22V’s Kim Wallace and Michael Hirson hosted a webinar today on US-China tech tensions with our guest Paul Triolo of Albright Stonebridge Group. A replay is available is HERE, and our key takeaways are summarized below.
Paul observed at the start of the discussion that the last two years of President Biden’s first term will be a rough ride for the US-China tech tensions. The conversation centered on the frontline of geopolitics and technology – semiconductors – and concluded with a discussion on the outlook for TikTok’s ability to keep operating in the US.
Geopolitics of semiconductors
- How will US export controls on advanced semiconductor technology, announced in October, impact China’s tech sector?
- The US controls imposed in October have thrown off the strategies and investment plans of established Chinese chipmakers in both memory (YMTC, CMXT) and logic (SMIC). SMIC has somewhat more capabilities than the other firms to cope but still faces major challenges. Aspiring Chinese chipmakers face even more daunting problems.
- The threshold allowed under current controls still permits US chipmakers (such as Nvidia) to sell chips that are sufficient for many current commercial applications. But over the longer-term the controls will hurt China’s competitiveness in areas such as AI, as large language models (such ChatGPT) require heavy computing power.
- Can China overcome US restrictions with domestic technology? It will be very difficult, given the comprehensive nature of US controls and lack of access to some parts of the global supply chain. It may be a decade before we know how China is doing. The biggest question is whether Chinese toolmakers can step up, as this is the area where their industry is the furthest behind.
- What are the risks for the US semiconductor industry?
- There are two risks for US firms. The first is the loss of sales in China for chipmakers (particularly Nvidia and AMD as leaders in GPUs used for AI applications) and toolmakers (Lam Research, KLA Tencor, and Applied Materials). Several of the toolmakers have announced layoffs due to the impact of the controls as well as broader cyclical downturn. The loss of potential sales will get worse over time. A key issue for Nvidia and AMD is whether the US eventually grants licenses that allow them to sell advanced chips to certain commercial customers in China – right now license requests are under a presumption of denial by the US Commerce Department.
- The second risk is that Chinese companies as well as third country companies (such as Dutch lithography leader ASML) “design out” US IP from global semiconductor supply chains. These efforts began several years ago with US export controls against ZTE and Huawei.
- Will US allies (Japan, EU) join US restrictions?
- The US had been in consultations with the Netherlands and Japan but moved ahead unilaterally in October. These partners will impose some restrictions but will not align when it comes to applying export controls to Chinese memory chip makers or restricting their citizens from working with Chinese firms (controls on persons). Japan will likely announce its measures in March, while the Dutch may be silent in terms of public announcements.
- The devil will really be in the details when it comes to understanding the impact of the restrictions, for example how the Dutch treat exports of ASML’s DUV tools to China, which are not at the cutting edge but can still be used to produce advanced semiconductors.
- How do geopolitical tensions impact the critical role of Taiwan and TSMC in the global semiconductor supply chain?
- Taiwan is playing a difficult balancing game between the US and China. US export controls have cut off some leading Chinese companies from chips made by TSMC, just as the US has wooed TSMC to build a fab for advanced semiconductors in Arizona.
- Many in Taiwan are uncomfortable with US efforts to onshore semiconductor production, concerned that it could hollow out industry in Taiwan and erode the “silicon shield” that helps deter an invasion by China.
- Even with efforts by the US, EU and Japan to woo TSMC to build overseas fab facilities, the vast majority of capacity will remain in Taiwan, due in part to the unique supply chain and ecosystem that has developed there. Taiwan accounts for roughly 90% of global production of advanced semiconductors and 60% of overall foundry capacity.
- US politicians and military officials are calling on Washington to arm Taiwan to the teeth, citing a high risk of an invasion by China. Taiwan officials seek to play down these risks. At the same time, the possibility of such a conflict dawned on many people in Taiwan for the first time after former House Speaker Nancy Pelosi’s visit last August.
- The probability of a mainland invasion of Taiwan in the next several years is low, but Beijing is also reacting to US measures and could take action if it feels Washington is forcing its hand. Multinational companies with supply chain exposure to Taiwan should look not just at the risk of invasion but broader scenarios, such as one in which the US imposes sanctions on China as a deterrent.
US policies towards TikTok
- The next month will be critical in TikTok’s efforts to convince US stakeholders that it’s “Project Texas” – a hugely expensive effort to create a separate enclave for its US operations – addresses national security and privacy concerns. On March 23, TikTok’s CEO Shou Zi Chew will testify before the House Energy and Commerce Committee.
- Within the Biden administration, the Department of Justice is among the agencies opposed to allowing TikTok to continue operating in the US. And of course almost every day another US state government imposes restrictions, such as prohibiting use of TikTok on government-provided phones. Still, action by Congress to try to impose a ban on TikTok – if the administration does not do so on its own – is likely to be very messy and subject to court challenges.
- Avoiding a messy outcome will take a lot of effort. TikTok will need to persuade the Biden administration and Congress, and of course the company itself will also decide if it is worth it to continue the large investments necessary to try to address US concerns.
We look forward to hearing again from Paul as events warrant and reading his forthcoming publication next month from Albright Stonebridge Group on the geopolitics of semiconductors.
