WEBVTT - This Is What the US Just Did to China on Semiconductors 0:00:09.960 --> 0:00:14.080 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.160 --> 0:00:17.439 I'm Geo Wist and I'm Tracy Alloway. Tracy, do you 0:00:17.440 --> 0:00:19.680 ever want to write a book? One day? Yes? You 0:00:19.720 --> 0:00:22.360 know this, Joe. You know this because I try to 0:00:22.360 --> 0:00:24.079 make you write a book with me all the time. 0:00:24.200 --> 0:00:26.000 I don't want to write a book. It seems like 0:00:26.040 --> 0:00:28.120 a lot of work. No, it would be fun. Well, 0:00:28.560 --> 0:00:30.480 first of all, it is a lot of work. I 0:00:30.480 --> 0:00:33.199 wrote two book proposals last year and it nearly killed me. 0:00:33.720 --> 0:00:36.080 That's a very long story for another time. But I 0:00:36.080 --> 0:00:38.800 think it would be fun. We should do it. All 0:00:38.880 --> 0:00:41.479 thoughts the book come on. Maybe I could see an 0:00:41.479 --> 0:00:43.560 Odd Lots book. But here's what would worry me about 0:00:43.600 --> 0:00:46.000 writing a book, which is you, we could have a 0:00:46.040 --> 0:00:49.960 book idea today, in two maybe we get a deal 0:00:50.200 --> 0:00:53.360 sometime in and then they're like it's going to come 0:00:53.360 --> 0:00:56.960 out and fall six, congrats like that. It's like, I 0:00:56.960 --> 0:00:59.880 don't have time. It's just too long. And then here's 0:00:59.920 --> 0:01:01.680 the thing that I would worry about is that by 0:01:01.680 --> 0:01:05.560 the time like August two comes out, it's like maybe 0:01:05.600 --> 0:01:07.520 no one at all cares about what we want to 0:01:07.560 --> 0:01:09.080 say in our book. All I'm going to say in 0:01:09.120 --> 0:01:11.759 response to that, is how many game stop books came 0:01:11.760 --> 0:01:15.760 out in like, there were at least three, and they 0:01:15.800 --> 0:01:18.559 all came out within a year of it actually happening. Yeah, 0:01:18.640 --> 0:01:21.440 and by then no one cared anymore. There's my point, Okay. 0:01:21.560 --> 0:01:24.360 I take the point that it's very difficult to write 0:01:24.480 --> 0:01:27.960 a well researched book that says something new and interesting 0:01:28.520 --> 0:01:31.480 on a topic at exactly the right time ahead of 0:01:31.520 --> 0:01:34.120 it kind of blowing up in the public consciousness. That 0:01:34.280 --> 0:01:37.280 is difficult. But our guest today has done that. We're 0:01:37.280 --> 0:01:39.520 going to be speaking to a guest who has a 0:01:39.520 --> 0:01:42.080 new book out, and I think the timing could not 0:01:42.160 --> 0:01:43.679 have been better. I don't even know how the timing 0:01:43.720 --> 0:01:47.039 was possible, right, So this is actually a book on 0:01:47.080 --> 0:01:50.000 a topic that we First of all, we should say 0:01:50.000 --> 0:01:52.840 that we have had this guest on before talking about 0:01:52.840 --> 0:01:57.120 a topic that kind of became core all thoughts content 0:01:57.240 --> 0:01:59.680 and also a core issue for the rest of the world. 0:02:00.200 --> 0:02:03.360 It truly exploded into the public's consciousness in a way 0:02:03.360 --> 0:02:06.400 that I don't think any of us weren't necessarily expecting 0:02:06.440 --> 0:02:09.040 when we first started talking about this. I think that 0:02:09.120 --> 0:02:13.119 was back in like late nineteen and then COVID happened, 0:02:13.280 --> 0:02:17.679 and everyone became focused on this particular issue or thing, 0:02:18.160 --> 0:02:20.280 and then fast forward a couple of years and it 0:02:20.320 --> 0:02:24.519 also became an issue of strategic and even military importance. 