It’s easy to forget in the app era, but Silicon Valley got its name from microchips. The generation that transformed orchards into Oracle did so by manufacturing electronic circuits that encrust “chips” of a semiconductor material, usually made of silicon. In the fertile purlicue south of San Francisco, the foundations of the electronic revolution were invented, designed, and manufactured. Shockley Semiconductor, Fairchild Semiconductor, Intel, and other integrated-circuit makers thrived. Computer makers who used their parts burgeoned too. Software and services came next, and then the venture capital to fund these efforts.
Today, the capital and the software remain, and some computer and device makers, too. But the integrated circuit business has largely left the region. Silicon is etched into Silicon Valley mostly in name. The reasons are many. Land, housing, and labor became more expensive. Other countries, most of them in East Asia, created incentives for semiconductor manufacture. Global just-in-time manufacturing, along with the low cost of shipping small, light microchips around the world, made vertical integration less desirable.
This is a useful lens through which to view an explosive story published this week by Bloomberg Businessweek. The report claims that Chinese spies systematically infiltrated U.S. corporate and government computer systems by installing hardware exploits on the motherboards of servers destined for widespread use, from video-streaming services to the CIA. According to Businessweek, the infected machines provided a backdoor into any network on which the machines were installed. The reporting claims that at least 30 U.S. companies were affected, including Apple and Amazon, the most valuable companies in the world. Both companies have vociferously denied the claims, but Bloomberg stands by its story.
Who is right is a matter of corporate and national security. The exploits and hacks that have rocked the tech industry in recent years would seem minor compared with a foreign state gaining stealth access to the entire networks of companies and government agencies that manage enormous volumes of sensitive information. But even if the situation turns out to be different than Businessweek’s report, the scenario outlined in the piece (or one like it) is totally plausible. That plausibility, made newly visible, could combine with an accelerant: A tough American stance on Chinese business, including President Trump’s love for tariffs and trade war, and China’s increased dedication to independence. The resulting blaze has serious implications for the American technology business, and it won’t soon burn out.
The international-trade scholars Henry Farrell and Abraham Newman speculate that those repercussions might weaponize U.S. dependence on China. If Chinese manufacturers offer the best or cheapest option for components needed for domestic manufacture, then it might become beneficial for China to take advantage of that need in order to conduct corporate or governmental espionage. The risks would be enormous, of course—the ZTE ban likely would have bankrupted the company had it not paid the hefty fine to lift it. But over time, if China’s investments in local sources for parts pan out, then China might not rely on imports from the United States and Europe as much as those regions do on China.
Up until now, cost has driven much of the U.S. reliance on Chinese manufacturing: In many cases, it’s the best way to get lots of parts produced fast and cheap. But there are downsides, too, like the lack of redundancy and weakened negotiating position that come from overreliance on one supplier, or on a cartel of regional ones. Labor, environmental, and political concerns are also mounting, hacked motherboards being just the most recent example. And besides all that, Chinese manufacturing has been getting more expensive anyway.
But unlike China, the United States isn’t prepared to rebuild its semiconductor and motherboard-manufacturing industries. Some of that effort still takes place domestically. Intel still makes some of its microprocessors domestically, at plants in Arizona, New Mexico, and Oregon. Texas Instruments manufactures integrated circuits in the Dallas metro area. Micron, which makes flash memory for use in solid-state drives, has fabrication facilities in Utah and Virginia. Patriot Memory makes USB flash drives in Fremont, California. But all these and other semiconductor companies also maintain fabrication facilities in Taiwan, Dalian, and elsewhere in East Asia.