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Chips with everything

This is an audio transcript of the Tech Tonic podcast episode: Chips with everything

[CHINESE AUDIO CLIP PLAYING] 

Chad Duffy
I’m based in Taipei, yeah, I’m based in Taipei. The security community here is really, you know, really deeply technical, is a really vibrant security community full of lots of just really talented software developers.

James Kynge
That’s Chad Duffy. He works in cyber security. And if you want someone to stop hacking into your company’s computer system, you might call him. He’s American. But these days, he works for a company in Taiwan. Why? Well, because Taiwan is home to one of the most important technology industries in the world today: semiconductors. The computer chips you find in every phone, laptop, car and even missile system. And when you make semiconductors, sometimes people try to hack you.

Chad Duffy
Job security-wise, it’s pretty amazing, really. It’s like attacking is definitely not going to stop.

James Kynge
Chad’s company CyCraft is used to seeing security breaches. But towards the end of 2019, they got a call from a Taiwanese chipmaker about something completely new.

Chad Duffy
Basically, they just saw, you know, some anonymous user behaviour, said, OK, you’ve discovered that like some of our files have been accessed and they came to us asking, hey, can you kind of put together this whole picture?

James Kynge
What Chad and CyCraft found was a hack bigger and more sophisticated than they’d ever seen before. The hackers had burrowed deep into the chipmaker’s computer systems, staying there for months undetected, giving them free rein to move around and hoover up a gold mine of sensitive chip designs and other industry secrets.

Chad Duffy
That’s what I think where it got really exciting was when we say, wait a second, this is a this is a really cool, you know, speaking from I mean, it’s not, it’s not cool that this happened, but I mean, it was really interesting from engineering perspective how they did it.

James Kynge
They dubbed the hack “Operation Skeleton Key”. And the closer they looked, the more they realised this was no teenage hacker in a basement somewhere.

Chad Duffy
Over seven significant semiconductor, you know, manufacturers were attacked, and so this is much more like a coordinated effort, and they were all in the same place, around the Hsinchu Science Park.

James Kynge
They soon picked up evidence about who might be behind the hack.

Chad Duffy
We can’t say with 100 per cent surety. We’ll look at the metadata of sort of what’s going on there. There’s the 996, you know, kind of work schedule at play, which is where they’re working from 9am to 9pm and then also doing it at six days a week.

James Kynge
This 996 work schedule is a hallmark of the tech industry in one country: China. This was professional. The hackers even took a standard lunch break.

Chad Duffy
Another thing we saw is that there was a lull in the activity during October, which is you know a national holiday in China. And then also, we did stumble upon some documents that were written in simplified Chinese because when you’re dealing with an advanced, persistent threat, it’s not just one person. It’s dealing with a team of people and they have to share information. And so, you know, they will write little notes to each other about how to use this tool or what to do here.

James Kynge
In Taiwan, Chinese characters are written in traditional, fully formed script. But on mainland China, those characters are simplified. It looked like Chinese hackers had staged a massive cyber attack in the heart of the global chipmaking industry, right on China’s doorstep in Taiwan.

Chad Duffy
The stakes are really high because obviously we’re talking about Taiwan’s semiconductor industry, and that’s a lot of what Taiwan’s relationship with the world is economically based. And so when you’re attacking that pillar, this economic, you know, footing for Taiwan is on the front line of all of that.

[MUSIC PLAYING] 

James Kynge
This is Tech Tonic from the Financial Times. I’m James Kynge, the FT’s global China editor with the third of our six-part series on China’s emerging status as a tech superpower. It’s a development that sparked intense rivalry with the US because whoever wins the race will have a defining hand in shaping the technology that will affect how all of us live. In this episode, how China’s growing appetite for computer chips has put Taiwan on the front line in the US-China battle for global tech supremacy.

[MUSIC PLAYING] 

[MARCHING SOUND PLAYING] 

It’s a well-known fact that Beijing has coveted Taiwan for decades. It sees it as a breakaway province to be reunited with the mainland. Under the one-China policy. The threat of an invasion from mainland China has for years loomed large over the island state. But more recently, something else about Taiwan has caught China’s attention: its leading global role in making semiconductors. When it comes to the most advanced chips found in cutting-edge technology, Taiwanese companies like the giant TSMC make the bulk of them. That means every country in the world today has an interest in Taiwan.

Dan Wang
The Americans are calling semiconductors the new oil.

James Kynge
That’s Dan Wang. He’s a technology analyst with the independent research firm Gavekal Dragonomics, based in Shanghai.

Dan Wang
The Taiwanese are calling semiconductors the lifeblood of the digital economy, and then the Koreans have started calling it rice. What different countries have realised is that a lot of products on now demand chips, so it is now much more of a national security strategic task for many large jurisdictions all over the world to really try to figure out this crucial technology that is powering a lot of the products that we use every day, as well as many of the products that we aren’t using yet.

