Speaker 1: Semiconductors are at the heart of America's geopolitical rivalry with China.
Speaker 1: They're vital to products we use every day, including smartphones
Speaker 1: and computers, and for advanced technologies like AI, electric vehicles
Speaker 1: and defense systems. China's made in twenty twenty five policy
Speaker 1: a decade ago called for aggressive manufacturing and self sufficiency
Speaker 1: in this space.
Speaker 2: That's been worrying Washington ever since, with both the Biden
Speaker 2: and Trump administrations adding tougher rules like cutting access to
Speaker 2: American technology and certain semiconductors, and it's been met with
Speaker 2: limited success. Chinese firms are still finding ways of getting
Speaker 2: the hands on US and Taiwanese advanced semiconductors, and the
Speaker 2: Chinese government continues to double down on its own industry.
Speaker 1: So where are we in a great chip war? Who's winning?
Speaker 1: If anyone? Could we see more thawing in the relationship
Speaker 1: as China and the US try to negotiate a trade deal,
Speaker 1: and how can regions like Taiwan, South Korea and Japan
Speaker 1: benefit from this rivalry. You're listening to Asia Centric from
Speaker 1: Bloomberg Intelligence. I'm Katydmitreva in Hong Kong.
Speaker 2: I'm John Lee also in Hong Kong.
Speaker 1: And today we have Chris Miller, who wrote the book
Speaker 1: on Justice. He's a professor at Toft University and the
Speaker 1: author of Chip War, The Fight for the World's Most
Speaker 1: Critical Technology, often seen as required reading for understanding this space.
Speaker 1: He joins us in Boston. Thank you for joining us, Chris,
Speaker 1: Thank you for having me.
Speaker 2: Chris in your own words, why are semiconductors so important
Speaker 2: to the great powers?
Speaker 3: Well, I think there are two reasons why. The first
Speaker 3: is that chips are just important for the global economy
Speaker 3: writ large. If you look at the world's biggest companies
Speaker 3: by market capitalization, they're all either designers of chips, producers
Speaker 3: of chips, or companies that really couldn't function without chips.
Speaker 4: Look at global trade.
Speaker 3: The largest single flow in all of global trade is
Speaker 3: the flow of chips into China each year, from Taiwan,
Speaker 3: from Korea, from Southeast Asia. And so you can't understand
Speaker 3: modern economies without chips. That's one reason. The second is
Speaker 3: that when you look forward towards the application of artificial
Speaker 3: intelligence to every aspect of the economy, what you find
Speaker 3: here too, chips are central the advances that we've seen
Speaker 3: in AI over the past couple of years have been
Speaker 3: driven by better and better semiconductors, which are both used
Speaker 3: to train these ultra capable AI systems but also in
Speaker 3: deploying them at scale. And so, just like all of
Speaker 3: the world's governments, tech CEOs too are betting that if
Speaker 3: you want to be able to build and deploy the
Speaker 3: best AI systems, you've got to be able to access
Speaker 3: to large numbers of high quality AI chips. And so
Speaker 3: these two factors, the macroeconomic centrality and the importance to AI,
Speaker 3: have put chips not just on the radar screens of
Speaker 3: Silicon Valley leaders, but also of the world's top political officials.
Speaker 1: And just sort of a historical point for those who
Speaker 1: haven't read the book yet, when did this all begin?
Speaker 1: In terms of this importance of chips, Well.
Speaker 3: In some ways it dates back to the origins of
Speaker 3: the chip industry. The first ships were invented in the
Speaker 3: late nineteen fifties. The aim was to miniatureize computing powers.
Speaker 3: You could fit a computer in the nose cone of
Speaker 3: a missile and guide it more accurately towards its target,
Speaker 3: and this was critical for the Cold War competition between
Speaker 3: the United States and the Soviet Union. But it really
Speaker 3: kind of kicked up a notch about ten years ago
Speaker 3: when the United States was the dominant player in the
Speaker 3: chip supply chain, not the dominant manufacturer of chips, but
Speaker 3: the dominant producer of many of the key inputs into chips,
Speaker 3: the ip the design know how, many of the key tools,
Speaker 3: and China realized that it's economy was becoming more and
Speaker 3: more dependent on ships that at the time it was
Speaker 3: almost completely an importer of. It produce many at all
Speaker 3: domestically in the chips that it did produce were all
Speaker 3: low end, and so in twenty fourteen, China launched a
Speaker 3: major industrial policy effort trying to develop more self sufficiency
Speaker 3: in semiconductors. It set up a very large central government
Speaker 3: investment fund, and each of the provinces set up their
Speaker 3: own investment funds to try to build a self sufficient industry.
Speaker 3: And this was seen not just by the US but
Speaker 3: also by other key players Taiwan, Korea, Japan is a
Speaker 3: economic and potentially down the road, a security threat.
Speaker 2: And where is China now in its aims to become
Speaker 2: self sufficient? How would you grade the efforts so far?
Speaker 3: Well, the chip industry is large and complex, and you
Speaker 3: get a different answer depending on which corner of the
Speaker 3: hip industry.
Speaker 4: You look at. So there's different types of chips.
Speaker 3: There's processor chips, there's memory ships, and there's also different
Speaker 3: segments of the supply chain, the design process, the manufacturing itself,
Speaker 3: the production of the tool rules that are used to
Speaker 3: make chips, and you need to kind of look at
Speaker 3: each of these segments individually to really understand how China
Speaker 3: stacks up against other competitors. At a high level, I
Speaker 3: would say this, On the one hand, China's import of
Speaker 3: chips from the rest of the world, which means largely
Speaker 3: from Taiwan and Korea and their assembly facilities in Southeast Asia,
Speaker 3: generally hits a new high each year it's grown for
Speaker 3: most of the last decades. China is importing larger numbers
Speaker 3: at least larger dollar values, of chips from abroad. But
Speaker 3: China is also producing more at home as well, and
Speaker 3: so when it comes to lower range and mid range ships,
Speaker 3: China's building a lot of self sufficiency in the types
Speaker 3: of ships that go into cars and to refrigerators and
Speaker 3: industrial equipment, but the high end ships are getting even
Speaker 3: more important. Both the chips that go in phones and PCs,
Speaker 3: but also critically the processors and the memory ships that
Speaker 3: make AI possible in data centers, and for these cutting
Speaker 3: edge ships, China is still mostly importing the chips that
Speaker 3: its tech firms need to deploy advanced computing at scale.
