High Stakes on Chips

The restrictions on Chinese chip manufacturers accessing new technologies, India’s aspirations to become the next hub of microelectronics production, fierce competition between Taiwanese and South Korean developers, Chinese firms seeking cutting-edge technologies in neighbouring South Korea to bypass restrictions, and the technological race involving European and Taiwanese companies – all of these factors create the landscape of the global chip war in autumn 2024. The stakes are high, and the competition is only set to intensify.

On 10 September, South Korean police reported the arrest of two former officials from Samsung Electronics Co., one of the world’s most efficient and largest producers of microchips, particularly memory chips. These two individuals are accused of stealing technology worth over $3.2 billion for the benefit of Chinese chip manufacturers. This illegal technology transfer could have enabled China to launch a state-of-the-art chip production plant. The stolen technology reportedly involved the relatively modern 20-nanometre DRAM chips, which are energy-efficient and highly compact memory chips.

This wasn’t a high-speed, James Bond-style operation with secret photography and dramatic escapes. Far from it. The Industrial Technology Security Investigation Division of the Seoul Metropolitan Police Department stated that the two former officials recruited South Korean chip experts to access Samsung’s technology through a joint venture Chengdu Gaozhen (CHJS) – all done quite openly. According to the Seoul police reports, the crime likely involved the theft of production documentation, which would have enabled the replication of similar industrial production in China. Samsung representatives have so far declined to comment on the situation.

The crime not only harmed Samsung's competitiveness but, as reported by the Seoul police, also "weakened the nation's competitiveness at a time when countries are engaged in a global chip war." 

There may not be much to say, considering this is far from the first such incident in the ongoing chip war. In fact, the scandal surrounding Chengdu Gaozhen JS began more than a year ago. The root of the issue is that chip production requires two key elements: know-how, meaning skilled experts with deep experience, and cutting-edge equipment, which only a handful of companies worldwide manufacture.

Photo: State-of-the-art equipment for producing efficient chips from ASML is becoming increasingly inaccessible to Chinese microelectronics manufacturers. Source: ASML

Perhaps the Key Secret to Chinese Manufacturers' Success

The success of Chinese chip manufacturers is built on two main pillars: importing modern equipment and headhunting foreign specialists. One doesn’t work without the other, and without both, there is little point in pursuing this strategy. This was the case with Chengdu Gaozhen JS. That’s why this situation deserves a closer look. Other cases are similar to varying degrees.

In fact, the arrest of two leaders of Chengdu Gaozhen JS – the company’s CEO, Choi Jin-seok, and its CTO, known as Oh – was not unexpected. Their role in bringing South Korean know-how into the Chinese chip industry was already known by at least the summer of 2023. However, it wasn’t until now that South Korean police took more decisive action.

This story began in autumn 2020 with the creation of Chengdu Gaozhen JS, which was founded by the Chinese state organisation “Chengdu High-Tech Zone Government” and the joint venture Zhenxin (Beijing) Semiconductor Co., Ltd. The timing of this decision is noteworthy, as the project was launched during the height of the COVID-19 pandemic, when it was already clear that key foreign consumers of Chinese chips and microelectronic devices would soon try to diversify their supply chains. This diversification aimed to reduce dependence on China, as various industries in the US and Western Europe, which relied heavily on Chinese supply chains, had been severely affected by disruptions.

The company went on to recruit nearly 200 South Korean specialists for its research and development (R&D) centre, mainly from Samsung and SK Hynix. These two companies are fierce competitors and are among the most advanced in terms of technology. Chengdu Gaozhen also sought to purchase cutting-edge equipment from globally renowned companies such as ASML (Netherlands), Tokyo Electron (Japan), and AMAT, Lam Research, and KLA Corporation (all three from the USA). All five companies were undoubtedly crucial to the project’s success, but Dutch company ASML, which leads the world in photolithography processes for microchips, held the key technologies. The success of Chengdu Gaozhen’s plant depended heavily on ASML’s involvement.

The ultimate goal was to create an exact replica of Samsung’s plant in the South Korean city of Hwaseong, located 40 kilometres south of the capital, Seoul. Xi’an, the Chinese city chosen for this copycat plant, has a population of 12.5 million and is situated 1,600 kilometres west of Hwaseong, in central China, some 900 kilometres southwest of Beijing.

