US-China semiconductor battle: Second and third order consequences

Julio Franco

Posts: 8,887   +1,806
Staff member
Why it matters: Earlier this month, the US government blocked the sale of specific chips to anyone in China. We see this as an important change by the government in the tactics they are deploying. The United States has gone from blocking specific companies in China, to blocking all companies and focusing on specific products. This is a big change, and opens up the question -- what exactly are they hoping to achieve? This matters obviously in that it can help us predict the outcome, but we increasingly hold the view that the government may not have entirely thought through how this will ultimately play out.

Some background. The US has been pushing back against China's trade practices, going back to the late Obama administration, with a marked escalation by his successor. The Biden administration appears to be maintaining that path, albeit with some rethinking of the tactics.

Until just recently, the US government had largely relied on its "Entity List" (here is the complete list), for those keeping score at home, there are 183 Huawei entities on the list. This blocks specific companies from purchasing products exported from the US, or produced by US companies and/or IP.

Editor's Note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multi-functional consulting firm. Jonathan has developed growth strategies and alliances for companies in the mobile, networking, gaming, and software industries.

The entity list process is unlikely to be remembered for its success. As soon as a large number of large Chinese companies started appearing on this list around 2017-2018, US companies dispatched teams of lawyers and lobbyists to poke as many loopholes as they could.

From the Chinese perspective, the entity list appeared terrifyingly random. True, Huawei was a primary target, but many other companies ended up on the list for reasons not entirely clear to them. We have spoken with many people at Chinese companies who have grown incredibly wary of doing business with anyone in the US for fear that they will somehow end up on the list. This has created a high degree of uncertainty and a rush for alternatives, a topic which we will return to below.

Late last month, the US government added seven more names to the list, and judging from those names we have to question who is compiling this list. These latest additions all appear to be involved with aerospace matters, and while they have academic connections, the fact that all seven have Unit number designations seems to indicate that these are military affiliates, if not outright units of the People's Liberation Army (PLA).

We are now six years into this process, how are these units just now being added to the list? Judging by what came next, we have to think that the people putting the list together realized they faced a hopeless task. Chinese companies have become incredibly adept at creating byzantine corporate structures, making tracking their affiliations close to impossible. Our guess is that someone in the government realized the futility of this approach and made the decision to instead switch to banning shipments of specific products.

The latest approach targets high-end chips used for machine learning. These are the kinds of chips that can be used to create AI enhancements for search algorithms and finding users who want to watch dancing kitten videos. They are also the kinds of chips that can be used to simulate missile trajectories and nuclear explosions.

From what we can tell, the US government, in all of this, is trying to limit the ability of the PLA and its many affiliates from accessing the latest in US technology. The war in Ukraine has highlighted the US' military advantage rests largely on its access to the most advanced technology. Of course, there is more to it, but this is something that the US military relies on heavily. Seeing China's military as an increasing threat, it makes sense that the US does not want to do anything to help China dilute this advantage.

So in our opinion, the latest switch to banning products marks a meaningful expansion of the US government's efforts. Will this work any better than the entity list?

We are skeptical.

First, as noted above, the biggest force working to dilute past efforts was US companies themselves. Nvidia's shares fell on the latest news, and they warned of a $400 million revenue shortfall resulting from the ban. Maybe this will work for these specific chips, but we think further expansion will meet with stiff resistance from the home front.

Secondly, how will this work in a modern supply chain? Let's say a US company wants to buy a few million dollars worth of banned Nvidia chips. Who will then assemble the chips into working systems, inserting the chips onto motherboards and installing those in server racks? Today, most of that work is done by Taiwanese companies' factories in China. Can Nvidia ship those chips to China? Technically, we think the answer is yes, but it is easy to see how this process can get easily derailed.

Third, this is a short-term move, but it has long term consequences. As we noted above, every Chinese company buying parts from US vendors is now busy looking for domestic alternatives. We have written a lot about the growth in the capabilities of Chinese fabless firms, including a host of companies producing GPUs not too dissimilar from what the US government just banned (not the same, but getting closer all the time). The US government's actions are directly leading to interest in a sea of aspiring Nvidia competitors. For companies like Biren, the US government's actions are a major boost.

And those are just the first order effects. Stratechery recently touched on this, noting that one of Nvidia's biggest advantages in the market for AI chips is its CUDA software. It is now highly unclear what the status of this software is in China. This will certainly increase interest in open source alternatives to CUDA. So not only is Nvidia losing out in direct sales, it now risks seeing its competitive advantage being worn away.