James Kynge
These tiny semiconductors are basic building blocks for the tech industry. In fact, you’d be hard-pressed to think of any modern electrical gadget that doesn’t use semiconductors. And to make them requires some of the most sophisticated manufacturing facilities in the world.

Dan Wang
If you are ever able to visit a semiconductor facility, I certainly recommend it. It’s great fun. You’ll be putting on a bunny suit [sound of zipper being pulled]. You’ll be entering one of the cleanest environments in the universe, and they’ll be bathed in this sort of odd yellow light and you’ll be up close in one of the greatest engineering scientific marvels that humanity has ever achieved.

James Kynge
Right now, no one country controls the semiconductor industry. Taiwan manufactures the majority of high-end chips, but most of the chip designs come from the US. And there’s a whole network of companies in countries around the world that have some part to play in the complex process of producing chips. But those logistical challenges haven’t stopped the world’s major economic powers from dreaming of semiconductor independence and even supremacy.

Dan Wang
China is a country that is always very intent on trying to make itself as self-sufficient as possible. Certainly, China has the ambition to be much more self-sufficient on semiconductors.

James Kynge
But Dan Wang in Shanghai, who watches the industry closer than anyone I know, says growing your own semiconductor industry is no easy feat.

Dan Wang
Self-sufficiency in semiconductors is a fantasy for anyone. It would be a fantasy for the United States. It would be a fantasy for anywhere in Europe, in Taiwan, South Korea, Japan. No one can make every aspect of a chip. There are just too many issues involved in everything from the chemicals to the production tools, to the software, to the chips themselves that cannot be monopolised by any country.

James Kynge
How long might it be before China is kind of getting close to parity with other big semiconductor nations, such as, as you mentioned, the US, Taiwan, South Korea?

Dan Wang
I don’t expect that self-sufficiency is anything like a near-term goal. Any hope that China might catch up to the technological leading edge will not be realised in the present decade. But I think I will be a little bit more constructive on China’s efforts. For the most part, what China needs to do is to reinvent existing technologies, and that is an order of magnitude easier than the tasks of firms in leading countries that are trying to push forward the technological edge. And so China is trying to reinvent existing products. These products are technology. They’re not magic.

James Kynge
In other words, even if China isn’t making the kind of computer chips that will power future technologies right now, they’re working on being able to do so in the future. Trying to replicate the whole global chipmaking industry at home is hard. But China sees few alternatives. Not least because its growing appetite for computer chips is being thwarted by an active US campaign to cut off its supply. Since the 90s, the United States has kept a blacklist of companies effectively banned from receiving US technology. And in recent years, it’s added dozens of Chinese tech companies to this list, to prevent them from getting hold of the best US-designed semiconductors.

[NEWS CLIP PLAYING]
The Commerce Department statement saying that they are adding more companies to its government blacklist for doing business with Chinese entities without government approval . ..

Dan Wang
I don’t get it. It’s, I guess it’s a reflection of the toxic environment in Washington relating to China.

James Kynge
Not everyone in the US thinks attempting to shut down China’s semiconductor ambitions by banning the sale of technology is a good idea.

Stephen Orlins
I’m Steve Orlins, president of the National Committee on US-China Relations.

James Kynge
Orlins is a champion of economic co-operation between China and the United States. A former private equity director who spent much of his professional career in Hong Kong, He’s not happy with just how zealous Washington has been about putting Chinese tech giants like Huawei and others on export blacklists.

Stephen Orlins
What is under-appreciated in the United States is the consequences of this bifurcation. It’s going to create duplication where the Chinese are going to have to develop something and we’re going to have to develop the same thing. The result of that is each of us spend more money and we’re able to develop less and develop less quickly. We’re perfectly willing to have areas which are totally off-limits, but we should certainly not be having this broad-brush approach, which basically affects innovation.

James Kynge
Orlins points out that when China’s Huawei was put on the export blacklist, the defence department initially opposed that move. He saw that as a sign that some in government understand the potential blowback from creating a blacklist.

Stephen Orlins
They understood that if we knocked off tens of billions of dollars of sales of these US semiconductor companies, it’s going to reduce their profitability and their R&D budgets are a percentage of their profitability. So to the extent that you’re reducing the profitability of these US semiconductor manufacturers, you’re gonna reduce their R&D, and the Pentagon is then not going to be able to get the most advanced chips that they want. Now, ultimately, they were persuaded that Huawei was a national security threat and they needed to agree to those restrictions. But they, the Pentagon, was the last holdout in that process. So the question becomes how do you weigh the national security benefits of that versus the reduced profitability? And I hope the US government is weighing that carefully.