0:02:24.960 --> 0:02:28.720 That's right. So we've done semiconductor episodes in the past. 0:02:28.800 --> 0:02:30.680 We've done several of them, and we sort of tried 0:02:30.680 --> 0:02:33.640 to trace the semi conductor supply chain, and one of 0:02:33.680 --> 0:02:36.160 the companies at the end or somewhere in the semi 0:02:36.200 --> 0:02:39.480 conductor supply chain that's very important is the Dutch Advanced 0:02:39.560 --> 0:02:43.359 Lithography Maker a SML, which applies equipment, and so we're like, okay, 0:02:43.400 --> 0:02:45.239 who should we talk to about a s m L. 0:02:45.639 --> 0:02:47.840 I never said, you gotta talk to this guy, Chris Miller, 0:02:47.880 --> 0:02:49.760 who knows all about them. And at the time, he 0:02:49.880 --> 0:02:52.239 was writing this book, and the book has just come out. 0:02:52.320 --> 0:02:54.480 It's out, and of course the timing is perfect. So 0:02:54.560 --> 0:02:57.760 Chris Miller, he is the author of Chip War, The 0:02:57.840 --> 0:03:01.120 Fight for the World's Most Critical techno Oology. And of 0:03:01.160 --> 0:03:05.520 course we just had the Biden administration announcing new restrictions 0:03:05.639 --> 0:03:09.280 on semi conductor technology export to China, which is something 0:03:09.320 --> 0:03:11.959 we briefly touched on in a recent episode with Dan Wong, 0:03:12.520 --> 0:03:15.280 But it is truly the perfect guest with the perfect timing, 0:03:15.440 --> 0:03:18.280 the perfect guest with the perfect timing. I'm thrilled that 0:03:18.360 --> 0:03:20.640 we have Chris back on the show to talk about 0:03:20.639 --> 0:03:22.760 this new action and how they fit in the broader 0:03:22.800 --> 0:03:25.880 context and his research. So Chris Miller, thank you so 0:03:25.960 --> 0:03:28.760 much for coming back on the podcast, Thanks for having 0:03:28.760 --> 0:03:32.840 me back, and congratulations. Just like incredible timing, because I mean, 0:03:32.840 --> 0:03:35.520 the book just came out right and then right then 0:03:35.640 --> 0:03:39.760 we have everybody talking about the chip war basically because 0:03:39.800 --> 0:03:42.840 of these actions by the Biden administration. Well, that's right, 0:03:42.880 --> 0:03:45.800 that this the timing of the regulations that were released 0:03:45.800 --> 0:03:47.440 a couple of weeks ago. We're a bit of a 0:03:47.480 --> 0:03:50.160 surprise to me, but I think the trajectory was pretty 0:03:50.200 --> 0:03:52.560 clear from the last time we spoke about two years ago, 0:03:52.720 --> 0:03:55.640 that we're going to see more tightening of controls and 0:03:55.680 --> 0:03:59.880 more bifurcation between the US and China developing separate some 0:04:00.000 --> 0:04:05.240 conector ecosystems. Wait, was the trajectory clear, because you know, 0:04:05.360 --> 0:04:07.880 my impression was there was a lot of noise during 0:04:07.880 --> 0:04:12.880 the Trump administration about technology security and these types of issues, 0:04:13.160 --> 0:04:16.640 but no one was necessarily expecting the Biden administration to 0:04:16.680 --> 0:04:20.160 take this up to the extent that it did. So 0:04:20.200 --> 0:04:23.760 the export controls that were announced recently, well maybe you 0:04:23.760 --> 0:04:27.279 can tell us, like how extreme are they in your view? 0:04:27.880 --> 0:04:31.200 But do you think it was expected? Were you expecting 0:04:31.279 --> 0:04:34.320 something along those lines? Well? I think so. I mean, 0:04:34.400 --> 0:04:38.400 if you look at the Trump administration's actions, I think 0:04:38.440 --> 0:04:41.720 you've got to differentiate a bit between sort of what 0:04:41.760 --> 0:04:44.479 the Twitter feed was showing any individual day and the 0:04:44.520 --> 0:04:47.479 direction of travel of the National security bureaucracy underneath it. 0:04:47.560 --> 0:04:50.800 And I think the bureaucracy was trending in the same 0:04:50.839 --> 0:04:54.520 direction actually, from the late Obama administration in terms of 0:04:54.800 --> 0:04:59.279 greater skepticism of inbound investment into U S SMI connector firms, 0:04:59.320 --> 0:05:03.680 from in terms of greater concern about the difficulty of 0:05:03.960 --> 0:05:07.799 preventing chips from reaching military end users in China, greater 0:05:08.040 --> 0:05:10.960 confidence that computing power and some my conductors would be 0:05:11.000 --> 0:05:14.560 critical to the future of military power, and thus concerned 0:05:14.600 --> 0:05:17.240 that China's access to U S ship technologies would have 0:05:17.240 --> 0:05:21.080 a military benefit. All that has been developing for really 0:05:21.080 --> 0:05:24.920 about a decade in Washington and is less driven by 0:05:25.120 --> 0:05:28.200 the question of of who's president and more the collective 0:05:28.200 --> 0:05:30.760 assessment of the