"Please rewrite the following sentence correcting any issues or awkwardness." Back in the day, a Korean-Chinese professor named An Youhua appeared on the KBS Hong Sahoon Economic Show and talked about the U.S. CHIPS Act, saying, "The CHIPS Act may delay China’s semiconductor development but cannot stop it. With enormous support and subsidies, even if it takes 10 or 20 years, China will be able to produce its semiconductors.” I thought they brought on an ignoramus who knew nothing about semiconductors; such baseless blather. It would be a huge loss in terms of China’s national power and opportunity cost to be self-sufficient in semiconductors, and ultimately, the U.S. would want exactly that to happen.

Professor Chris Miller’s book “Chip War” mentions two major strategies that the U.S. chose to collapse the Soviet Union. One was to trigger an arms race, imposing unbearable economic burdens on the Soviet economy, and the second was to impose a semiconductor blockade—those were the two strategies.

Regarding the first strategy, even when the Soviet economy was deteriorating post the Brezhnev era, the U.S. provoked the Soviets with “SDI (Strategic Defense Initiative),” aka “Star Wars,” leading to excessive arms competition. Second, by blocking semiconductors, the U.S. forced the Soviets to waste immense national resources on becoming semiconductor self-sufficient and fall far behind in the information technology revolution. This caused considerable damage to the Soviet Union and led to its eventual collapse as it severely lagged in the systemic competition.

From this perspective, there are mainly two alternatives to EUV in the sub-7nm processing technology without using highly sophisticated ArF immersion lithography equipment: SADP (Self-Aligned Double Patterning) and LELE (Litho-Etching-Litho-Etching). SADP involves forming a basic pattern using lithography, then etching it to create fine repetitive patterns—like drawing a line with a pen, then erasing it to make it thinner, commonly used in memory chips where sophisticated patterns are less needed. LELE, on the other hand, is literally repeating lithography and etching processes—drawing and etching patterns twice. Though more costly because it repeats the expensive lithography process, it can create precise patterns, often used in logic chips. To achieve even finer processes, SADP would need to be repeated twice (SAQP), and LELE four times (LE4). However, both processes require significantly more steps compared to EUV. According to ASML data, while producing fine-width patterns with EUV only requires about 10 steps total, LE4 needs about 34 steps, and SAQP a staggering 60 steps.

Therefore, TSMC’s latest 3nm technology (N3), for instance, uses 25 EUV layers (compared to 15 in their 5nm process), and some processes even use EUV double patterning. Replacing all of these with ArF SAQP and LE4 would likely entail nearly 600 additional process steps. For instance, LE8 may be required just to replace EUV double patterning layers—a truly unprecedented endeavor likely to exacerbate issues of cost and productivity.

This explains why SMIC’s 7nm technology is not too significant, as, in my opinion, the physical limit for commercial mass production without EUV is around the logic 7nm process. For example, TSMC managed to go up to N7 without EUV but had to implement it starting with N7+. If SMIC tries to push forward to 5nm and beyond, inefficiencies from increased process steps will skyrocket. As process steps increase, non-routine process mishaps also surge. As someone from Samsung or Hynix might know, these minor incidents happen almost daily in fabs—from equipment shutdowns and human errors to material quality issues. More steps naturally lead to more chances for such issues. Assuming conservatively that only 0.02% yield loss occurs per process across 600 steps, even excluding all other factors, the final fab yield drops to just 88%. Moreover, as we scale down, issues like pattern fidelity decline and pattern collapse become more severe with repeated ArF patterning. This was evidenced by recent data from Intel comparing ArF multi-patterning to EUV single patterning quality in its Intel4 process, clearly demonstrating greater precision with the latter.

Given all these factors, non-EUV mass production of logic processes below 7nm seems practically impossible without incurring substantial monetary losses due to reduced yields and increased processing costs. Jefferies estimates that even SMIC’s 7nm process yield is around 50%, marking limitations in mass production and necessitating significant government subsidies due to the high costs imposed by U.S. sanctions.

YMTC’s NAND situation isn’t much better. While they’ve successfully commenced mass production of the 6th generation 128-layer NAND using a mix of foreign second-hand equipment and domestic gear through their ‘Wumu Mountain Project’, their 8th generation 232-layer NAND, developed last August, is stalled without access to new cutting-edge equipment from abroad—a necessity the firm counted on initially. As Samsung moves towards 300-layer NAND, the etching complexity demands entirely new equipment not available to China. Attempting 5-6 stacks with substandard domestic equipment while competitors use 2-3 with superior tools from the West would blow up YMTC’s costs and viability.