This also extends beyond the GPU/AI semiconductor space, it applies to all US semis, what we would call third order effects. All Chinese companies, even those with absolutely no ties to China's military now have to look for alternative vendors. This is not patriotism, it is just rational commercial contingency planning. The effects are most likely to be felt first in industrial and automotive semis -- I.e. far away from leading edge GPUs, as this is the area where China's aspiring chip companies look most competitive today. We are going to keep an eye on companies like Texas Instruments and On semi's comments about China in coming quarters.

So while we understand the US government's interest in curbing the supply of high technology to a potential long-term adversary, we have to wonder if over that long-term this works to China's advantage. There are no simple answers to this problem. That said, the US government needs to think very strategically here. Is the goal to limit specific Chinese military projects? Is it to cripple the entire Chinese semis complex? Is there even an end goal? From what we can tell right now, that does not seem to be the case.

Permalink to story.

 

psycros

Posts: 4,331   +6,320
There's nothing vague about the US government's goals - its just far too little, far too late. China has stolen every piece of intellectual technology that the moronic Wall Street tycoons handed them (because DC rewarded them for offshoring American jobs). Somehow these greedy fools created a mutual delusion that America would switch to a purely financial and "information" economy and everyone else would do the dirty work. Not sure how they overlooked the fact that phone lines and the Internet work the same everywhere and lax environmental laws are a huge economic advantage. Now their trying to stop China from stealing the very last high-tech sector that the US has a corner on, which is high-end chip fabrication. The shift can certainly be slowed down, perhaps for many years, but if we don't start seeing OTHER types of manufacturing jobs being protected as well the effort will ultimately fail. You can't pick and choose with protectionism - even China tarriffs the hell out of practically everything except food and oil they desperately need.
 

TheRealSCDC

Posts: 305   +422
There's nothing vague about the US government's goals - its just far too little, far too late. China has stolen every piece of intellectual technology that the moronic Wall Street tycoons handed them (because DC rewarded them for offshoring American jobs). Somehow these greedy fools created a mutual delusion that America would switch to a purely financial and "information" economy and everyone else would do the dirty work. Not sure how they overlooked the fact that phone lines and the Internet work the same everywhere and lax environmental laws are a huge economic advantage. Now their trying to stop China from stealing the very last high-tech sector that the US has a corner on, which is high-end chip fabrication. The shift can certainly be slowed down, perhaps for many years, but if we don't start seeing OTHER types of manufacturing jobs being protected as well the effort will ultimately fail. You can't pick and choose with protectionism - even China tarriffs the hell out of practically everything except food and oil they desperately need.

Man, did you hit the nail on the head about too little, too late. The damage is done and irreversable.
 

Uncle Al

Posts: 9,070   +8,100
And it isn't just the semiconductor industry ... China has stolen every bit of technology they could lay their hands on and then some. The bottom line is simply no longer trust them. Don't sell them anything, don't give them access to any product data or let them visit US companies and start re-setting up American companies with a "buy American" law that is enforceable and can not be gotten around. China will never be a reliable trading pardner ... it's' taught to Chinese at an early age and both China and Russia need to be blackballed altogether ......
 

Endymio

Posts: 1,801   +1,855
An incredibly myopic and misinformed article:

We have spoken with many people at Chinese companies who have grown incredibly wary of doing business with anyone in the US for fear that they will somehow end up on the list.
You don't get on the list for dealing with a US firm. You get there by fronting for the PRC military, supplying surveillance gear to the Uighur death camps, engaging in wholesale industrial espionage, or something equally unsavory.

how will this work in a modern supply chain? Let's say a US company wants to buy a few million dollars worth of banned Nvidia chips.
NVidia is a US company, producing chips in the independent nation of Taiwan. How on earth do you think they'll be banned by Chinese sanctions?
 

p51d007

Posts: 3,292   +2,883
And it isn't just the semiconductor industry ... China has stolen every bit of technology they could lay their hands on and then some. The bottom line is simply no longer trust them. Don't sell them anything, don't give them access to any product data or let them visit US companies and start re-setting up American companies with a "buy American" law that is enforceable and can not be gotten around. China will never be a reliable trading pardner ... it's' taught to Chinese at an early age and both China and Russia need to be blackballed altogether ......


Have you noticed some are putting "made" or "assembled" in America, of foreign components on things now?
Yeah, the entire thing is made in China, shipped over here and the labels are glued on so they can say "assembled" in America. Thanks to opening up trade with China in the 60's, then making them a "most favored nation" status the greedy CEO's gave away the farm, just to boost profits for Wall Street & stock holders.
 
What battle? US is just putting sanctions using words like ALLEGED with no proof or facts. Lets not forget history US is the one who started the opium war and opened China in the first place. Its funny also how everyone supports US using the semiconductor industry for military but the news points negatively when other countries are doing the same.
 

Tantor

Posts: 349   +629
Very good article.

I don't think US/Western technological superiority will last very long. East Asians have a significantly higher IQ than Westerners, and there are far more of them. They graduate far more technical degrees. Our universities are awash with Asian students.