Speaker 1: So how far behind is China behind global leaders in
Speaker 1: terms of being self sufficient?
Speaker 3: Well, it really depends again on what exactly one wants
Speaker 3: to measure. If you ask how far behind is China
Speaker 3: when it comes to designing smartphone processors, I would say
Speaker 3: it's hardly behind at all. The smartphone processors that Huawei's
Speaker 3: high silicon arm designed are by a lot of metrics,
Speaker 3: almost as good or just as good as what Apple
Speaker 3: or Qualcom would design, And for every different category of
Speaker 3: chip you get a different rough metric. But there's a
Speaker 3: couple places where China remains meaningfully behind, and it's been
Speaker 3: struggling to replicate the capabilities of industry leaders. And I'll
Speaker 3: flag two of them which are the most critical. The
Speaker 3: first is in the production of the machines that make chips.
Speaker 3: If you go inside a chip making facility in China today,
Speaker 3: to the complex machines, especially at the high end, are
Speaker 3: imported imported from Japan, from the Netherlands and from US firms,
Speaker 3: and China has been trying to build out its own
Speaker 3: suite of machines that can make chips. But this is
Speaker 3: extraordinarily complex equipment, and it's been struggling to make a
Speaker 3: lot of progress in replacing foreign chip making tools with
Speaker 3: domestic variants. And because of that, China's also struggled to
Speaker 3: ramp up cutting edge capacity to manufacture chips itself. And
Speaker 3: so you can look, for example, at the leading Chinese firm, SMIC,
Speaker 3: which is a chip maker, and compare it to the
Speaker 3: leading Taiwanese firm, which is the world's leader, t SMC,
Speaker 3: and they have similar manufacturing trajectories. And so you can
Speaker 3: look at what SMIC does this year and look at
Speaker 3: what TSMC did several years ago and measure the gap
Speaker 3: between them as a way of assessing where China stacks up.
Speaker 3: And here you find that SMICK right now in Shanghai
Speaker 3: has got a seven nanimeter process that it has just
Speaker 3: ramped at scale. It's producing ai chips, producing smartphone processors.
Speaker 3: But TSMC and Taiwan did that six years ago. So
Speaker 3: there's a five or six year gap between what Smith
Speaker 3: can produce at scale and what TSMC can produce a scale.
Speaker 3: So those are two segments where it's clear there is
Speaker 3: still a significant gap between China's capabilities and the leading
Speaker 3: Taiwanese US Japanese firms. But those are only two ways
Speaker 3: you could measure the gap. And in other segments, especially design,
Speaker 3: China's got very impressive capabilities, and I would argue it
Speaker 3: has been closing the gap in recent years.
Speaker 1: Maybe a technical point, but you mentioned that China kind
Speaker 1: of legs behind in the equipment that makes chips. So
Speaker 1: could you describe just a bit why these machines are
Speaker 1: so complex and why China is perhaps behind in it.
Speaker 1: Because when you think of China as a manufacturer, I
Speaker 1: mean the world's factory floor, it's really got the supply
Speaker 1: chains down. So what is it about the equipment that
Speaker 1: they're not able to do now?
Speaker 4: Yeah, it's a great question.
Speaker 3: When I first myself began studying the industry, it was
Speaker 3: kind of a puzzle, why could Chiny to make everything
Speaker 3: except for these tools? And the answer, it turns out,
Speaker 3: is that these are the most complex and precise tools
Speaker 3: humans have literally ever produced. So if you take, for example,
Speaker 3: the most complicated and expensive tool called an extreme ultraviolet
Speaker 3: photo lithography tool. These are tools produced by just a
Speaker 3: single company in the world, ASML of the Netherlands. They
Speaker 3: have hundreds of thousands of components, including the flattest mirrors
Speaker 3: humans have ever made, the most powerful lasers ever deployed
Speaker 3: in the commercial device, the capable of manufacturing at nanometer
Speaker 3: scale that's billionths of a meter with close to perfect accuracy.
Speaker 3: And that's just one of the tools you need to
Speaker 3: make chips. There are many others that are only scarcely
Speaker 3: less complex, and so when you start to look at
Speaker 3: these tools, you realize that there's nothing that comes close
Speaker 3: in terms of complexity and really any other industry. And
Speaker 3: so it's not a surprise that China hasn't caught up
Speaker 3: because most of these types of tools, there's just one
Speaker 3: or two companies in the entire world that can undertake
Speaker 3: this activity. And people have been ask why hasn't China
Speaker 3: cut up and the production of extreme multi violet photo
Speaker 3: lithography tools, Well, no one else has caught up either.
Speaker 3: There's just one company that can do it. Others have
Speaker 3: tried and failed because the engineering is so complicated and
Speaker 3: the business model is so hard to make work, and
Speaker 3: so it really is the fact that we're at the
Speaker 3: frontiers of engineering the frontiers of physics that explain why
Speaker 3: it's not easy for China to replicate this, even though
Speaker 3: China's a course, very good at manufacturing many other types
Speaker 3: of machinery.
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Speaker 2: to subscribe and chair Chris, Look, I read your book,
Speaker 2: But for the uninitiated who didn't read your book, can
Speaker 2: you explain why like this industry lends itself to monopolies
Speaker 2: like you mentioned that ASML pretty much like no one
Speaker 2: else makes these you know, lithic of methography on machines,
Speaker 2: and I think you said no one else makes these
Speaker 2: TSMC also manufactures over ninety percent of the advanced AI chips.
Speaker 2: Why is this the case? That there are monopolies formed
Speaker 2: in the supply chain.
Speaker 1: Yeah.
Speaker 3: I think there are two factors that lend the chip
Speaker 3: industry to these sort of oligopolistic rin monopolistic markets. The
Speaker 3: first is the capital expenditures are often tremendous. So for TSMC,
Speaker 3: every new factory they build is the world's most expensive
Speaker 3: factory because each factory is more expensive and breaks the
Speaker 3: prior record. We're talking twenty or twenty five billion dollars
Speaker 3: per FACI, and so this scope for a new startup
Speaker 3: firm to compete is approximately zero. That has really kept
Speaker 3: competition down because the number of players that could even
Speaker 3: conceive of taking on TSMC is very small, and the
Speaker 3: same dynamic is true in other segments of the supply chain.