Pentagon and the Commerce Department and then 0:05:30.800 --> 0:05:35.120 our security councils involved, and that's been a pretty steady intensification, 0:05:35.160 --> 0:05:38.160 even though the politicians at the top have have differed. Sorry, 0:05:38.160 --> 0:05:40.680 I'm just looking again at you know, your book was 0:05:40.720 --> 0:05:44.440 released October four, and the restrictions I think we're announced 0:05:44.520 --> 0:05:47.880 October seven or right around there, so basically the same day. 0:05:47.920 --> 0:05:51.640 But you know, before we get again to these specific restrictions, 0:05:51.680 --> 0:05:53.360 you know, I think when we talked about a s 0:05:53.440 --> 0:05:56.080 m L in our episode, you know, even at that time, 0:05:56.600 --> 0:06:00.760 a s mL, I believe was restricted from exporting its 0:06:00.839 --> 0:06:05.440 most advanced technology to Chinese companies. And maybe they were 0:06:05.640 --> 0:06:08.480 still able to export some technologies, but not the most 0:06:08.560 --> 0:06:12.000 advanced lithography. You know, you mentioned some of the factors 0:06:12.279 --> 0:06:16.479 driving concerns about constraining Chinese semiconductors. But where did this 0:06:16.560 --> 0:06:21.000 really start the story of the US deciding that, you know, 0:06:21.080 --> 0:06:25.040 limits on technology transfer would be part of our foreign 0:06:25.040 --> 0:06:28.119 policy with China. Well, I would actually start the story 0:06:28.320 --> 0:06:32.320 before China was the focus, because there have been limitations 0:06:32.400 --> 0:06:35.479 on semi conductor technology transfer since the invention of the 0:06:35.480 --> 0:06:38.599 first chips. And if you think back to where chips 0:06:38.600 --> 0:06:42.600 came from They emerged out of demands to miniat your eyes, 0:06:43.080 --> 0:06:46.400 computing power to fit and guidance computers on missiles during 0:06:46.440 --> 0:06:48.960 the Cold War, and so there's been a deep into 0:06:48.960 --> 0:06:53.159 relationship from the earliest days between defense technology and the 0:06:53.240 --> 0:06:56.120 chip industry, and so controls have been part of the 0:06:56.160 --> 0:06:59.559 US government strategy since that time. So during the Cold 0:06:59.560 --> 0:07:03.280 War So Union, there were really extensive controls placed both 0:07:03.320 --> 0:07:05.479 on the transfer of chips to the Soviet Union and 0:07:05.520 --> 0:07:09.239 also the transfer of chip making equipment and so in 0:07:09.240 --> 0:07:11.600 in some ways, what we're seeing today is just a 0:07:11.640 --> 0:07:16.080 continuation of that process of trying to control technology transfer 0:07:16.120 --> 0:07:19.160 that's militarily relevant. Now it's different because the target is 0:07:19.200 --> 0:07:21.840 different at this time it's China. And it's different because 0:07:21.920 --> 0:07:24.600 unlike in the earliest days of the chip industry and 0:07:24.760 --> 0:07:28.559 the late nineteen fifties and nineteen sixties, at that point, 0:07:28.600 --> 0:07:31.080 most chips were going towards some sort of military use, 0:07:31.080 --> 0:07:35.040 whereas today percent of chips are going towards civilian uses. 0:07:35.080 --> 0:07:37.640 So so that's different. But the basic concept that you 0:07:37.680 --> 0:07:40.600 want to control the ability to produce advanced ships because 0:07:40.640 --> 0:07:44.960 they have military uses is basically something we've always had now, 0:07:45.160 --> 0:07:48.119 certainly there's been a shift in the policy towards China 0:07:48.160 --> 0:07:50.760 over the past couple of years, driven by a couple 0:07:50.760 --> 0:07:53.600 of factors. I think one most important is that the 0:07:53.640 --> 0:07:56.160 military balance in general between the U S and China 0:07:56.240 --> 0:07:59.240 has shifted. Whereas a decade or two ago is clear 0:07:59.320 --> 0:08:01.800 the U S military area was far stronger, today that's 0:08:01.880 --> 0:08:05.080 less clear, especially when you look at potential hotspots like 0:08:05.120 --> 0:08:08.240 the Taiwan Straits, and so it's easy to find analysts 0:08:08.280 --> 0:08:11.400 who say the US would have a hard time defending Taiwan, 0:08:11.560 --> 0:08:13.840 which wouldn't have been the case a decade or two ago. 0:08:13.920 --> 0:08:17.040 So that's that's one. More concerned about the Chinese military capabilities. 