James Kynge
All this takes us back to Taiwan and that cyber attack against its chipmakers uncovered by Chad and his team at CyCraft that we mentioned at the beginning of this episode. CyCraft suspected a state player was behind the attack, namely Beijing. It’s nigh on impossible to confirm or deny that. Certainly, Beijing would deny it. But if it was China, its motivation would be pretty clear. Taiwan is a potential treasure trove for skilled and acquisitive hackers. In Taiwan’s companies, China could find the valuable information on production techniques and chip designs it needs if it’s going to stop making semiconductors for itself. And it’s not just the information buried in Taiwanese computer systems that China is after. It’s looking for Taiwanese semiconductor talent as well.

[MUSIC PLAYING] 

Cheng Ting-Fang
. . . Shanghai. But I think Taiwan (inaudible) is much better than in Shanghai. It’s more authentic in Taiwan.

James Kynge
I think Taiwan is the best.

Lauly Li
Yes that’s always like bubble tea. Bubble tea is better . . . 

James Kynge
Meet our correspondents from the FT’s sister publication, Nikkei Asia. They’re based in Taiwan.

Cheng Ting-Fang
This is Cheng Ting-Fang and people call me Annie as well. I am a tech correspondent with Nikkei Asia.

Lauly Li
Hi, everyone, this is Lauly. I’m the tech correspondent with Nikkei Asia that covered tech supply chains.

James Kynge
Annie and Lauly have spent years covering the rise of Taiwan’s semiconductor industry, and more recently, they’ve started noticing how China has stepped up attempts to recruit skilled talent from Taiwan’s chip companies.

Cheng Ting-Fang
Taiwan built its own semiconductors way back from the 1980s, but China is like trying to catch up its efforts. But time is not like waiting for China, so I think China is like taking some of the shortcuts, like poaching talents or stealing trade secrets and because of the proximity, geographical proximity to Taiwan. So Taiwan’s talents and Taiwan’s companies, trade secrets are often the targets by the Chinese companies.

Lauly Li
Yes, I think the competition is really about talent recruitment. There are no language barriers, no huge cultural differences between Taiwan and China. We even have many same important holidays like the Lunar New Year. Really, there are very easy to jump on a flight to Chinese cities of Shenzhen, Shanghai, Wuhan, Hefei. You could work there from Monday through Friday and then come back to Taiwan on weekends to visit your parents and families.

James Kynge
And it turns out, Chinese companies have deep pockets when it comes to poaching Taiwanese semiconductor talent.

Cheng Ting-Fang
Basically, it’s all about offering higher salary. The most famous anecdote is that they were asking how much you got paid in Taiwanese dollar and they will match that in Chinese yen. So that is about 4.5 times higher, taking the exchange rate into account.

James Kynge
Dan Wang, the analyst in Shanghai, who we heard from earlier, has seen this in action in mainland China, too.

Dan Wang
The famous stories here are, that SMIC, China’s leading semiconductor maker, built a church for one of its Taiwanese executives. So it is a little bit unusual for this formerly atheist country to be building churches for Taiwanese compatriots. I have heard that close to the semiconductor plant in Shanghai there is a little street that is pretty much a little Taipei, where one can get really good beef noodles, as well as excellent bubble tea because it has been able to attract a lot of Taiwanese engineers.

James Kynge
Taiwan’s authorities have taken note. It has drafted a law that will forbid virtually anyone working for Taiwanese semiconductor companies from travelling to China without government approval.

James Kynge
Lauly, that raises the question of how they do it because, you know, it’s a free market right? I mean, you can’t force somebody to work in a certain company. So if another company comes along and offers them, as Annie said, you know, four times the salary, then you’ve gotta let them go, right? I mean, how does that work?

Cheng Ting-Fang
Right. But there are some of the circumstances where they will have abnormal activities before they leave the companies. There are still some cases when you can just use your smartphone to screenshot some of the internal documents and nobody will know what exactly you’ve been download or you’re being captured from the company. So it’s like a war that never ends. And you sometimes, you have to rely on your trust on the employees, but sometimes you can’t trust them fully. So it’s very difficult dilemma to the companies too, I will say.

James Kynge
It seems to me that really, from what you’ve been saying, Lauly, you know, Taiwan is under constant siege from mainland efforts to get intellectual property with regard to semiconductors. If it’s not poaching the best talent, then there’s cyber attack.

Lauly Li
So I will say that we can foresee that China’s goal to build a self-reliant chip supply chain is not going to stop, and you will even celebrate its efforts, given that now the US has its eye on Chinese tech advancement. I think China will only try to accelerate its efforts on this front.

James Kynge
In China itself, this demand for tech talent has kick-started a government campaign to raise the profile of the semiconductor industry.

