The US-China Semiconductor Battle: Second and Third Class Consequences

why does it matter: Earlier this month, the US government prevented Sell ​​certain chips to anyone in China. We see this as an important change by the government in the tactics it is deploying. The US has gone from banning certain companies in China to banning all companies and focusing on specific products. This is a big change and opens the question – what exactly are they hoping to achieve? Obviously, this is important because it can help us predict the outcome, but we are increasingly taking the view that the government may not have fully thought about how this will eventually happen.

some background. It was the United States go back Against Chinese trade practices, back in the late Obama administration, with a marked escalation by his successor. The Biden administration appears to be keeping this track, albeit with some rethinking of tactics.

Until recently, the US government relied largely on the Entity List (Here you will find a complete list), for those who keep the scores at home, there are 183 Huawei entities on the list. This prevents certain companies from buying products exported from the US, or produced by US and/or IP companies.

Editor’s note:
guest author Jonathan Goldberg He is the founder of D2D Advisory, a cross-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. Once a large number of large Chinese companies began appearing on this list around 2017-2018, US companies sent teams of lawyers and lobbyists to penetrate as many loopholes as possible.

From a Chinese perspective, the entity list appeared horribly randomly. TRUE, Huawei It was a primary goal, but many of the other companies on the list ended up for reasons that aren’t entirely clear to them. We’ve spoken with several people at Chinese companies who have become incredibly wary of doing business with anyone in the US for fear that they somehow end up on the list. This has created a high degree of uncertainty and a rush toward alternatives, a topic we will return to below.

The US government added late last month Seven other names To the list, and judging by these names, we have to ask who compiles this list. All of these recent additions seem to be involved in aviation matters, and although they have academic connections, the fact that all seven have unit number designations seems to indicate that these units are military, if not expressly PLA units. .

We have now spent six years in this process, how are these units now being added to the list? Judging by what happened next, we have to believe that the people who put the list together realized they were facing a desperate task. Chinese companies have become incredibly adept at creativity Byzantine corporate structures, making tracing their affiliations nearly impossible. Our guess is that someone in the government realized the futility of this approach and made the decision to switch instead to banning shipments of certain products.

Targets the latest approach that uses high-quality chips machine learning. These are the types of chips that can be used to create AI improvements to search algorithms and find users who want to watch dance videos. They are also the types of chips that can be used to simulate missile trajectories and nuclear explosions.

From what we can tell, the US government is, in all of this, trying to limit the ability of the People’s Liberation Army and many of its subsidiaries to have access to the latest American technology. The war in Ukraine highlighted that the United States’ military advantage depends in large part on its access to the most advanced technology. Of course, there’s more to it than that, but it’s something the US military relies heavily on. Given the Chinese military as a growing threat, it stands to reason that the United States would not want to do anything to help China mitigate this advantage.

So, in our opinion, the recent shift to product bans represents a meaningful expansion of US government efforts. Would this work better than Entity List?

We are skeptical.

First, as noted above, US companies themselves have been the biggest force working to weaken earlier efforts. Nvidia shares tumbled in the latest news, warning of a $400 million revenue shortfall caused by the ban. Perhaps this will work with these specific chips, but we believe that further expansion will meet stiff resistance from the home front.

Second, how will this work in the modern supply chain? Suppose an American company wants to buy banned Nvidia chips worth a few million dollars. Who will then assemble the chips into the working systems, insert the chips into the motherboards and install those chips into the server racks? Today, most of this work is carried out by the factories of Taiwanese companies in China. Can Nvidia ship those chips to China? Technically, we think the answer is yes, but it’s easy to see how easily this process can be derailed.

Third, this is a short-term step, but it has long-term consequences. As we noted above, every Chinese company that buys spare parts from American sellers is now busy looking for domestic alternatives. We have written a lot about Growth in the capabilities of the Chinese The fabless companies, including a handful of GPU-producing companies, are not much different from what the US government just banned (not the same, but it comes close all the time). The actions of the US government directly lead to interest in a sea of ​​ambitious Nvidia competitors. For companies like BernThe US government’s actions are a huge boost.

And these are only first-class effects. Stretchy recently touch on this, noting that one of Nvidia’s biggest advantages in the AI ​​chip market is CUDA. It is now unclear what the status of this program is in China. This will definitely increase the interest in open source alternatives to CUDA. So not only is Nvidia losing out on direct sales, it now risks seeing its competitive advantage erode.

This also extends beyond the GPU/AI semiconductor space, it applies to all US semiconductors, what we call third order effects. All Chinese companies, even those that have nothing to do with the Chinese military, now have to look for alternative vendors. This isn’t patriotism, it’s just a rational business contingency plan. The effects are likely to be felt first in semi-industrial cars and cars – away from the leading GPUs, as this seems to be the area in which ambitious Chinese chip companies seem most competitive today. We’ll be watching for comments from companies like Texas Instruments and On semi about China in the coming quarters.

So, while we understand the US government’s interest in limiting the supply of high technology to a potential long-term adversary, we have to question whether in the long run this works in China’s favour. There are no simple answers to this problem. Having said that, the US government needs to think very strategically here. Is the goal to limit specific Chinese military projects? Is it paralyzing the entirety of half of China? Is there even an end goal? From what we can tell now, this does not appear to be the case.

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