0:08:17.520 --> 0:08:20.440 Two is that China plays a bigger role than ever 0:08:20.520 --> 0:08:24.360 before in the global electronics and computing supply chain. Still 0:08:24.640 --> 0:08:27.400 a circumscribe role, and we can talk about the specifics, 0:08:27.400 --> 0:08:31.520 but nevertheless its relative weight is more important than certainly 0:08:31.520 --> 0:08:34.480 a decade or two ago. And then third, China's trying 0:08:34.480 --> 0:08:38.040 to catch up technologically in advanced semiconductors and through a 0:08:38.080 --> 0:08:40.800 number of industrial policy programs, the most famous of one 0:08:40.800 --> 0:08:44.319 which is probably made in China. It's specifically targeting its 0:08:44.360 --> 0:08:47.560 hip industry with really substantial subsidies, and and so this 0:08:47.600 --> 0:08:50.880 has raised concern not only Knew US, but particularly then 0:08:51.040 --> 0:08:54.199 US that China might succeed in reaching the cutting edge 0:08:54.200 --> 0:08:56.959 and a number of key technologies which would have both 0:08:57.200 --> 0:09:00.920 technological and economic but also potentially uh military implications on 0:09:01.000 --> 0:09:04.280 the road. Right. So this is actually something we were 0:09:04.320 --> 0:09:09.040 speaking with Dan Wong about, the the Gavicale tech analyst 0:09:09.280 --> 0:09:12.200 who also wrote a little blurb for your book. So 0:09:12.480 --> 0:09:15.840 it's nice to see multiple odds guests come together in 0:09:15.880 --> 0:09:19.480 that way. But can I ask, like just a very 0:09:19.600 --> 0:09:23.360 general step back question. I think it's become really common 0:09:23.400 --> 0:09:27.360 nowadays to say that semiconductors are the new oil in 0:09:27.400 --> 0:09:32.120 the sense that they're you know, military lee and strategically significant. 0:09:32.880 --> 0:09:35.800 But are they really like oil in the sense that, 0:09:36.520 --> 0:09:41.040 you know, they don't necessarily seem bounded by geography. I mean, 0:09:41.080 --> 0:09:43.240 it's not like we're trying to pull out a finite 0:09:43.240 --> 0:09:46.479 resource from the ground. We're trying to build up expertise 0:09:46.880 --> 0:09:52.040 and technological capability to make additional chips available. And you know, 0:09:52.080 --> 0:09:55.400 there are some fabs in the US, not a lot, 0:09:55.480 --> 0:09:57.720 but the Chips Act is all about building more of 0:09:57.760 --> 0:10:01.360 these chips factories so I guess what are the parallels 0:10:01.400 --> 0:10:04.760 with oil and what are the key differences. Yeah, I 0:10:04.760 --> 0:10:08.280 think you're you're right that there are obviously differences with oil. 0:10:08.720 --> 0:10:13.800 The geographic distribution is one difference though, Actually I think 0:10:14.360 --> 0:10:17.880 oil is more geographically distributed than chip making capabilities, especially 0:10:17.960 --> 0:10:19.840 at the leading edge. And if you look at Saudi 0:10:19.880 --> 0:10:22.960 Arabia produces ten or fifteen percent of the world's oil supply. 0:10:23.280 --> 0:10:26.240 By contrast, Taiwan produces over a third of the world's 0:10:26.280 --> 0:10:30.000 processor chips every year. And if you're talking about the 0:10:30.000 --> 0:10:33.480 most advanced processor chips or SML has got a far 0:10:33.520 --> 0:10:37.400 bigger role in the lithography production process percent of the 0:10:38.000 --> 0:10:41.079 leading edge of UV lithography compared to what everyone else 0:10:41.120 --> 0:10:43.520 has in the oil industry. So in terms of concentration, 0:10:43.559 --> 0:10:46.960 we actually have more concentration at multiple parts of the 0:10:47.000 --> 0:10:51.040 chip supply chain than than Saudi Arabia or even OPEC 0:10:51.160 --> 0:10:53.960 as a whole has. So if you're worried about the 0:10:54.040 --> 0:10:57.440 risks of supply cutoffs, there's more reason to be concerned 0:10:57.440 --> 0:10:59.960 about some my conductors. I think that concerned about oil. 0:11:16.720 --> 0:11:18.920 So this is something that you touch on in your book. 0:11:19.120 --> 0:11:23.240 