The location was unlikely to have been chosen by accident – it sits almost exactly in the centre of China, at least 900 kilometres from the nearest border, which happens to be with Mongolia, a country heavily dependent on Beijing. The nearest coastline is even farther, about 960 kilometres away. This means the plant was planned to be located in a place that was not ideal for logistics but was uncompromisingly secure from the perspective of protection against military invasion.

The project progressed quickly, but a series of events soon made its success impossible. In February 2022, Russia launched a full-scale invasion of Ukraine, starting a major war in Europe. In response, the US, Canada, Japan, EU countries, and the UK imposed sanctions on Russia aimed at weakening its ability to produce weapons, especially advanced ones.

Photo: Where it all began. Assistant Attorney General for National Security Matthew G. Olsen (centre), Assistant Secretary for Export Enforcement Matthew S. Axelrod from the Department of Commerce (left of Mr Olsen), five US prosecutors from offices across the country, and representatives of HSI and the FBI announced the first five Strike Force cases in May 2023. Source: Bureau of Industry and Security US

At this point, Beijing stepped in to support Moscow. A flow of sensitive goods, including microelectronics, began to stream into Russia through China and directly from Chinese manufacturers. At the same time, tensions in the Taiwan Strait escalated, with Beijing increasingly asserting its claims over Taiwan. Chinese companies also intensified efforts to obtain American technologies and sensitive goods.

As a result, the US began imposing restrictions on the export of advanced chip manufacturing equipment, including extremely advanced ultraviolet lithography systems used to produce the most modern chips of 16 nanometres and smaller. These systems are exclusively made by Dutch company ASML, which fully complied with US restrictions, effectively halting Chengdu Gaozhen’s ambitions. The best they can now produce are less advanced chips in the 15-20 nanometre range, which Samsung brought to market eight years ago. 

Photo: Choi Jin-seok, CEO of Chengdu Gaozhen, was arrested due to overly close cooperation with the Chinese government. Source: Chengdu Gaozhen

The Plant That Never Was

Choi Jin-seok, the CEO of Chengdu Gaozhen, continues to address visitors from the company's main website, but his dreams now seem unlikely to come to fruition:

“As a research company, Chengdu Gaozhen Technology Co., Ltd. plans to promote an initial public offering (IPO) and build a stronger, self-sufficient semiconductor ecosystem for China through our modest efforts. Chengdu Gaozhen Technology Co., Ltd. hopes that China and South Korea will unite and work together to achieve one goal. We will make every effort to create a good precedent and become a positive example of cooperation between the two countries.”

However, due to technological restrictions, Chengdu Gaozhen began to receive more modest funding, which further slowed its progress. In February 2023, the US announced the formation of the "Disruptive Technology Strike Force" to "protect critical technological assets from acquisition or use by nation-state adversaries."

Under the pressure of this strike force, US partners increasingly countered attempts to acquire critical goods and technologies, focusing primarily on Beijing, as Russia largely relied on pirated purchases of chips and other dual-use goods.

The strike force announced its first results in May 2023, coinciding almost exactly with the first arrest of Choi Jin-seok. He was detained in South Korea in early June 2023 during a short trip from China to his home country. At the same time, the local prosecutor’s office brought charges against him, which could have led to a court ruling. However, something else happened.

In May 2023, an investigation was launched into former Samsung employees recruited by Chinese companies within the Chengdu Gaozhen JS ecosystem. South Korea’s National Intelligence Service (NIS) suspected two former Samsung employees of transferring commercial secrets to China, particularly the 16-nanometre DRAM memory chip production technology, in May 2023.

These individuals travelled to China, where they worked for the local company Changxin Memory Technologies (CXMT), specialising in chip development and production. They were finally arrested on 15 December 2023 in South Korea. The biographies details of these two men, known as Mr. Kim and Mr. Bang, did not match those of Choi Jin-seok and Oh.

The takeaway from this case is clear: it is not enough to block the supply of modern technological equipment; it is equally important to prevent a “brain drain” – the exodus of experts who hold sensitive technologies. In response to the case of the copycat plant, South Korea’s leading tech companies have begun retaining retired specialists as “honorary advisors,” significantly reducing the risk of such personnel moving to other countries and thus lowering the risk of sensitive technology leaks.

Photo: The factory that never materialised. A rendering of the Chengdu Gaozhen facility in China, which was meant to be an exact replica of the Samsung factory in South Korea. Source: Chengdu Gaozhen

Who Will Replace China?

The landscape suggests that the most likely scenario is not so much the involvement of Indian, Malaysian, Thai, and Indonesian industrial sites in the chip supply chains, but rather the deep cooperation between Taiwanese and South Korean companies with their European and American counterparts.