Lots of 'US technology' is actually Asian. Did TSMC steal tech from the US? Or did they develop it themselves. I would bet that China has access to most of the tech at TSMC. It should be noted that Intel's tech is primarily Israeli. And note that both AMD and Nvidia's ceos are Asian.

As the situation develops, Russia will be a huge beneficiary. China will be happy to trade their tech for Russian oil/gas/fertilizer/food. Russia is no techno slouch either.

In the long run this is all for the better good. Trump very wisely tried to bring US industry back to the US. We need to make these things at home rather than buy them from foreigners.
 

Alfatawi Mendel

Posts: 220   +321
The US only ever looks 5 years into the future. The Chinese are looking 100 years into the future. That is why all the worlds top universities are awash with Chinese students.
The future does not look good for the US, now the petro-dollar is waning. Best get used to your new masters....
 

godrilla

Posts: 491   +244
The US only ever looks 5 years into the future. The Chinese are looking 100 years into the future. That is why all the worlds top universities are awash with Chinese students.
The future does not look good for the US, now the petro-dollar is waning. Best get used to your new masters....
Looking forward to tomorrow is a conservative trait last I checked the left is in power and is using all its power to keep it that way. Notice America is still a mostly 2 party system unlike Ch!na where they have no resistance for a century outlook! Orange man was looking into the future but they are attempting to muffle him with even record overreach of the FBI lapdog eg. todays news like the Russian Collusion Russian contact wait for it was an FBI assest!
Update I just hope the current sanctions and Biden's rhetoric of protecting Taiwan from Ch!na and Nancy Pelosi's vitis doesn't actually facilitate it by plan!
 
Last edited:

Mr Majestyk

Posts: 1,348   +1,229
There's nothing vague about the US government's goals - its just far too little, far too late. China has stolen every piece of intellectual technology that the moronic Wall Street tycoons handed them (because DC rewarded them for offshoring American jobs). Somehow these greedy fools created a mutual delusion that America would switch to a purely financial and "information" economy and everyone else would do the dirty work. Not sure how they overlooked the fact that phone lines and the Internet work the same everywhere and lax environmental laws are a huge economic advantage. Now their trying to stop China from stealing the very last high-tech sector that the US has a corner on, which is high-end chip fabrication. The shift can certainly be slowed down, perhaps for many years, but if we don't start seeing OTHER types of manufacturing jobs being protected as well the effort will ultimately fail. You can't pick and choose with protectionism - even China tarriffs the hell out of practically everything except food and oil they desperately need.

This argumnet basically applies to any Western nation you can name. Our Australian governments have been especially duplicit in this insanity and they were also cheering loudly for destroying local manufacturing and off-shoring jobs and just shout "globalisation gives us lower prices" damn the consequences. Covid brought those chickens home to roost.
 
Last edited:

kiwigraeme

Posts: 1,193   +872
Very good article.

"I don't think US/Western technological superiority will last very long. East Asians have a significantly higher IQ than Westerners"
Citation needed - given good childhood , stimulation , disease/sickness free , good diet -and applicable IQ test - Humans are pretty close in IQ - no matter the colour.

How accurate IQ tests to life achievements is debatable .
Some IQ tests are studiable - even if just learning the format
a thorn to a rose is like a ------- to a bee .
Passion , perseverance , opportunity and good technique go a long long way - add in curiousity and hardwork.

This is why Trump closing The USA to immigrants was silly - NY , London etc run on imported talent.
AI , processing power etc will be crucial going forward - ie applied smarts .

As an aside China couldn't fully make ballpoint pens until about 5 years ago

Foreign policy is economic domination at a certain level - however it's best everyone is successful at something - China needs the USA . USA needs China
 

Puiu

Posts: 5,732   +4,668
TechSpot Elite
Looking forward to tomorrow is a conservative trait last I checked the left is in power and is using all its power to keep it that way. Notice America is still a mostly 2 party system unlike Ch!na where they have no resistance for a century outlook! Orange man was looking into the future but they are attempting to muffle him with even record overreach of the FBI lapdog eg. todays news like the Russian Collusion Russian contact wait for it was an FBI assest!
Update I just hope the current sanctions and Biden's rhetoric of protecting Taiwan from Ch!na and Nancy Pelosi's vitis doesn't actually facilitate it by plan!
Orange man is just that, an insane orange. He had no plan at all and ran the country as if he was running his hotel: in a shady and racist way.

The FBI had to, and I repeat, HAD TO intervene because he was refusing to hand over sensitive government documents. And the raid showed just that, Trump has been lying and doing shady stuff again.

The current administration is head and shoulders above Trump's which just rode the Obama growth wave while doing stupid things.
 