But when COVID happened. There were plenty of businesses that 0:11:23.320 --> 0:11:27.640 were disrupted by the pandemic, and semiconductors became a big 0:11:27.679 --> 0:11:31.760 issue around that time. And we can argue about whether 0:11:31.880 --> 0:11:35.680 or not there were semiconductor shortages because of the chips 0:11:35.720 --> 0:11:40.760 makers themselves, or because the companies putting in orders massively 0:11:40.880 --> 0:11:44.240 underestimated demand and things like that. But what role did 0:11:44.280 --> 0:11:48.760 the pandemic play in I guess highlighting these shortage issues 0:11:48.800 --> 0:11:52.280 that you just described, or maybe shortage isn't the right word, 0:11:52.400 --> 0:11:56.959 it's it's uneven distribution. I guess yeah, I think that's 0:11:57.000 --> 0:11:59.120 the right way to describe it. And you know, the 0:11:59.120 --> 0:12:02.720 shortage context has to be understood in that supply increased 0:12:02.800 --> 0:12:07.120 dramatically in terms of aggregate chips produced in one It's 0:12:07.120 --> 0:12:09.760 just that demand grew even faster and that created this 0:12:09.920 --> 0:12:13.400 set of shortages in certain subsets. I think if you 0:12:13.440 --> 0:12:17.120 actually look at the track record in both of those 0:12:17.160 --> 0:12:21.160 pandemic years of the global chip industry and producing chips, 0:12:21.200 --> 0:12:23.120 you'd have to say it it's sailed through the crisis 0:12:23.160 --> 0:12:27.000 with comparatively few disruptions. The fact that supply increased dramatically 0:12:27.120 --> 0:12:29.920 across the board, the fact that you know, we had 0:12:30.080 --> 0:12:33.720 major economies that played a big part in the chip 0:12:33.800 --> 0:12:37.320 supply chain being shut down for several months, if not 0:12:37.440 --> 0:12:40.760 longer across COVID, and yet the number of disruptions were 0:12:40.760 --> 0:12:43.880 actually quite limited, suggests the extent that which the supply 0:12:43.920 --> 0:12:46.520 chain actually works pretty well and in producing the chips 0:12:46.520 --> 0:12:49.320 that are needed. And when you look at where we've 0:12:49.360 --> 0:12:52.640 seen the most disruption in terms of shortages, which is 0:12:52.640 --> 0:12:54.920 the auto sector, I think there's a pretty good argument 0:12:54.960 --> 0:12:57.200 that what we're seeing is not a chip shortage but 0:12:57.280 --> 0:13:00.280 a automaker inability to properly plan the number of hips 0:13:00.280 --> 0:13:02.680 that they need, which is the problem that they faced. 0:13:02.880 --> 0:13:07.079 Automakers made an error in early slashing their chips sales 0:13:07.400 --> 0:13:11.199 just as demand for smartphones and PCs, etcetera was spooming 0:13:11.360 --> 0:13:14.000 because of the work from home trend, and as a result, 0:13:14.040 --> 0:13:16.800 when they came back to their chip suppliers a couple 0:13:16.800 --> 0:13:18.960 months later and said, actually, we're not gonna need to 0:13:19.000 --> 0:13:21.200 cut demand as much as we expected, they found that 0:13:21.240 --> 0:13:24.319 capacity was already reallocated. So this is really more a 0:13:24.400 --> 0:13:27.320 question of how automakers managed their procurement and they're just 0:13:27.360 --> 0:13:30.440 in time procurement processes than anything to do with chips 0:13:30.520 --> 0:13:33.679 per se, and if you look at specific disruptions to 0:13:33.760 --> 0:13:38.200 the shipmaking process one you'll find that factory fires or 0:13:38.240 --> 0:13:41.440 ice storms and Texas were probably just as impactful as 0:13:41.440 --> 0:13:44.120 any sort of COVID related disruption. But you know, all 0:13:44.120 --> 0:13:47.439 that is to say that certainly COVID put semi conductor 0:13:47.520 --> 0:13:51.120 shortages in the headlines in a way that catalyzed politicians 0:13:51.120 --> 0:13:53.120 to take the issue more seriously into act. And I 0:13:53.120 --> 0:13:55.520 don't think we would have seen the Chips and Science 0:13:55.559 --> 0:13:57.720 Act passed and the way that it did had it 0:13:57.800 --> 0:14:00.240 not been for the fact that COVID made this and 0:14:00.480 --> 0:14:03.000 visceral and seeming to be relevant to the typical person. 