Speaker 4: The dollar values are lower, but not much lower.
Speaker 3: Even if it's only three billion dollars for a new
Speaker 3: factory that makes the ultra purified a silicon wafers, for example,
Speaker 3: that's still a monumental capital expense for most companies, and
Speaker 3: it deters new entrants from even trying. The second factor
Speaker 3: is that the R and D is really extraordinarily highly specialized,
Speaker 3: and for a lot of the process steps and making chips,
Speaker 3: the only way you learn about how to undertake that
Speaker 3: specific step is by having already been in the industry
Speaker 3: and learning alongside your suppliers and your customers.
Speaker 4: And so, if you think of.
Speaker 3: The way the chip industry's R and D works, every year,
Speaker 3: the entire industry works together to bring a new process
Speaker 3: that's more capable than the prior years, often dramatically more
Speaker 3: capable in terms of the computing power it produces. And
Speaker 3: so you've got really tight alignment between the existing chemicals producers,
Speaker 3: existing machinery producers, existing chip manufacturers themselves to make sure
Speaker 3: that these processes arrive on time and that all the
Speaker 3: necessary components are together. There's a lot of shared learning
Speaker 3: inside of that small circle. But if you're an outsider
Speaker 3: who's never been part of that learning process, there's no
Speaker 3: way to do it on your own. You can't just
Speaker 3: test on your own very easily whether your new chemical
Speaker 3: will work with a existing extreme ultraviolet photogthography machine. If
Speaker 3: you want to buy one of those machines yourself, it
Speaker 3: costs you one hundred and fifty million dollars. And moreover,
Speaker 3: companies aren't going to let you run a lot of
Speaker 3: tests in their fab because they just spend twenty billion
Speaker 3: dollars building a fab they.
Speaker 4: Need to run that at full capacity.
Speaker 3: So it's really hard to break in from an R
Speaker 3: and D perspective, And when you combine that with the
Speaker 3: capital intensivity, it means that many of the firms that
Speaker 3: have key roles in the supply chain have had them
Speaker 3: for the last decade or in some cases the last
Speaker 3: three or four decades, and that has kept competition down
Speaker 3: in the hip industry.
Speaker 1: So you wrote your book in twenty twenty two, that
Speaker 1: was under the Biden administration. We're now under the Trump
Speaker 1: administration two point zero. What are the big differences you've
Speaker 1: seen in how both administrations have handled this issue? Are
Speaker 1: there some similarities that come up, but also some of
Speaker 1: the big big differences, because of course under Biden we
Speaker 1: had the Chips IRA Act, But under both administrations it
Speaker 1: seems like a bipart is an issue.
Speaker 3: Yeah, I think it is, and I think that the
Speaker 3: similarities are to me more substantial than the differences. So first,
Speaker 3: there's a focus on domestic manufacturing in the United States,
Speaker 3: an effort to reduce reliance both on the lower end
Speaker 3: ship produced in China, but also dependence on high end
Speaker 3: chips produced in Taiwan the Chips Act. Although Biden claimed
Speaker 3: credit for it, it actually emerged under the trumpetministration. That was
Speaker 3: when the Congress first started discussing the bill, and people
Speaker 3: like Secretary of State Mike Pompeo played a major role
Speaker 3: in some of the early investments that the Taiwanese from
Speaker 3: TSMC announced the United States. So there's been a through
Speaker 3: line of support for manufacturing chips in the United States
Speaker 3: that has been bipartisan.
Speaker 4: I think that's a point of continuity.
Speaker 3: I think the second point in continuity has been a desire
Speaker 3: to stop China from accessing the most advanced ship making technologies.
Speaker 3: The export controls on ASML tools, for example, started under
Speaker 3: the first administration, were expanded under Biden, and we'll see
Speaker 3: they could well be expanded further at some point under
Speaker 3: the current TRUP administration. So that's also a through line.
Speaker 3: And I think the third is concern about Chinese industrial
Speaker 3: subsidies in the chip industry and implications for trade policy.
Speaker 3: The Trumpdministration in round one imposed higher tariffs and Chinese
Speaker 3: ships imported the United States. Biden expanded those tariffs, and
Speaker 3: of course President Trump right now is considering what he's
Speaker 3: going to do.
Speaker 4: On chip tariffs.
Speaker 3: But there's widespread expectation that there will be another round
Speaker 3: of chip tariffs coming at some point later this year,
Speaker 3: and so that's also a through line of concern about
Speaker 3: Chinese subsidies. I think there are differences. Obviously, you know,
Speaker 3: we're going to see where exactly Trump's chip tariffs land,
Speaker 3: and they might end up being much broader on a
Speaker 3: whole range of different countries, not just China focused.
Speaker 4: If so, that would be a difference.
Speaker 3: But I think when you zoom out, you actually end
Speaker 3: up seeing a pheromounta continuity, despite some nuances that are different.
Speaker 1: Chris.
Speaker 2: President Trump seems to be dialing back on some of
Speaker 2: the policies now. Under the previous administration, they banned the
Speaker 2: export of high end in Nvidia chips into China, but
Speaker 2: Donald Trump recently suggested that they could allow the export
Speaker 2: of certain Age twenty chips back into the country. What
Speaker 2: does this mean, Well, I.
Speaker 3: Think it's too soon to have a confident judgment. I
Speaker 3: would say when the Biden administration left office, in Videau's
Speaker 3: H twenty were still legal to sell China. Then in
Speaker 3: month four of the trumpdministration, the President banned the export
Speaker 3: of Age twenty chips, and now there's suggestions they might
Speaker 3: be allowed again. As of today, we're still at a
Speaker 3: tighter restrictive policy than when the Biden administration ended.
Speaker 4: When the Trump administration started.
Speaker 3: We'll see exactly how this plays out, but I think
Speaker 3: it speaks again to a continuity, which is that both
Speaker 3: Biden and Trump feel like they need to balance action
Speaker 3: on chip issues with the broader.
Speaker 4: US China relationship.
Speaker 3: So into the Biden administration, it was regularly the case
Speaker 3: that the Commerce Department would have a new regulation ready
Speaker 3: that would limit this or that aspect of the chip trade,
Speaker 3: and then it would wait for three months or six
Speaker 3: months or nine months while the State Department found what
Speaker 3: they thought was a quote unquote good window in which
Speaker 3: to roll out a new restriction that the Chinese wouldn't like.
