Huawei Defies U.S. Sanctions While Beijing Bans Apple; the 1-2 Combo
Huawei Defies U.S. Sanctions While Beijing Bans Apple; the 1-2 Combo
China's flagrant disregard for U.S. sanctions timed with Apples expanding ban in China sets in motion a new phase in policy. The U.S. either needs to crack down, or refocus on critical technology.
Huawei and SMIC: Testing the Waters of U.S. Sanctions
SMIC, under sanctions, has been providing 7nm chips to Huawei, another sanctioned company, actions that are well over the line. Despite early indications that SMIC's production efficiency for these chips is subpar, it may represent China's symbolic message that "U.S. sanctions are ineffective,".
"Huawei is testing the US red line now. If there's no response from the US, Huawei will see it as a green light, and its suppliers might follow SMIC's footsteps, undermining US sanctions," Lin Tsung-nan, electrical engineering professor at National Taiwan University.
The Challenge of Enforcing U.S. Sanctions on China's Turf
The aim of the Trump era Huawei ban is to restrict any manufacturer, from leveraging U.S.-made equipment in its production processes to create products for Huawei. However, the challenge lies in the execution and enforceability of such a ban on Chinese suppliers. While the United States can exert control and influence on its own soil, or through international trade, attempting to dictate how already-sold equipment is used within China's borders presents significant obstacles. Direct enforcement of such a ban within another country is near impossible.
Where the U.S. does retain significant control is within its borders and with its own (and to a lesser extent, allied) exports. Thus, a more feasible and enforceable strategy would involve curbing or monitoring the export of sensitive machinery or technology to China, like the Biden administration October 2022 ban. By managing what equipment enters China, the country can influence how China's tech sector operates, without overstepping into direct intervention within China's internal affairs.
“Covenants, without the sword, are but words and of no strength to secure a man at all.” Hobbes, Leviathan.
One could argue that sabotage, particularly via compromising industrial control systems, could be a way to disincentivize Chinese suppliers from selling to Huawei. Our previous research shows that it would be possible for the U.S. to target Western industrial control systems operating in Chinese fabs (China's Options for Semiconductor Security). Such actions come with considerable ramifications and could escalate tensions further however this route has been walked before. Blocking control system software updates and replacement parts would be another means to make this more challenging for Chinese manufacturers
“It [Stuxnet, an industrial control system virus used against Iranian nuclear material enrichment facility] bought us time. First, it was to get across from one administration to the next without having the issue blow up. And then it was to give Obama a little more time to come up with alternatives, through the sanctions,” Cyber-attacks "bought us time" on Iran: U.S. sources | Reuters
China's Semiconductor Reality
“We should actually be pretty cautious in how we interpret this…Huawei has a great job of publicizing this but I don’t think we should conclude that it means something that it doesn’t necessarily mean. We shouldn’t over-estimate the impact of this news… Absent great data on yield and cost and volume, it definitely doesn’t mean that SMIC will have an easy pathway toward 5 nanometer.” Chris Miller, author of Chip War: The Fight for the World’s Most Critical Technology.
Doug Fuller, a prominent China tech observer and author, took to X to shed light on China's chip manufacturing landscape. A few of his observations include:
The success story of China's semiconductor industry might be more of a myth.
SMIC's chip yield rate is less than 10%, a stark contrast to Taiwan's TSMC which had 80-94% for its 7nm chips four years back.
Fuller points out that his sources indicate that the yield rate of SMIC’s process is less than 10% (using Western equipment). This dismal performance starkly contrasts with Taiwan's TSMC, which boasted yield rates of 80-94% for its 7nm chips nearly four years ago. The Chinese government has stepped in to subsidize this low-performing sector, making it economically viable only because the state is absorbing the high costs.
We've delved into China's journey towards semiconductor independence (here). We estimate that eliminating Western technology from their supply chain up to 5nm could cost China over $60B and may take them until the decade's end. By that time, the allied supply chain will have advanced by several generations.
Strategizing Sanctions: What Works Best?
“If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.” Applied in reverse. "If you take a mans fish, you starve him for a day. If you take away a man's ability to fish, you starve him for a lifetime."
Or more specifically “If you take a nations commodities, you weaken them for a day. If you take away a nations manufacturing technology, you weaken them for a lifetime.”
Sanctions are a powerful geopolitical tool used by nations like the U.S. to influence or penalize adversaries. However, their effectiveness and fairness are debated, especially in the tech arena involving AI and semiconductors. Using the "teach a man to fish" analogy, there's a dilemma: should the U.S. restrict the end product or the means of production? The former may produce immediate results (Huawei decapitation), but the latter could have more profound long-term effects. Paul Scharre suggests that while the U.S. aims to control China's chip-making abilities, completely cutting off access may backfire by fueling China's domestic growth.