0:14:03.280 --> 0:14:05.680 By the way, speaking of all the people who have 0:14:05.760 --> 0:14:10.240 glowingly blurbed your book, I see Admiral stephrevious. Also is 0:14:10.280 --> 0:14:12.760 one here another odd Lots guests, So I'm glad to 0:14:12.760 --> 0:14:16.199 see the odd Lots crew so represented. All right, let's 0:14:16.200 --> 0:14:18.280 get to the new news. And of course, as we 0:14:18.360 --> 0:14:21.480 discussed there, there were already restrictions on what kind of 0:14:21.480 --> 0:14:24.560 technology could be exported to China. But why don't you 0:14:24.600 --> 0:14:28.640 sort of summarize what was the status quo and say September, 0:14:28.720 --> 0:14:32.200 where were we a month ago, and how dramatically have 0:14:32.360 --> 0:14:35.800 things changed with the new announcements from the Commerce Department 0:14:35.880 --> 0:14:39.120 and the Biden administration on exports, like just summarize, give 0:14:39.160 --> 0:14:42.200 us the big picture differences of them versus now. So 0:14:42.480 --> 0:14:45.160 one month ago, there were i'd say two main categories 0:14:45.200 --> 0:14:49.120 of restrictions that applied to China. First was for equipment 0:14:49.200 --> 0:14:52.560 at the most cutting edge, so UVY lithography machines being 0:14:52.680 --> 0:14:55.800 the best example of this, that were impossible to transfer 0:14:55.960 --> 0:14:58.880 to China, and it's really only referred to a small 0:14:58.920 --> 0:15:03.080 set of tool roles that only restricted Chinese ability to 0:15:03.760 --> 0:15:07.320 move to the most advanced process nodes in producing logic 0:15:07.320 --> 0:15:09.480 ships and certain types of memory ships as well. But 0:15:09.520 --> 0:15:12.000 it was the most cutting edge set of machinery that 0:15:12.040 --> 0:15:14.640 was the first restrictions. And then second there restrictions on 0:15:14.680 --> 0:15:19.160 specific Chinese firms that were restricted either from accessing US 0:15:19.200 --> 0:15:22.680 technology or also in some cases accessing production capacity in 0:15:22.680 --> 0:15:25.640 Taiwan at t SMC that use US technology, and so 0:15:25.720 --> 0:15:27.520 Huawei is the best example of this, but there were 0:15:27.560 --> 0:15:29.840 also a bunch of Chinese firms that were assessed to 0:15:29.880 --> 0:15:31.840 have links to the Chinese military, and so these were 0:15:31.920 --> 0:15:34.400 the two sets of restrictions that were in place today. 0:15:34.440 --> 0:15:37.840 After the new set of regulations, these have been broadened 0:15:37.880 --> 0:15:41.240 pretty substantially. And so, first off, the the set of 0:15:41.280 --> 0:15:44.400 equipment that is no longer possible to ship to China 0:15:44.600 --> 0:15:46.840 is expanded a lot, so it's no longer just the 0:15:46.880 --> 0:15:50.520 most cutting edge, is also tools that are actually kind 0:15:50.560 --> 0:15:52.920 of one or two generations, with three generations behind the 0:15:52.920 --> 0:15:55.920 cutting edge today. So in the logic chip making space, 0:15:56.000 --> 0:16:00.000 anything that's headed towards the facility that's sixteen nanometers or 0:16:00.040 --> 0:16:03.040 blow is no longer possible to send to China. So 0:16:03.040 --> 0:16:05.200 so this is not the most cutting edge ship like 0:16:05.240 --> 0:16:08.160 you find an iPhone processor, for example, But this is 0:16:08.200 --> 0:16:10.360 a much broader swath of chips, and there's a whole 0:16:10.360 --> 0:16:12.360 lot of chips that you still can send equipment forward 0:16:12.400 --> 0:16:14.520 to China, but there's a broader definition of the cutting 0:16:14.600 --> 0:16:18.080 edge which is designed to more tightly restrict China's ability 0:16:18.200 --> 0:16:21.080 to advance. So that's that's one big change. The second 0:16:21.160 --> 0:16:23.760 is that there's a new set of restrictions on the 0:16:23.800 --> 0:16:27.240 ability to send certain chips to China, and this focuses 0:16:27.320 --> 0:16:30.600 on chips called GPUs, which are used in artificial intelligence 0:16:30.600 --> 0:16:34.080 applications and data centers. And alongside this there are restrictions 0:16:34.080 --> 0:16:37.440 on sending chips to Chinese supercomputers. So this set of 0:16:37.480 --> 0:16:41.200 the