This is why China’s pursuit of semiconductor self-sufficiency is a massive drain on its national strength. And it’s a reality the Chinese government likely did not want to face. Semiconductors are too important for both security and the economy. If the West cuts off semiconductor supplies, the Chinese economy faces potential collapse due to dependency. Plus, AI’s pivotal role in the future economy hinges on semiconductors; without them, China can’t catch up with the U.S., widening the gap even further.

The U.S. succeeded in pressuring the Soviets into enormous semiconductor self-sufficiency investment while falling behind in the PC revolution, which had massive implications for labor productivity, thus contributing to the USSR’s downfall.

AI will similarly transform labor productivity. Goldman Sachs Research points to electrification, PC proliferation, and the impending AI revolution as key milestones in productivity since the Industrial Revolution. Falling behind in AI equates to the disparity the U.S. and USSR experienced with PCs, leaving China lagging in the economic race.

But China faces structural limitations and systemic contradictions that, I believe, will lead to inevitable defeat against the U.S. in the semiconductor war. China’s victory hinges on surpassing the collective economies of the free world, including the U.S., and building an independent semiconductor ecosystem of greater scale. But again, since AI, and semiconductors as its foundation, are crucial for economic growth, you’re stuck in a catch-22: to be self-sufficient in semiconductors, the Chinese economy needs to grow even more—yet, for the economy to grow, it needs semiconductors. It’s a paradox, a Möbius strip leading to inevitable failure.

The key is that while the U.S. can win the overall battle for supremacy, including in semiconductors, it can’t dominate every industry. America’s strength in certain areas implies China could have its own strongholds, industries where cost benefits lean towards China due to lower labor costs and material inputs, or areas where Chinese subsidies can be most effective. Sadly, I think this includes most of Korea’s key industries, apart from cutting-edge semiconductors.

When analyzing industries, the cost structure alone tells me if an industry could stand against China long-term. There’s no need for detailed business model analysis or meticulous report reviews; cost structure is the ultimate indicator, encapsulating all vital information.

Unfortunately, the cost structure of both batteries and legacy semiconductors resembles what we’ve already lost to China, like solar panels and steel. Batteries, for example, derive 60% of their costs from raw materials, which China produces more cheaply and efficiently than anyone else, and upon which even Korea relies. Even if global supply chain diversification efforts lessen dependence on China, matching their cost efficiency is challenging. The Financial Times series “The Battery Revolution” highlights that only China can produce these materials so cheaply because they spare no expense—even at the risk of human lives, disregarding environmental and safety concerns.

With its technological edge in LFP and its cost advantages, China’s battery industry will only strengthen its competitive position. Historically, consumers tend to choose price over performance in binary decisions.The entire value chain for batteries, unlike cutting-edge semiconductors, is already self-contained within China. Western regulations can hardly dent their progress now.

Legacy semiconductors are in a similar plight. Using older processes beyond 28nm means neither the equipment is particularly expensive, nor are there significant depreciation costs, as long-since amortized tools are still in use. Consequently, labor costs account for a larger slice of their expense. With technical differentiation largely exhausted, it mirrors the situation of the LCD industry. China still relies on imports for legacy semiconductor equipment, but domestic alternatives are far easier to replace than their advanced semiconductor counterparts.

Therefore, I believe that the true game changers in batteries and legacy semiconductors, if any, lie not so much with the U.S. but with China. They’re well within the Chinese playing field, and now the U.S. and Europe face a painful decision: do they incur economic losses by erecting trade barriers to contain China and protect their industries, or do they stabilize their economies by importing cheaper Chinese products? The industry-specific struggle could outweigh even the broader victory in the power struggle.

Batteries and legacy semiconductors are, ultimately, industries whose fates hinge on the political sphere. Korea’s prospects depend on how high the U.S. and Europe are willing to build their trade walls, and what economic sacrifices they are willing to make. Unlike cutting-edge semiconductors, I worry less about news like SMIC’s 7nm AP development and more about whether other industries, where China has competitive strengths, face new trade barriers from the U.S. Without further measures by the U.S. and Europe, Korea’s battery and legacy semiconductor industries face significant risk.