Huawei Got 7nm Chips, Your Move America
Huawei Got 7nm Chips, Your Move America
Chip Choke trumps the Credit Crunch for Chinese stimulus. Biden has a range of options to regain credibility around Chinese sanctions, but wants to save the sledge hammer for his second term.
In an evolving landscape, the competition in the semiconductor space is heating up. As China pushes relentlessly to establish its prominence in the chip sector while it’s economy struggles, the U.S. is re-evaluating its export restrictions and gearing up for potential strategic moves. This article delves deep into China's determination to leapfrog its technological constraints, the U.S.'s profit-driven maneuvers, and the high stakes political chess game that's unfolding.
China's chip aspirations are more than just a quest for innovation – they're a testament to the nation's drive to cement its place in the world. While Huawei flaunts its 7nm chip, and Beijing amplifies its investment in the semiconductor industry, a looming shadow of U.S. restrictions and economic hurdles persist. On the other side of the Pacific, American corporations, with an eye on immediate profits, are navigating this intricate geopolitical terrain, epitomized by Nvidia's tactical dance around licensing rules. Yet, with the upcoming U.S. elections, the tech warfare could experience a seismic shift, with policy decisions holding the potential to reshape the industry's landscape.
Whether it's China's aggressive investments, the U.S.'s corporate strategies, or the impending political decisions – the chips, quite literally, are up in the air.
China is Determined to Catch up
Despite the fanfare around Huawei's latest 7nm chip, it's important to temper expectations and view it for what it truly is: not a "breakthrough," but rather a resumption of progress in an industry already capable of such feats. Huawei had the know-how to design 7nm chips even before the imposition of trade restrictions. Additionally, SMIC had the equipment and tools to be manufacturing 7nm chips at a low yield well before the restrictions. Huawei Defies U.S. Sanctions While Beijing Bans Apple; the 1-2 Combo
Beijing continues to prioritize investments in its semiconductor industry amidst the technological rivalry with the U.S., rather than concentrating on broad economic stimulus measures. This decision aligns with President Xi Jinping's goal of safeguarding economic security amidst rising U.S. tensions, possibly at the expense of short-term economic growth.
In August, medium to long-term loans to households in China, including mortgages, plummeted by approximately 40% year-on-year. The markets were expecting the People's Bank of China to lower interest rates this week but they refrained. The yuan's recent decline against the dollar, reaching its lowest since 2007, may have influenced this decision, as further rate cuts could exacerbate the currency's fall and spur capital flight.
China's economic revival remains sluggish, particularly with a two-year property market downturn and disruption from its zero-COVID policy. Efforts, like softening real estate regulations, haven't had significant impacts. While China unleashed a 4 trillion yuan stimulus post the 2008 financial crisis, there are no signs indicate a similar approach now, with local governmental debts and slowing tax revenue growth being barriers. The country's tax revenue was 13.8% of its GDP in the previous year, a decline of nearly 5% since 2014.
Chip Choke Trumps the Credit Crunch
The government has been cautious about direct payments to households, leading to concerns about potential deflation and prolonged low growth amid a fragile job market. Amid budgetary limitations, Beijing emphasizes sectors like domestic semiconductors and electric vehicle production, reportedly preparing another $40 billion dollar semiconductor fund. Recently, Beijing declared expanded tax benefits for semiconductor and machine tool sectors, allowing a 120% tax deduction on R&D expenses for five years. We remind readers of our assessment that for China to develop an indigenous supply chain at current 5nm technology levels could take to the end of the decade. The latest round of subsidies and increased focus could shift that goal-post closer, and we will continue to update our forecasts.
US Companies are Determined to Make Money
While Beijing's focus remains on reinforcing its semiconductor sector, the U.S. is considering tightening export restrictions on key artificial intelligence (AI) chips.
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. Huawei Defies U.S. Sanctions While Beijing Bans Apple; the 1-2 Combo
American firms, driven by the allure of short-term profits, have a strong incentive to maximize sales today, even if it means navigating complex regulatory waters. The creativity of companies in U.S. allied nations should not be underestimated. These entities have historically showcased their knack for adhering to the letter of Bureau of Industry and Security (BIS) regulations, whilst often sidestepping their true intent.
A recent example of this intricate dance is Nvidia's maneuver following the introduction of licensing rules that affected its A100 chips. The A100, a potent chip rolled out two years ago, is pivotal for data centers, facilitating large scale AI computations. Alongside the A100, Nvidia's advanced H100 chips, released this year, also fell under the new licensing rules.