[CHINESE AUDIO CLIP PLAYING] 

James Kynge
There’s even a new Chinese TV drama all about semiconductors called Zong Heng Xin Hai, or The Silicon Waves. Who knew semiconductors could be that interesting? Back to Dan Wang.

Dan Wang
I suspect that this is the case that the TV producers have opportunistically tapped into a moment when they know that chips are now very, very important.

[CHINESE AUDIO CLIP PLAYING]

Dan Wang
One of the goals of Beijing is to make semiconductors sexy in a way that it was when it first got started in the 1970s in Silicon Valley, and so I do perceive that there is a little bit of a cultural promotion of semiconductors.

James Kynge
But while China promotes careers in semiconductors and the image of a glamorous industry at home, it continues to look to Taiwan for talent. Thanks to US sanctions, Taiwanese semiconductor manufacturers face some hard choices of their own.

Lauly Li
Really, a lot of Taiwanese companies are stuck in the middle and forced to choose side and forced to let go of some of the business that supported their revenue growth so much in the past few years. And I think this is really a dilemma for both Taiwanese companies to strike a balance in between because sometimes, you have to choose sides and it is very difficult. China is such a big market. There are so many clients and nobody want to give up such big clients.

James Kynge
What do you think the future will hold for Taiwan given the pressures that you’ve just described?

Lauly Li
It is very interesting that we actually just saw a job posting by TSMC today that TSMC is looking for some business intelligence analyst with geopolitical and economic background. So nowadays, operating business have to care more about how the geopolitical dynamics between the US, China and Taiwan might play out.

James Kynge
At a recent talk I hosted about the industry, one analyst pulled me aside and, somewhat shamefacedly, asked me if he was right in thinking China’s hunger for semiconductor knowhow might be a reason for it to launch an invasion of Taiwan. I was sceptical, but I did ask Dan Wang to address what is clearly playing on people’s minds.

Dan Wang
I think that Beijing might decide to move on Taiwan, but it will move on Taiwan for reasons that would be completely unrelated to semiconductors. When I think of a lot of the most advanced facilities in Taiwan, it is very, very easy for the Taiwanese to sabotage them. And China has no way to guarantee that it can keep all the talent and then also entice them to keep working. Finally, I would also say that a lot of the most advanced tools for producing semiconductors are not made on either the mainland or in Taiwan. They’re made in Holland, the United States and Japan. And in case of any sort of a broader action, China would be sanctioned six ways to Sunday.

James Kynge
The delicate situation in Taiwan may give us some insight into what’s next for the US-China tech race. Chad Duffy, the cyber security expert, says that the horizons for cyber warfare are global.

Does this also happen between China and the US, and with this type of cyber hacking in order to exfiltrate crucial technological information?

Chad Duffy
I would say this probably happens from everybody. Everywhere is doing this to each other. I wouldn’t say this is just a pure Chinese thing. There are lots of other state actors. Is there a lot of hacking going on everywhere? Yes, there, for sure there is.

James Kynge
How would you rate China’s prowess in this, I mean, among other countries?

Chad Duffy
They’ve been getting significantly better. Taiwan is sort of the test bed for a lot of things like we saw that with this Chimera APT. In terms of the goal, try it out here and then once they feel that they have a good enough operating procedure, then they’ll take it on the road. So that’s why we have a really unique standpoint from the security perspective, because we see things before the rest of the world does.

[MUSIC PLAYING] 

James Kynge
Next time in this season of Tech Tonic: China’s growing military might. It’s giving the Americans something to sweat about.

Interviewee
The fact that China has mastered the technology to be able to fire a missile from a weapon travelling at Mach 5 and above is just an astounding scientific feat. And it stunned the Pentagon because their most advanced military scientists don’t know how to do that.

James Kynge
And how the tech race between China and the US is being pushed to the final frontier 

Interviewee
From missiles that can shoot down satellites in space to lasers that can blind the sensors on the satellite, if you wanna be a superpower on the world stage, you’ve got to be able to use space.

[MUSIC PLAYING] 

James Kynge
You’ve been listening to Tech Tonic. I’m the FT’s global China editor, James Kynge. Our senior producer is Edwin Lane and our producer is Josh Gabert-Doyon. Manuela Saragosa is our executive producer. Our head of audio is Cheryl Brumley, and our sound engineer is Breen Turner. Music on this episode by Metaphor Music. If you like this series, do leave us a review. It helps other people get to know about our show. And for more stories about technology from the FT, head to the link in the show notes. Also, there’s a discounted FT subscription offer. I’ll be back with the next episode in this six-part series in a week’s time on April 18th. Make sure you don’t miss it by subscribing now to Tech Tonic wherever you get your podcasts.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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