Endymio

Posts: 1,801   +1,855
This is why Trump closing The USA to immigrants was silly
Misinformation. Trump did nothing of the sort. In 2019, his last pre-Covid year in office, the US issued 1.03M permanent resident visas, a figure basically identical to Obama's 8-year average of 1.06M visas per year:


NY , London etc run on imported talent.
Meaning you must agree with Trump's proposal to ditch the US's inane random "lottery" system for visas and instead focus on skills and merit, a program essentially identically identical to New Zealand's "skilled migrant program", which accounts for the lion's share of your own country's immigrant visas.

Oops.
 

gamerk2

Posts: 728   +696
There's nothing vague about the US government's goals - its just far too little, far too late. China has stolen every piece of intellectual technology that the moronic Wall Street tycoons handed them (because DC rewarded them for offshoring American jobs). Somehow these greedy fools created a mutual delusion that America would switch to a purely financial and "information" economy and everyone else would do the dirty work. Not sure how they overlooked the fact that phone lines and the Internet work the same everywhere and lax environmental laws are a huge economic advantage. Now their trying to stop China from stealing the very last high-tech sector that the US has a corner on, which is high-end chip fabrication. The shift can certainly be slowed down, perhaps for many years, but if we don't start seeing OTHER types of manufacturing jobs being protected as well the effort will ultimately fail. You can't pick and choose with protectionism - even China tarriffs the hell out of practically everything except food and oil they desperately need.

The problem is since the 80's, the guiding economic policy in the United States has been to keep inflation down at all costs by keeping supply of goods high and the costs of those goods low. Therefore, Free Trade to make overseas goods cheaper, and corporations making the next logical step and outsourcing most all production overseas and sourcing most parts overseas to lower costs.

This becomes a self-fulfilling prophecy; the lower cost of goods results in lower wage increases over time, making it harder (if not impossible) for consumers to afford more expensive produced goods. This in turn forces economic policy to continually double down on the above policy, since any type of price shock risks spending the economy into a spiral.

What I would do in the short-term is focus on companies based in the US who re-import to save on costs. Those companies in particular I would heavily tariff in order to make it more expensive to produce overseas relative to producing locally. I would not (at this time) start tariffing foreign imports, for the very simple reason the US can't adequately deal with the price shocks that would result (as we saw with Trumps ill-conceived tariffs on raw resources, which hurt US producers due to the increased costs of production).
 

Sathi43

Posts: 52   +63
As an aside China couldn't fully make ballpoint pens until about 5 years ago
As a neutral observer who's neither American nor Chinese, I must say some Westerner's view on China is hilarious to watch. The sentiment that China has to steal all their innovation may have had some merit few decades ago. It is simply not true anymore. For starters, did you know China leads the world in cutting-edge scientific research?

Reference:
https://www.theguardian.com/world/2022/aug/11/china-overtakes-the-us-in-scientific-research-output
 
There's nothing vague about the US government's goals - its just far too little, far too late. China has stolen every piece of intellectual technology that the moronic Wall Street tycoons handed them (because DC rewarded them for offshoring American jobs). Somehow these greedy fools created a mutual delusion that America would switch to a purely financial and "information" economy and everyone else would do the dirty work. Not sure how they overlooked the fact that phone lines and the Internet work the same everywhere and lax environmental laws are a huge economic advantage. Now their trying to stop China from stealing the very last high-tech sector that the US has a corner on, which is high-end chip fabrication. The shift can certainly be slowed down, perhaps for many years, but if we don't start seeing OTHER types of manufacturing jobs being protected as well the effort will ultimately fail. You can't pick and choose with protectionism - even China tarriffs the hell out of practically everything except food and oil they desperately need.

US never had high end fabrication. The article wasn't even about stealing lol.

Not sure if you know how trade works... but you trade, other get ideas and replicate, that is the name of the game called capitalism. Do you complain about burger king, mcdonalds, five guys, etc all selling hamburgers?
 

loki1944

Posts: 600   +441
There's nothing vague about the US government's goals - its just far too little, far too late. China has stolen every piece of intellectual technology that the moronic Wall Street tycoons handed them (because DC rewarded them for offshoring American jobs). Somehow these greedy fools created a mutual delusion that America would switch to a purely financial and "information" economy and everyone else would do the dirty work. Not sure how they overlooked the fact that phone lines and the Internet work the same everywhere and lax environmental laws are a huge economic advantage. Now their trying to stop China from stealing the very last high-tech sector that the US has a corner on, which is high-end chip fabrication. The shift can certainly be slowed down, perhaps for many years, but if we don't start seeing OTHER types of manufacturing jobs being protected as well the effort will ultimately fail. You can't pick and choose with protectionism - even China tarriffs the hell out of practically everything except food and oil they desperately need.

Well said.