restrictions focuses on limiting China's ability to develop capabilities 0:16:41.200 --> 0:16:43.840 and artificial intelligence and advanced data centers, so that this 0:16:43.880 --> 0:16:47.200 is a new focus area. And then three, there is 0:16:47.240 --> 0:16:51.520 a set of restrictions on US persons, so citizens, Green 0:16:51.560 --> 0:16:54.520 card holders and US companies on interacting with a bunch 0:16:54.560 --> 0:16:56.760 of different firms in the Chinese ship industry. And this 0:16:56.840 --> 0:17:00.320 is new. Before there weren't any restrictions on individuals in 0:17:00.440 --> 0:17:02.800 such a broad fashion working in the Chinese ship industry. 0:17:02.800 --> 0:17:04.399 And this is going to have major effects because there 0:17:04.400 --> 0:17:06.200 are actually a lot of dual citizens who are working 0:17:06.200 --> 0:17:08.560 in Chinese ship industry, including CEO, so some of the 0:17:08.600 --> 0:17:11.040 biggest firms in China. And so this this is a 0:17:11.080 --> 0:17:14.720 new escalation of the controls designed again to take apart 0:17:14.800 --> 0:17:17.240 to decouple the U s and the Chinese ship industry 0:17:17.240 --> 0:17:18.760 at the cutting edge. But all of this is to 0:17:18.800 --> 0:17:21.320 say that there's still no restrictions on anything that's not 0:17:21.359 --> 0:17:23.520 cutting edge for the most part, and so the goal 0:17:23.600 --> 0:17:27.000 of the regulations is to be fairly targeted in saying 0:17:27.280 --> 0:17:29.880 we're not going to allow any progress in the cutting edge, 0:17:29.880 --> 0:17:33.440 but we're still leading all of the lighting edge, mostly unrestricted, 0:17:33.480 --> 0:17:36.000 so it's it's still targeted, but it's pretty sweeping in 0:17:36.000 --> 0:17:39.920 the sense that it's saying no more progress towards advanced notes. 0:17:41.040 --> 0:17:45.280 So that third point about Americans or Green card holders 0:17:45.320 --> 0:17:48.240 no longer being able to do that kind of work 0:17:48.840 --> 0:17:52.080 in China, That's exactly what I wanted to ask you about, 0:17:52.160 --> 0:17:54.840 because this seems to be so far one of the 0:17:54.880 --> 0:17:56.840 things that is getting a lot of attention, one of 0:17:56.840 --> 0:18:00.680 the most extreme things. And we've already seen at least 0:18:00.840 --> 0:18:04.760 one semiconductor company talk about how it's having to like 0:18:05.119 --> 0:18:08.200 send people home or at least cut off their access 0:18:08.280 --> 0:18:12.359 at work. But first of all, how exactly does this 0:18:12.480 --> 0:18:17.080 restriction work in practice? And then secondly, I have seen 0:18:17.160 --> 0:18:20.919 some people talk about an expectation that maybe some of 0:18:20.920 --> 0:18:24.119 these companies are going to get some type of exemption. 0:18:24.840 --> 0:18:28.879 What's the possibility that that happens, and that some of 0:18:28.920 --> 0:18:31.919 the extreme moves that have been outlined in these export 0:18:31.960 --> 0:18:36.840 controls are actually not necessarily rolled back, but they're sort 0:18:36.880 --> 0:18:41.000 of softened through these types of exemptions. Well, the Commerce 0:18:41.040 --> 0:18:44.720 Department in their announcement did clarify where they were likely 0:18:44.760 --> 0:18:47.520 to give exemptions and not likely to give exemptions, and 0:18:47.560 --> 0:18:50.440 so they were pretty clear that for foreign chip firms 0:18:50.480 --> 0:18:53.280 operating in China, and again there's it depends on the specifics, 0:18:53.320 --> 0:18:56.399 but there's their scope for receiving exemptions. So companies like 0:18:56.520 --> 0:18:59.399 t SMC or some of the big South koreanship makers 0:18:59.400 --> 0:19:02.000 have facilities in China and the goal of these restrictions 0:19:02.040 --> 0:19:05.119 is not to impact their production, so there will be 0:19:05.119 --> 0:19:08.120 exemptions for their ability to acquire certain types of machinery 0:19:08.160 --> 0:19:11.000 things like that. But across most the other restrict restrictions, 0:19:11.000 --> 0:19:13.359 the Commerce Department has what's called a presumption of denial, 0:19:13.440 --> 0:19:15.159 which means that you can apply for license, but the 0:19:15.160 --> 0:19:17.240 presumption is that it will be denied. And again there's 0:19:17.520 --> 0:19:19.960 a lot of nuance in this, but I think broadly 0:19:20.000 --> 0:19:22.480 we should treat this as as something that's not a 0:19:22.480 --> 0:19:24.639 bureautic kick up, and that in fact, most of the 0:19:24.640 --> 0:19:27.159 places where the Commerce Department has said there will be 0:19:27.200 --> 0:19:28.880 a presumption of denial will be a place with there's 0:19:28.920 --> 0:19:31.240 lots of licenses that are denied, and probably people won't 0:19:31.280 --> 0:19:34.040 apply for licenses in the first place. I I think 0:19:34.080 --> 0:19:37.119 we shouldn't. We shouldn't assume that these are regulations that 0:19:37.160 --> 0:19:40.320 are accidentally overly broad. I think the by administration put 0:19:40.320 --> 0:19:42.080 two years of work into this, and I think they 0:19:42.119 --> 0:19:44.399 have a pretty clear sense of what they're trying to accomplish. 0:19:44.960 --> 0:19:48.199 And my guess is that looking at the impact in 0:19:48.240 --> 0:19:50.639 the first couple of days after the regulations were now, 0:19:50.680 --> 0:19:54.960 it's there more or less seeing results that they had anticipated. 0:19:55.680 --> 0:19:57.760 So what's it going to do the sort of in 0:19:58.080 --> 0:20:01.000 the first order effect, I mean, long term, maybe China 0:20:01.000 --> 0:20:05.359 will redouble or accelerated effort at building out its domestic capabilities, 0:20:05.560 --> 0:20:08.360 But what is the effect going to be tomorrow and 0:20:08.440 --> 0:20:11.080 in the short term on Chinese tech? The short term 0:20:11.119 --> 0:20:12.439 effect is that China is going to buy a lot 0:20:12.520 --> 0:20:17.240 less equipment from US suppliers, but also as a result 0:20:17.320 --> 0:20:21.320 from Japanese and Dutch suppliers, just because there's no point 0:20:21.359 --> 0:20:24.000 in buying half a production line. So the overall equipment 0:20:24.000 --> 0:20:26.680 sales will be decreasing. Again, it's not across the board, 0:20:26.720 --> 0:20:29.800 because for lower tech production that's still possible to acquire, 0:20:29.880 --> 0:20:32.320 but but there will be an impact on equipment firms, 0:20:32.320 --> 0:20:34.760 and you've seen that reflected in their public statements. That's 0:20:34.800 --> 0:20:37.960 one to There are a number of Chinese firms that 0:20:38.040 --> 0:20:40.720 were close to the cutting edge that will be directly 0:20:40.720 --> 0:20:44.159 impacted by this. So one example is the Chinese nand 0:20:44.280 --> 0:20:47.320 memory producer called y MTC, which was in the process 0:20:47.359 --> 0:20:49.840 of being of having its chips qualified for use in 0:20:49.880 --> 0:20:53.440 Apple's iPhones. Apple was reportedly going to buy y MTC 0:20:53.640 --> 0:20:56.520 ships for a large chunk of its iPhones going forward, 0:20:56.960 --> 0:20:59.720 and that firm was targeted by these regulations, and so 0:20:59.800 --> 0:21:02.159 now according to media reports, Apple is no longer going 0:21:02.200 --> 0:21:04.840 to be buying y YMTC ships for its iPhones. And 0:21:04.880 --> 0:21:06.879 so for firms that are are directly impacted like that, 0:21:06.920 --> 0:21:09.000 because they're right at the cusp of being at the 0:21:09.000 --> 0:21:12.200 cutting edge and therefore directly impacted by these regulations, we're 0:21:12.200 --> 0:21:15.880 going to see their ability to produce and their ability 0:21:15.960 --> 0:21:20.200 to expand directly impacted. And then third, we're going to 0:21:20.320 --> 0:21:25.080 see disruption of of individuals, jobs and livelihoods because of this. 0:21:25.359 --> 0:21:27.960 Tracy mentioned the restrictions and individuals. That's going to have 0:21:28.040 --> 0:21:30.560 a pretty dramatic effect because there will be people in 0:21:30.600 --> 0:21:33.760 positions of having to choose between continuing their work or 0:21:33.840 --> 0:21:37.560 potentially renouncing cititionship or green cards, and that's a that's 0:21:37.560 --> 0:21:40.320 a dramatic effect. Now, you know, this isn't isn't new, 0:21:40.359 --> 0:21:42.640 because there's lots of companies around the world that Americans 0:21:42.640 --> 0:21:44.439