Why is that? Firstly, there are concerns that these countries may not be particularly committed to preventing Russia, China, and other autocratic regimes from accessing modern technologies. Initially, the United States, Japan, and South Korea attempted to conduct “business as usual” with China. But as we’ve seen, this process has exceeded rational limits and begun to pose an existential threat to the donor countries of advanced technologies. Secondly, developed countries have realised the dangers of own excessive deindustrialisation in times of global instability. For example, chips are not only needed for car manufacturing but also for fighter jets and missiles. To depend on other countries in this regard? No, thank you.

Moreover, there are numerous concerns when it comes to the production of chips for cars. The EU and the United States have already encountered unfriendly competition from Chinese car manufacturers, especially in the electric vehicle sector.

As early as April 2024, The Gaze reported on the establishment of production hubs by Taiwan’s TSMC in the United States. This was a consequence of the bipartisan passing of the CHIPS Act in the US in the autumn of 2023, which allocated $52.7 billion in public investment. The goal was transparent – to bring chip manufacturing back to the US and restore competitiveness compared to South Korea and Taiwan.

TSMC, the world’s largest semiconductor manufacturer, is vying for $6.6 billion from this programme. These funds will support the construction of three his factories in the state of Arizona, US.

A similar situation is unfolding in the EU, with an even deeper level of integration. In Europe, TSMC has formed a consortium with companies Infineon (Germany, Neubiberg) and NXP Semiconductors NV (Netherlands, Eindhoven), and they are expanding large-scale chip production for the automotive industry, which is perhaps the most significant consumer of microelectronics. This market is currently growing globally at a rate of nearly 20% per year, so the competition is fierce.

At present, access to modern microelectronics is becoming one of the most powerful levers for strengthening competitiveness among car manufacturers, and for European car companies, it may be their last chance to compete with Chinese manufacturers.

Now, the consortium made up of TSMC, Infineon, and NXP Semiconductors NV is building a modern €10 billion chip production facility in the city of Dresden, in the economically depressed region of Saxony, Germany. However, it’s not just about increasing the volume of modern yet traditional silicon chips. On 11 September, Infineon announced the successful implementation of a project for the production of 300mm (12-inch) gallium nitride wafers.

Firstly, from these wafers, 2.3 times more chips can be cut compared to the 200mm wafers currently used in chip technology. This opens the way to significantly reducing the cost of gallium nitride chips, which are an ultra-modern material for chip production. Secondly, gallium nitride itself is a breakthrough in chip production, as these microchips are more energy-efficient, compact, and powerful compared to their silicon counterparts.

While these new gallium nitride chips are not expected to be ready tomorrow, Infineon’s management plans to provide industrial consumers with samples of such chips by 2025. Mass production of wafers is expected to begin at their factory in Villach, Austria. Infineon, in turn, relies on attracting partners with cutting-edge technologies. A breakthrough in the production of gallium nitride chips occurred thanks to the acquisition of GaN Systems (Ottawa, Canada) last year for $830 million, and Infineon’s software development direction is significantly supported by its R&D centre in Lviv (western Ukraine), where 200 skilled developers are employed.

Photo: A technical engineer in the clean room of the Infineon Technologies plant in Villach, Austria, holding a 300mm gallium nitride wafer, a precursor to the production of advanced chips. Source: Infineon

As we can see, Taiwanese chip manufacturers have proven to be much more agile in globalising their businesses than their South Korean competitors. We have yet to see such large-scale projects from South Korean manufacturers. However, it’s possible that Samsung will catch up soon, as a strong presence in key markets is becoming crucial for maintaining those markets. A strong presence doesn’t just mean renting office space for sale departments, but also investing in high-tech production.

Thus, we are witnessing the convergence of two powerful trends – the migration of chip manufacturing sites to developed countries, and the strengthening of technological superiority over countries losing ground in the chip market due to geopolitical reasons. Developed countries are trying to widen the technological gap between themselves and autocratic regimes, as this is a matter of survival for democratic nations.

But hold on, a curious reader might ask, what about the statement from NXP Semiconductors CEO Kurt Sievers, who announced that the company is investing over $1 billion in its research centre in India? He made this announcement on 11 September at the Semicon India conference near New Delhi. Yes, this doubles the company’s investment in India. However, this is more of a venture investment aimed at selling even more chips in a country where the automotive industry is rapidly developing.