPC meeting in 2021,

President Xi Jinping pledged $1.4 trillion

to accelerate their tech industry

and become totally independent from foreign technology.

One of the announcements that we've seen come out

since the NPC has been SMIC,

China's top chipmaker,

signing an agreement to build

a $2.5 billion semiconductor foundry,

or manufacturing plant with Shenzhen's government.

And I think you'll see more of those

private-public partnerships,

where a private giant or entity, such as SMIC,

drives more efficient private capital

into national objectives.

SMIC, or

Semiconductor Manufacturing International Corporation,

is China's largest foundry.

Although it's still decades behind Taiwan's TSMC,

China has shown its ability to throw money

and human resources at the development of mega projects.

But the chip industry isn't quite the same thing.

There have been numerous failures

in terms of China's domestic chip development effort.

SMIC is an example of a success

but have been plenty more that have fallen by the wayside.

Literally hundreds of much smaller corporations

that you and I have never heard of

that raised capital but ultimately failed

to deliver on its goals.

TSMC has shown

it takes much more than capital and human resources.

It takes time.

So TSMC was founded in 1987.

And it has spent more than 30 years

in developing and creating its own manufacturing technology.

It is just not very likely that you can create

a comprehensive semiconductor ecosystem overnight.

And unlike the U.S. or China,

Taiwan's economy is largely built around semiconductors.

TSMC is located in the small town of Hsinchu,

which hosts a whole ecosystem of other well-established

chip manufacturing and packaging companies.

And the industry also attracts Taiwan's best talent.

One of Taiwan's best-paying industries

is the semiconductor industry.

So with that incentive,

a lot of school children would see

the electrical engineering or anything that's related

to the semiconductor manufacturing as their top choice

when they decide on which university departments

they want to go to.

So in the U.S. you have students

choosing to study computer science

or other subjects that would be more related to the skills

that big tech companies like Google or Amazon require.

Likewise in China,

students are much more likely to be attracted by companies

like Tencent, Baidu and Alibaba, or make their own app.