Speaker 3: And cour we're seeing the trumpministration as something similar.
Speaker 4: Right now.
Speaker 3: The President wants to negotiate a trade deal with China.
Speaker 3: Their White House is trying to get rare earth magnets
Speaker 3: flowing again, and so there's concern in the White House
Speaker 3: that if they were to take punitive steps on chips
Speaker 3: or on chip making tools, that this would disrupt the
Speaker 3: US China relationship. One can debate whether that's the right approach,
Speaker 3: but I think it is a striking similarity to a
Speaker 3: lot of the delays and the kind of half hearted
Speaker 3: decision making that you saw in the Biden administration when
Speaker 3: it came to whether or not to restrict certain types
Speaker 3: of tools or chips.
Speaker 1: So, after the Trump administration recently allowed the export of
Speaker 1: H twenty chips, very closely afterwards, China called in Nvidia
Speaker 1: staff to have a discussion with them behind that is
Speaker 1: at least partly the Trump administration suggesting to track these chips.
Speaker 1: And this is all happening within the context of a
Speaker 1: trade war and trade negotiations. So one of the questions
Speaker 1: we've been thinking about is, you know, why are the
Speaker 1: US and China right now fighting over what are essentially
Speaker 1: kind of third rate chips. I mean, these aren't like
Speaker 1: the most advanced chips out there. As John ass like,
Speaker 1: how should we read this kind of back and forth.
Speaker 3: Well, I wouldn't say it's right to consider the H
Speaker 3: twenties third rate chips. I think if you're a Chinese
Speaker 3: tech company, these are first rate. These are the US
Speaker 3: you can get at scale can you smuggle in small
Speaker 3: volumes of the higher quality H one hundred yes. Can
Speaker 3: you access small volumes of Huawei ASSN chips Yes? But
Speaker 3: can you access either by the tens or hundreds of thousands, No,
Speaker 3: both because Huawei can't produce that efficient scale and because
Speaker 3: smuggling you can do a medium scale, but not at
Speaker 3: the scale you need. So you know, judging by the
Speaker 3: purchasing patterns of byte Edance and Ali Baba Intense, these
Speaker 3: are great chips, which is why they really want to
Speaker 3: spend hundreds of millions or billions of.
Speaker 4: Dollars on them.
Speaker 3: And I think that that is why this is such
Speaker 3: a critical issue, both for the US and for Chinese
Speaker 3: tech firms.
Speaker 4: If they really were third rate, we wouldn't be talking
Speaker 4: about them.
Speaker 2: Chris like and Vidia CEO Jensen Huang was very critical
Speaker 2: about the US ban on chips to China. He said
Speaker 2: it hurts US businesses, and he also insinuated that it's
Speaker 2: going to accelerate China's domestic semiconductive development. Do you agree
Speaker 2: with him? Do you think these mergers are in some
Speaker 2: way self defeating?
Speaker 3: Well, I think there's no doubt that in the short
Speaker 3: run it reduces in video sales. That's certainly clear. So
Speaker 3: does it hurt that business? I think the answer is yes.
Speaker 3: One of the dilemmas that any sort of export control
Speaker 3: regime faces is that if you restrict the sale of
Speaker 3: a certain tool, you hurt the tool makers, but you
Speaker 3: benefit the domestic companies that use that tool, who have
Speaker 3: less foreign competition. So, for example, if you restrict the
Speaker 3: sale of chip making tools, it's bad for the companies
Speaker 3: that make chip making tools, but it's actually better for
Speaker 3: chip makers in the West, including in Taiwan and South Korea,
Speaker 3: because they don't have strong competition in China at the
Speaker 3: cutting edge. And if you thought about the counterfactuals pose
Speaker 3: the Trudministration had not leaned on the Netherlands in twenty
Speaker 3: nineteen and said the Netherlands don't sell UV tools to China,
Speaker 3: China would be operating today a fleet of many UV tools,
Speaker 3: possibly the second largest behind Taiwan in the world, and
Speaker 3: that'd be a totally different landscape for the world's chip makers.
Speaker 3: It'd be better for sellers of chip maker tools, but
Speaker 3: worse for chip makers. And we're in a similar dynamic
Speaker 3: right now with chips. If you sell more chips it's
Speaker 3: good for chip makers, but it's probably worse for the
Speaker 3: companies that use chips, which are the big tech companies,
Speaker 3: cloud computing companies.
Speaker 4: And AI labs. Why is it that.
Speaker 3: We haven't seen large deployments of AI chips buy Chinese
Speaker 3: firms outside of China's because they can't produce enough, because
Speaker 3: they haven't been able to access large volumes of the
Speaker 3: high end tools that foreign firms have. And so I
Speaker 3: think that the trade off that the US has to
Speaker 3: navigate is, Yes, it's true that it's worse for your
Speaker 3: chip makers if you don't allow sales to China, but
Speaker 3: it's also probably better for your tech firms that use
Speaker 3: those ships because they won't have strong Chinese competitors or
Speaker 3: as strong Chinese competitors, and that's a trade off. I
Speaker 3: think there's no doubt about that. I think the other
Speaker 3: question is is US policy accelerating China's technological development?
Speaker 4: And here I look for empirical data points.
Speaker 3: We know that in twenty fourteen, China launched its first
Speaker 3: national level Integrated Circuit Investment Fund.
Speaker 4: It's been re upped now twice.
Speaker 3: Since then at the national level, and each province has
Speaker 3: If you ask yourself is it clear from the data,
Speaker 3: and the data's kind of messy, but is it clear
Speaker 3: that there's been a major increase in Chinese government subsidies
Speaker 3: towards the ship industry after export controls? It's not really
Speaker 3: clear because it started in twenty fourteen and it's been,
Speaker 3: as far as we can tell, roughly steady since then.
Speaker 3: If you ask, has there been a noticeable increase in
Speaker 3: the Chinese government pushing companies to buy domestic chips after
Speaker 3: export controls?
Speaker 4: I don't think it's clear.
Speaker 3: I think you've seen from twenty fourteen to present a
Speaker 3: steady push to buy a local And so if you ask,
Speaker 3: you know, what's the evidence that there's been a major
Speaker 3: uptick in self sufficiency, either support or pressure from the
Speaker 3: Chinese government.
Speaker 4: Around export controls? It's hard to find.