“The US government, meanwhile, has been slow to develop a strategy for competing in AI hardware. Like a drunk in a bar fight, the United States threw the first punch in a global chip war with no plan for how to finish the fight. Some of the U.S. government's actions are sensible but others have been self defeating. Restricting China's access to manufacturing equipment and software design tools necessary to manufacturing leading edge chips makes sense. The United States and its allies should aim to keep China reliant on foreign chips supplies, retaining the ability to cut off China's access to chips if needed. Yet actually cutting off access to chips, as the United States did with 5G chips for Huawei and with advanced AI chips nationwide, should be a rare move. Denying China the ability to import chips turns China's $400 billion of semiconductor buying power inward, fueling the growth of their domestic semiconductor industry, which is the exact opposite of what Washington should want.” - Paul Scharre, Four Battlegrounds
Moreover, as pointed out by various sources, the implementation of these restrictions has been porous. The Bureau of Industry and Security's licenses, ambiguities in technical standards, and vulnerabilities like leaked manuals, indicate that the sanctions, are leaky. These loopholes aren't just administrative oversights; they hint at deeper issues, including potential lobbying pressures from U.S. firms that stand to lose from stringent controls. The U.S. is at a crossroads—either to abandon these controls or rectify them.
Apple’s China Conundrum
To add to the drama, in the last week, China banned its government officials from using iPhones and other foreign devices at work, aiming to decrease dependence on foreign tech and boost cybersecurity. This move could hit up to 5% of Apple's iPhone sales in China, potentially costing the company around $4 billion in revenue. The ban might also tarnish Apple's brand image in the country. China is Apple’s third-largest market, accounting for 18% of total revenue last year. While the long-term effects are uncertain, Apple faces bearish challenges like losing market share to local competitors like Huawei and Xiaomi (revenue ↓) while adjusting its supply chain out of China (costs ↑). The ban poses a significant hurdle for Apple in one of its primary markets.
Several agencies have begun instructing staff not to bring their iPhones to work, people familiar with the matter said, affirming a previous report from the Wall Street Journal. In addition, Beijing intends to extend that restriction far more broadly to a plethora of state-owned enterprises and other government-controlled organizations, said the people, who asked not to be identified discussing a sensitive matter. https://www.bloomberg.com/news/articles/2023-09-07/china-plans-to-expand-iphone-ban-to-some-state-backed-firms-in-blow-to-apple
The U.S. Policy Stance: Work in Progress
As the Biden Administration and Congress start looking into the new Huawei phone, and US media like the Washington Post report on how much PRC media and netizens mocked Commerce Secretary Raimondo, is it possible that the trolling could be good for scoring cheap nationalist points but ultimately cause a lot more pain for Huawei and SMIC? Bill Bishop, Sinocism
The U.S. faces the challenge of aligning national security interests with the complexities of global trade. Jake Sullivan's "small yard, high fence" philosophy indicates a preference for a targeted approach, addressing genuine security threats without implementing a sweeping disconnection from China's technological landscape. Nonetheless, the perceived leniency, as illustrated by the collaboration between SMIC and Huawei, brings into question the administrations dedication to safeguarding its national priorities.
“I’m going to withhold comment on the particular chip in question until we get more information about precisely its character and composition… What it tells us, regardless, is that the United States should continue on its course of a ‘small yard, high fence’ set of technology restrictions focused narrowly on national security concerns, not on the broader question of commercial decoupling.” Jake Sullivan during a White House briefing
Mike Gallagher's stance (below) underscores a more stringent methodology, pushing for a cessation of tech exports to entities that either violate U.S. regulations or pose security risks. While this viewpoint might steer U.S. policy towards tighter controls, it's worth noting that aggressive measures might inadvertently hand China a nationalist victory, framing them as resilient underdogs against U.S. pressure. Furthermore, this could prompt China to hasten its technological progression, or forge ties with other global players, potentially contesting U.S. technological supremacy.
"This chip likely could not be produced without US technology and thus SMIC may have violated the Department of Commerce’s Foreign Direct Product Rule… The time has come to end all U.S. technology exports to both Huawei and SMIC to make clear any firm that flouts U.S. law and undermines our national security will be cut off from our technology." Mike Gallagher, Chair of the House Committee on the Chinese Communist Party
Central to this debate is not just restricting end products, but more critically, the means of production, which will be the real game-changer in this geopolitical tech tussle.