Nvidia's response to these constraints was both swift and strategic. The tech giant developed an AI chip tailored for the Chinese market, the A800 and the H800, ensuring it remained just beneath the performance benchmarks set by the U.S. Commerce Department. This crafty move allowed the A800/H800 to substitute the A100/H100 in data centers, bypassing the newly imposed restrictions with comparable performance for AI training workloads.
The new restrictions being contemplated by the department would ban the sale of even A800 chips without a license, according to the people familiar with the matter. U.S. Considers New Curbs on AI Chip Exports to China, WSJ
The administration is aware of this and sources close to the situation have indicated to the WSJ that the U.S. Commerce Department is contemplating even tighter restrictions. If these considerations materialize into policy, Nvidia's A800/H800 chip sales to China would also require a license.
US Policy Makers are Determined to Win… After Election Season
Maintaining the current level export controls poses a significant threat to America and its allies’ long-term economic and national security.
The US government and its allies could stop the Chinese semiconductor industry in its tracks. Here are some steps that could be taken to ensure that China does not develop the ability to mass-manufacture the sorts of chips needed for high-end military applications in the coming years…
Half measures will not work, but a full-scale assault will make it so the cost of replicating the semiconductor supply chain domestically is neigh on impossible. While we aren’t advocating for any of these specifically, it is clear the west can still stop China’s rise if decisive action is taken. SemiAnalysis
Amidst the drama, some pundits have been calling for tighter restrictions immediately. As Matt Gertken has frequently noted, the president controls foreign policy and Biden's apparent softness is influenced by his re-election ambitions and desire to prevent tensions from exploding prior to the election. China is well aware of this dynamic and so far has been unwilling to reciprocate with the U.S. outreach and visits from senior officials.
If Biden is re-elected [without congress being controlled], his hands are tied at home, that’s where he would have the ability to use the presidential powers aboard. And worst case scenario, it hurts the economy, that would hurt the democrat party. They don’t necessarily want him to do that, but at this stage Biden is worried about his legacy, he’s worried about going down in history as an American president who defended U.S. interests. That’s the same phenomena with Trump. These are also very old men, they’re going to be in their 80’s. So they’re not only at the end of their terms in office, they’re at the end of their lives. This is an environment where they could make visionary or apocalyptic or radical decisions and that’s going to cause more disruption for the financial markets. Matt Gertken, BCA Research’s Chief Strategist, Geopolitical Strategy and US Political Strategy
The post-election period will see the U.S. intensifying its protectionist agenda. However, China’s lack of cooperation is becoming more obvious in the near term and Biden can’t let that go unanswered without hurting his own credibility.
The Scalpel or the Chainsaw
The U.S. is not without leverage when it comes to challenging China's semiconductor and broader tech sectors. High-potential areas for U.S. intervention prior to the election include:
Nvidia's modified AI chips: An extension of restrictions on AI chips to include NVidias chips modified for the Chinese market could result in a significant drop in Nvidia's lofty stock value. Given the prior WSJ reporting on this, there is a high probability of this being passed, which creates downside risks to NVDA.
Targeted manufacturing equipment bans: Aimed at the equipment involved in the production of the specific Huawei 7nm chip, policy makers might target some of the specific masks, photoresists, metrology and etching equipment used at the high end outlined by SemiAnalysis. Such a policy would be detrimental for China's semiconductor fabs, while also affecting U.S. and Japanese equipment manufacturers but it depends on how it is structured.
Bans on after sales support and spare parts: These would have marginal impact on Non-Chinese companies while making operation and maintenance of SMIC’s DUV machines more difficult over time.
After the election the president will have more room to maneuver and could take a heavy handed approach to trade policy with China:
Ban all manufacturing equipment and software for 28nm and below: The would be an expansion of the October 2022 bans. This would severely impact revenues and valuations for U.S. and Japanese equipment makers given they obtain a large portion of their revenue from older equipment sales to China. Chinese companies have anticipated this and are buying older equipment like there is no tomorrow. China is making non-market driven purchases in stockpiling this equipment with the expectation that there will be no response from the U.S. administration. If that gains publicity, it could force Biden’s hand.
Chinese-produced legacy chip exports: This would be harder to target, as these older chips are mostly sold within China, however a ban could target Western products that have Chinese legacy chips assembled into them.
Grumpy cat after elections