Speaker 3: Now, could you argue that domestic Chinese tech firms before
Speaker 3: export controls would have said, of course, we're going to
Speaker 3: test local products. They would have bought local products and
Speaker 3: put them in the closet and instead relied on imported products.
Speaker 3: And now if they can't import products, they've got no
Speaker 3: choice but to take the domestic products. Seriously, I think
Speaker 3: you could argue that and perhaps that's happening to some degree,
Speaker 3: but I would say, again, the evidence for that is
Speaker 3: not super robust. And so if you're just trying to
Speaker 3: be empirical and say, what's been the evident changed in
Speaker 3: Chinese policy or the approach of Chinese tech firms or
Speaker 3: export controls, I would say it looks pretty continuous over time.
Speaker 3: In other words, export controls didn't obviously have a major impact.
Speaker 1: Are the expert restrictions enough though? Are there other things
Speaker 1: that you see the administration moving towards well?
Speaker 3: I think a lot depends on the broader US China relationship.
Speaker 3: There are certainly voices in the administration that want to
Speaker 3: do a lot more on the restrictive side. There are
Speaker 3: also voices administration that want to do a lot more
Speaker 3: on the promoting US technological advances side. But of course
Speaker 3: the administration has many priorities, and it's hard to see
Speaker 3: which is going to win out. I think in terms
Speaker 3: of the restrictions, it's very clear that the White House
Speaker 3: is going to try to balance the Hawk's desire for
Speaker 3: restrictions with the broader US channel relationship. And so as
Speaker 3: we approach what many people think is going to be
Speaker 3: a summit, this fall. I think history would suggest you
Speaker 3: shouldn't expect freemen restrictions and then run up to a
Speaker 3: summit on the promoting technological development side. I think there
Speaker 3: certainly are a lot of voices administration that want to
Speaker 3: see more money flowing to new firms with disruptive technology.
Speaker 3: But there's also a desire for pretty dramatic budget cuts
Speaker 3: to science and technology in the USA, and that cuts
Speaker 3: in the opposite direction. So how exactly these political priorities
Speaker 3: balance out is hard to predict with any certainty.
Speaker 1: Just a quick follow up on the point you made
Speaker 1: about this balance or dichotomy between US producers and exporters
Speaker 1: of chips and tech firms, how do you see the
Speaker 1: Trump administration to serve the next few years navigating that?
Speaker 1: Does it mean that they need to find other ways
Speaker 1: of supporting chip makers, for example, if they're going to
Speaker 1: be closing the route to China.
Speaker 3: Well, I don't think any administration has done a great
Speaker 3: answer to that question. I mean, China's obviously the second
Speaker 3: large economy in the world, and you know, twenty percent
Speaker 3: of GDP is a really large market to not be
Speaker 3: able to serve. I think the US has tried to
Speaker 3: argue to tech firms. Look, you can't serve this twenty percent.
Speaker 3: You have the rest of the eighty percent you can serve.
Speaker 3: And I think tech companies are inclined to serve that
Speaker 3: other eighty percent anyway to a large degree.
Speaker 4: But is it right that companies.
Speaker 3: Would be more profitable have high revenue if they could
Speaker 3: sell to the entire one hundred percent of GDP?
Speaker 4: For sure, no doubt about that, Chris.
Speaker 2: I'd love to talk about TSMC now. The company became
Speaker 2: the first Asian stock to reach a market capitalization of
Speaker 2: one trillion dollars. That was just you know recently. Can
Speaker 2: anyone challenge TSMC's dominance in this space.
Speaker 4: Well, not anytime soon.
Speaker 3: I don't think TSMC's as you mentioned, of the outset
Speaker 3: ninety percent or so market share and high end chips
Speaker 3: for many of the key designers of chips, TSMC produces
Speaker 3: all of their high end chips. That's true for Apple,
Speaker 3: that's true for Nvidia, that's true right now for Qualcomm's
Speaker 3: high end chips, for AMD. It's this absolutely central producer
Speaker 3: and so deeply internit into the rest of the tech sector,
Speaker 3: into how Silicon Valley functions. It's just very hard to
Speaker 3: see it being displaced, and rather than being displaced, I
Speaker 3: think it's more plausible that we end up in a
Speaker 3: situation in ten years where it's really the only player
Speaker 3: left stand at the cutting edge because it's two main competitors,
Speaker 3: Intel and Samsung are both facing real challenges to their
Speaker 3: business of manufacturing high end processor chips.
Speaker 1: How did we get here? Like, how did TSMCA become
Speaker 1: this giant?
Speaker 4: Yeah, it's an extraordinary story.
Speaker 3: I mean it really goes back to one individual and
Speaker 3: a unique business model. So Morris Chang, the founder of TSMC,
Speaker 3: spent most of his early career in the United States,
Speaker 3: but was passed over for the CEO job at Texas
Speaker 3: Instruments and was approached by the Taiwanese government in the
Speaker 3: mid eighties, where he made a number of professional contacts
Speaker 3: and they said, would you like to start a business
Speaker 3: in Taiwan And he said, yes, but only if I
Speaker 3: can try a new business model, which was called the
Speaker 3: foundry business model. The intuition was that if you didn't
Speaker 3: design any chips, you only manufactured them, you could become
Speaker 3: a manufacturing partner for multiple different chip design companies. Therefore
Speaker 3: you could build up scale drive down costs but also
Speaker 3: improve your manufacturing process because you were gathering data and
Speaker 3: know how across a larger number of chips. And that
Speaker 3: business model was radical at the time. Most people thought
Speaker 3: it would fail. At the time, Morris Chang went to
Speaker 3: the leadership at Intel and other titans of the chip
Speaker 3: industry for investment. Most of them turned him down, but
Speaker 3: it turned out it was the right business model. And
Speaker 3: so today TSMC is both the most advanced and the
Speaker 3: largest producer of processor chips, and those dynamics are deeply
Speaker 3: interlink because it has more data about chip manufacturing, so
Speaker 3: it can hone its production processes to a much greater
Speaker 3: degree than its competitors can.
Speaker 2: And how important is Morris Chang to TSMC now? The
Speaker 2: reason why I'm saying is that he is ninety four
Speaker 2: years old. There's going to be a time when TSMC
Speaker 2: lives without Morris Chang. Will this interrupt the business at all?
Speaker 2: Do you think?
Speaker 1: Well?
Speaker 3: I think TSMC is now and it's a second leader
Speaker 3: post Morris Cheng, so it's had multiple leadership transitions. Now,
Speaker 3: of course, it's still a company that has in the
Speaker 3: past been profoundly influenced by the sets of principles. The
Speaker 3: operating model the culture if you will, that he set up.
Speaker 3: But I think it's operated independently of his leadership since
Speaker 3: he's been retired now for some time. So do I
Speaker 3: think it can continue, Yes, but what's continuing as an
Speaker 3: organization that he set up with the culture that he
Speaker 3: established in a business model that he also deserves credit for,
Speaker 3: and for now it looks like both that culture and
Speaker 3: that business model are working extraordinarily well.
Speaker 1: We've touched on some regions outside of Taiwan and China
Speaker 1: in the US, you know, there's also Japan, South Korea.
Speaker 1: Are there ways that countries can kind of take advantage
Speaker 1: of the Chip War? Do you see scope for new alliances,
Speaker 1: potentially jee political alliances as a result of this.
Speaker 3: I think if you ask most other countries, they will
Speaker 3: describe themselves as having been taken advantage of.
Speaker 4: In the context of the Chip.
Speaker 3: War, the metaphor of when elephants fight, the grass gets trampled,
Speaker 3: that type of thing is often cited.
Speaker 4: I think there are those aspects of both.
Speaker 3: Certainly, it's the case that for medium sized countries Korea,
Speaker 3: Southeast Asian countries, India, they've got to be responsive to
Speaker 3: the decisions that both China and the US are making
Speaker 3: You can't take either one on head on, either from
Speaker 3: a business perspective or from a geopolitical perspective. But I
Speaker 3: think also there's a lot of companies that have realized
Speaker 3: the industry is going to shift a lot. Already has
Speaker 3: shifted a bit, and it's going to shift a lot
Speaker 3: more over the coming years, and that will open up opportunities.
Speaker 3: I think India is an interesting example. India until recently
Speaker 3: played an absolutely marginal role in electronics manufacturing, including in
Speaker 3: ship assembly and chip production. But India is looking at
Speaker 3: the desire for diversifying supply chains away from China and
Speaker 3: has attracted some big US companies as well as some
Speaker 3: big Taiwanese companies to set up manufacturing facilities in India
Speaker 3: as part of that diversification play. So there's an example
Speaker 3: of a country trying to capitalize on the US China rivalry.
Speaker 3: But for every example I could give you of a
Speaker 3: country capitalizing and give you another example on the opposite
Speaker 3: side of a country feeling it was getting squeezed between
Speaker 3: two larger powers in a struggle over which it had
Speaker 3: no control.
Speaker 1: How are they getting squeezed? I mean, what does that
Speaker 1: look like.
Speaker 3: Well, I'll give you an example with Korea. So you know,
Speaker 3: Korea is getting squeezed in a couple of different ways.
Speaker 3: On the one hand, Korean firms have to follow US
Speaker 3: export controls that impact China because every advanced Korean chip
Speaker 3: is made partly with tools that are imported from the
Speaker 3: United States, and therefore the US claims export control jurisdiction
Speaker 3: on basically every ship made in Korea, basically every shipman globally.
Speaker 3: And so for both Samsung and Skhiinex, the two leading
Speaker 3: Korean shipmakers, they've had real impacts on both the facilities
Speaker 3: they currently operate in China, which can't upgrade with the
Speaker 3: types of tools they would like to because those tools
Speaker 3: are now illegal to ship to China. But also certain
Speaker 3: types of memory chips that are used in AI servers
Speaker 3: they now can't sell to China, and so that's locked
Speaker 3: them out of some potential revenue. It's just like in
Speaker 3: Nvidio has been locked out of some potential revenue in China.
Speaker 3: So that's how the US has impacted Korean firms. On
Speaker 3: the flip side, if you ask yourself, who's the one
Speaker 3: of the key potential losers from China self efficiency drive.
Speaker 4: Well, it's Korean firms.
Speaker 3: Korean firms e support large volumes of chips to China,
Speaker 3: especially in the memory category, and that's where Chinese firms
Speaker 3: like CXMT and YMTC have made really impressive strides at
Speaker 3: catching up technologically and displacing Korean firms from at least
Speaker 3: the low and mid range of the memory markets. You've
Speaker 3: seen already really substantial price impacts in the memory market,
Speaker 3: pushing down margins for Samsung and eskhaiinix because of this
Speaker 3: increased competition from Chinese firms. And so that's how Chinese
Speaker 3: industrial policy is also squeezing companies that previously had access
Speaker 3: to the Chinese market in theory still have access, but
Speaker 3: in reality are being displaced by Chinese firms.
Speaker 1: How big of a part of the trade talks do
Speaker 1: you think this issue is? Because we just had, you know,
Speaker 1: the reciprocal tariffs announced on much of the world, we've
Speaker 1: also seen more attempts by the Trump administration to kind
Speaker 1: of target China's manufacturing kind of throughout the supply chain,
Speaker 1: and also this idea of secondary tariffs coming up as
Speaker 1: well as well as tariffs on transshipt goods, which seems
Speaker 1: to be. They haven't said China in relation to that,
Speaker 1: but we can guess it's probably China. So how do
Speaker 1: you think that's coming up in trade talks? And do
Speaker 1: you think tariffs maybe act counter to like it disincentivizes
Speaker 1: countries in a way from targeting this, You.
Speaker 3: Know, I think it's it's really complicated based on which
Speaker 3: country one is talking about, and because the tariffs are
Speaker 3: still all in flux, it's difficult to draw I think,
Speaker 3: confiding conclusions. We still don't know, for example, what the
Speaker 3: US is going to do on chip specific tariffs.
Speaker 4: Right now, there are basically no.
Speaker 3: Tariffs on ships, with the exception of some old tariffs
Speaker 3: on Chinese ships. But President Trump as repeatedly says there
Speaker 3: will be. And so where exactly that lands we don't
Speaker 3: yet know. Is it going to be only on China,
Speaker 3: It's going to be on the entire world, is going
Speaker 3: to be ten percent, fifteen percent, fifty percent, who knows?
Speaker 3: And those numbers, those details really really matter. And so
Speaker 3: I think we're still as of early August in two
Speaker 3: studtel territory just because some of the key tariff decisions
Speaker 3: have yet.
Speaker 4: To be made.
Speaker 3: One example, right now, we've got US tariffs on Taiwan
Speaker 3: that have been announced. Those could change, but ships aren't
Speaker 3: part of that because there's a separate process happening in
Speaker 3: the US, And of course, the most important decision that
Speaker 3: the US will make visa the trade of Taiwan is
Speaker 3: the potential tariff on ships being discussed. So I think
Speaker 3: we are in two studitel territory. I think the one
Speaker 3: other dam I that's interesting though, I think to me
Speaker 3: is that when it comes to the question of Chinese
Speaker 3: content in other countries' supply chains, there's an interesting alignment
Speaker 3: of interest between what the trumpministration says that it wants
Speaker 3: and what businesses in many third countries want, which is
Speaker 3: they want more value produced domestically rather than by Chinese companies.
Speaker 3: So you go to Vietnam, for example, and none of
Speaker 3: the business leaders in Vietnam want to be transhipping goods
Speaker 3: from China to the US. They want to be making
Speaker 3: the goods and capturing the value themselves.
Speaker 4: Now do they know how to do it? Not always?
Speaker 3: Is it easy to do not necessarily, But there's actually
Speaker 3: an interesting alignment between what Trump Minstration vis will say
Speaker 3: they want and what the Vietnamese business class would like
Speaker 3: to be doing. And so whether or not the Trump
Speaker 3: ministration has the diplomatic finesse to actually make that potential
Speaker 3: alignment into a reality, I'm not sure, but I think
Speaker 3: it is true to note that it's not only the
Speaker 3: trumpministration that has been looking nervously at the expansion of
Speaker 3: Chinese companies market share across the region and perceiving as
Speaker 3: much throughouts Upper Unity.
Speaker 2: Chris, I know you get this question all the time,
Speaker 2: and I read the book and I think I know
Speaker 2: what the answer is.
Speaker 4: But a lot of people.
Speaker 2: Are probably thinking, you know, if China, for example, does
Speaker 2: take over Taiwan and none of the factories of TSMC
Speaker 2: are damaged, does that mean that China dominates the semiconductor
Speaker 2: manufacturing space.
Speaker 3: I think the first thing to note is that, you know,
Speaker 3: the factories themselves are only a small part of what
Speaker 3: you need to actually make the advanced ships. You need
Speaker 3: the people, critical input, you need materials flowing from Japan.
Speaker 4: You need the.
Speaker 3: Spare parts and software updates flowing from the US and
Speaker 3: the Netherlands and elsewhere. So you've got to think about
Speaker 3: the entire ecosystem. But in that scenario where you've got
Speaker 3: a takeover without any disruption to the chip supply chain.
Speaker 3: It would be an extraordinary asset to China. Right now,
Speaker 3: the US can tell TSMC don't sell your most advanced
Speaker 3: ships for phones or for PCs or for AI to
Speaker 3: certain Chinese firms, which means sell them to US firms
Speaker 3: or Korean or European firms, and Chinese firms are a disadvantage. Well,
Speaker 3: that would flip if China were to take control over Taiwan.
Speaker 4: It could say.
Speaker 3: TSMC provide your most events capabilities to Huawei and none
Speaker 3: to Apple, or your most Huawei for GPUs and none
Speaker 3: to in Nvidia, And that computing advantage I think would
Speaker 3: be fundamentally important, especially as AI relies more and more
Speaker 3: on vast volumes of computing power.
Speaker 1: So we've talked about the US export controls. One thing
Speaker 1: we haven't talked about is how Chinese companies are avoiding them.
Speaker 1: So somehow there are still factories in China and in
Speaker 1: Southeast Asia that have chips that are not supposed to
Speaker 1: be there from the US. How are they able to
Speaker 1: do this?
Speaker 3: Yeah, you know, I think that the key with assessing
Speaker 3: chip export controls is that if you want a high
Speaker 3: end AI data center, you need tens of thousands of chips,
Speaker 3: so we shouldn't ignore when there's one or five or ten,
Speaker 3: but they're not strategically relevant. The key question is how
Speaker 3: can you get access to tens of thousands of cutting
Speaker 3: EDGI chips? And the best evidence we have is that
Speaker 3: this is mostly not happening by smuggling in.
Speaker 4: Tens of thousands.
Speaker 3: It's mostly happening by accessing data centers abroad in places
Speaker 3: like Malaysia and Thailand and perhaps elsewhere in Southeast Asia
Speaker 3: that can legally buy.
Speaker 4: Large volunes of chips.
Speaker 3: So if I were the US government think about this problem,
Speaker 3: I would say, of course I want to crack down
Speaker 3: on the ten ships here, ten ships there, But you
Speaker 3: really want to find are the ten thousand ships and
Speaker 3: where they're flowing. And it isn't obvious that we have
Speaker 3: chips flowing by the ten thousand increments into Chinese data centers,
Speaker 3: but it is obvious that there are chips flowing by
Speaker 3: increments that large and larger to countries in Southeast Asia
Speaker 3: that don't have domestic demand for that volume of chips.
Speaker 3: And so I think when you think of smuggling, you
Speaker 3: should think, yes, some people putting an extra chip in
Speaker 3: their suitcase and flying it across the border. But that's
Speaker 3: probably the less important challenge than the question of how
Speaker 3: can you confirm that a data center built in a
Speaker 3: third country isn't providing the compute to be in cloud
Speaker 3: computing services to a Chinese customer you are hoping to
Speaker 3: cut off. And that's part of the debate that is
Speaker 3: a bit more technologically complex and therefore not discussed, but
Speaker 3: probably more significant in the long run.
Speaker 1: It makes you such interesting stories though. You know, the
Speaker 1: men with suitcases full of chips boarding your next axetally happening.
Speaker 2: So the students caught in Dubai with chips.
Speaker 3: And that's why you know the US is you mentioned
Speaker 3: the outset Congress is considering legislation to require location verification
Speaker 3: for AI data center chips precisely with that in mind.
Speaker 4: You know right now there's a single.
Speaker 3: Sport Control verification official posted by the US government and
Speaker 3: all of Southeast Asia, and that single individual is expected
Speaker 3: to track the flow of thousands of chips.
Speaker 4: It's just a hopeless task.
Speaker 3: And so you need if you want to actually address
Speaker 3: the problem of physical smuggling, you need some sort of
Speaker 3: technology to enable it.
Speaker 1: That's fascinating. I mean that person must be traveling quite.
Speaker 4: A bit or busy person. Yes, hard chat.
Speaker 1: So one thing we haven't talked about is rare earths.
Speaker 1: They're crucial to semiconductors and AI data centers, and of
Speaker 1: course it's an area that China dominates as well. So
Speaker 1: I wonder can the US hope to become or can
Speaker 1: any country become a leader in chip semiconductors without having
Speaker 1: a rare earth's monopoly or at least having a larger
Speaker 1: share of the world pie of rare earths.
Speaker 3: Yeah, I think it depends a lot on which specific
Speaker 3: mineral you're looking at, So that rare earth magnets are
Speaker 3: mostly used in chip making equipment, not chips themselves.
Speaker 4: There's a bunch of other materials.
Speaker 3: Tungsten, gallium, germanium used in the chip making process, which
Speaker 3: are also largely processed in China. For a lot of these,
Speaker 3: what you find is that the chip industries demand is
Speaker 3: a small share of overall demand. So for rare earth
Speaker 3: magnets this is the case. There's a lot more demand
Speaker 3: that goes to the auto industry than the chip industry.
Speaker 3: My sense is that most of the companies in the
Speaker 3: chip industry that used rare earth magnets have than a
Speaker 3: fair amount of stockpiling in contrast to the auto industry,
Speaker 3: and so for the magnet side, I think the industry
Speaker 3: is better insulated than the auto industry certainly was in
Speaker 3: response to China's shut offs. But for other materials like
Speaker 3: gallium germanium, it's less clear. There's not good data what
Speaker 3: exactly the disruption might be if China were to impose
Speaker 3: comparable restrictions on gallium and germanium, and it hasn't really
Speaker 3: yet in terms of the severity. It's threatened restrictions, but
Speaker 3: they haven't been biting yet, and so I don't know,
Speaker 3: and I don't really think the Chinese government's sure if
Speaker 3: it were to try to do the same thing for
Speaker 3: these other materials, how impactful or not would it be.
Speaker 3: The key question for all these is first how easy
Speaker 3: is it or hard is it to do without a
Speaker 3: given material? And second how quickly could you bring online
Speaker 3: alternative supply and sort of like for rare er it's
Speaker 3: not actually rare. They're just polluting and capital intensive to produce,
Speaker 3: and that's why they've concentrated in China. The same with
Speaker 3: gallium and Germanium. It's not geology that dictates that these
Speaker 3: are in China, it's the economics of the mining and
Speaker 3: processing industry, which means that these are probably much less
Speaker 3: solid monopolies. If you will, then is the Netherlands monopoly
Speaker 3: on UV lithography tools.
Speaker 2: So Chris. Earlier this year, China had its Deep Seek moment.
Speaker 2: It came out with this LLM that really challenged the
Speaker 2: status quo. How impactful was this too, you know, like
Speaker 2: the whole AI system, I.
Speaker 4: Think it was very impactful.
Speaker 3: It represented a shift in the axes of progress in AI.
Speaker 4: So for the most period.
Speaker 3: From chatchipt up until the start of this year, advances
Speaker 3: in AI were largely driven by what's called pre training,
Speaker 3: so training models on larger and larger quantities of data.
Speaker 3: And Deep Seek as well as the one reasoning model
Speaker 3: from open AI that was released in twenty twenty four,
Speaker 3: represented a shift towards reasoning after a question is asked.
Speaker 3: So rather than training your model in large quantities of data,
Speaker 3: you still do grint and large, but you're you're focusing
Speaker 3: more on spending your compute resources on the thinking about
Speaker 3: the answer. And this really matters because it has very
Speaker 3: different implications for how you use compute and where you
Speaker 3: position your compute. So deep Seek they predominantly open source
Speaker 3: their model, which means that most queries to deep seak
Speaker 3: models take place not in deep seak servers but on
Speaker 3: the devices that deep Seak models are run on, so
Speaker 3: you can download their model computer use in your phone,
Speaker 3: and this has led to its rapid spread both in
Speaker 3: China but also globally. But it also poses an interesting
Speaker 3: business model question. If everyone's downloading your model, they don't
Speaker 3: need you after they downloaded the model, and the model
Speaker 3: downloads for free, and so you've now had a number
Speaker 3: of Chinese companies Alibaba's quin Models series for example, and
Speaker 3: others that have been very permissive in terms of open
Speaker 3: sourcing and downloading, and as a result haven't built businesses
Speaker 3: despite having really massive distribution of their models. The US firms,
Speaker 3: with the exception of Meta, have taken an opposite approach.
Speaker 3: They've kept mostly closed source, which means that customers need
Speaker 3: to call back to open AI servers every time you
Speaker 3: want check sipet to ask you a question, and so
Speaker 3: there's very different business models system from this. But there's
Speaker 3: also implications for the types of computing controls that we've
Speaker 3: been discussing earlier. The initial computing controls were intending or
Speaker 3: hoping they could slow the pre training process in China,
Speaker 3: but then everyone's pre training process slowed for technological reasons,
Speaker 3: and so instead what we've seen is that the controls
Speaker 3: have actually been the most impactful on the ability of
Speaker 3: Chinese firms to build out their own inference infrastructure. So
Speaker 3: you actually saw after deep Seek released its model It's
Speaker 3: our one model in January, they had to cut off
Speaker 3: access to using their servers to run their model because
Speaker 3: they didn't have enough servers to meet the demand of
Speaker 3: the entire world. And so they've actually been pushed in
Speaker 3: the direction of open sourcing more, I think by the controls,
Speaker 3: which had a contradictory and interesting effect of encouraging use
Speaker 3: because it is open source, but also undermining the long
Speaker 3: term business viability because right now it's unclear what the
Speaker 3: funding mechanism will be for either deep Seek or the
Speaker 3: other open source models in China in the long run.
Speaker 1: Fascating discussions. Thanks so much for joining us today, Chris.
Speaker 4: Well, thank you for having me.
Speaker 1: You've been listening to Asia Centric from Bloomberg Intelligence and
Speaker 1: Kai Di Dimitriva on Hong.
Speaker 2: Kong, also in Hong Kong. You can listen to all
Speaker 2: our episodes on Apple Podcasts, Spotify or review listen and
Speaker 2: this podcast was also produced and edited by Clara Chen.
Speaker 2: Thanks for listening.