Speaker 1: All eyes have been on Apple this hour as it
Speaker 1: unveils the iPhone fifteen.
Speaker 2: Cheering is starting right now.
Speaker 1: People were already in line. I got here a little
Speaker 1: before five am, and.
Speaker 2: People are already lined up. I talked to the first
Speaker 2: eye line.
Speaker 3: That's the familiar buzz we hear every time Apple releases
Speaker 3: a new iPhone, people waiting in line to be one
Speaker 3: of the first to get one. A few weeks earlier, though,
Speaker 3: another next generation smartphone very quietly hit the market. It's
Speaker 3: called the May sixty Pro and it's made by China's
Speaker 3: technology giant Huawei. If it's not quite iPhone level tech,
Speaker 3: it's also not too far off.
Speaker 2: In the US When a big phone comes out, like
Speaker 2: Apple just released the iPhone fifteen, Tim Cook is literally
Speaker 2: ushering people into the store on Fifth Avenue. But in
Speaker 2: Huawei's case, they just quietly released this phone online, no fanfare,
Speaker 2: no pomping circumstance.
Speaker 3: You know who did sit up and take notice? The
Speaker 3: US government, not so much because of the phone itself,
Speaker 3: but the sophisticated chip that powers it, which is far
Speaker 3: ahead of where China was thought to be. For years,
Speaker 3: the US has tried to slow Beijing's progress in making semiconductors,
Speaker 3: enforcing export controls that restrict the sale of the most
Speaker 3: advanced chip making materials and equipment to China. Bloomberg's Mackenzie
Speaker 3: Hawkins and Peter Elstrom report that chips like the one
Speaker 3: inside this new phone show how rapidly China is moving ahead.
Speaker 1: Huahwei is able to get domestic supply of these semiconductors
Speaker 1: that are so essential to its smartphone business and perhaps
Speaker 1: more importantly, could be used in other kinds of applications
Speaker 1: to including military applications.
Speaker 3: I'm west Kosova today on the Big Take, Why Huawei's
Speaker 3: new phone is a wake up call for Washington. I
Speaker 3: asked Peter why the launch of Huawei's Mate sixty Pro
Speaker 3: smartphone was such a big deal.
Speaker 1: Usually, of course, phone companies want to trumpet their accomplishments.
Speaker 1: They want to talk like Apple does, about how great
Speaker 1: their new phone is and talk about the new specs.
Speaker 1: Huawei did not disclose most of the key specs of
Speaker 1: the phone at the time. They just put it online
Speaker 1: and started selling it very very quietly. But it caught
Speaker 1: global attention really, and that's because of the technology that
Speaker 1: was inside of it, specifically this microprocessor that was powering
Speaker 1: the phone. It's a seven nanimeter chip, which is a
Speaker 1: quite advanced chip, and it was a very big step
Speaker 1: forward for Huawei, which essentially had been blasted out of
Speaker 1: the smartphone market a few years ago by the US.
Speaker 3: Niketzie. Why is the fact that this phone contains this
Speaker 3: chip such a big deal?
Speaker 2: So this is a huge deal in what's basically became
Speaker 2: a global cold war over tech, and the US and
Speaker 2: China are the main opponents.
Speaker 1: Now.
Speaker 2: The interesting thing about this phone's releases that happened while
Speaker 2: the US Commerce Secretary, Gina Raimando, was in China, and
Speaker 2: I was in China with her and had gone to
Speaker 2: these kind of days of diplomatic meetings. She's meeting with
Speaker 2: her counterpart of the Ministry of Commerce. She's trying to
Speaker 2: establish more formal diplomatic relations with China. And then at
Speaker 2: the tail end of her trip, the US's main technological
Speaker 2: adversary releases this phone that has semiconductor of technology, which
Speaker 2: is electronic component technology, a generation ahead of where the
Speaker 2: US wants it to be. So since the Trump administration,
Speaker 2: the US government has been trying to block China's access
Speaker 2: to super advanced technology that runs everything from electric vehicles
Speaker 2: to nuclear missiles, and China has showed that despite those attempts,
Speaker 2: it's been able to get ahead.
Speaker 3: Peter, let's talk for a second about this chip. What
Speaker 3: is it and why did it cause such a stir.
Speaker 1: What Bloomberg did was we got one of the early
Speaker 1: versions of this phone, and we worked with a company
Speaker 1: that specializes in teardown so that we could look at
Speaker 1: the chip inside, because essentially nobody knew exactly what the
Speaker 1: chip was or what it could do. What we found
Speaker 1: when we tore apart the phone and looked inside was this,
Speaker 1: in fact, was a seven nanometer chip that was made
Speaker 1: by a company called Smick. It's a Chinese company that
Speaker 1: specializes in producing these phones, and the US government had
Speaker 1: been trying to keep Chinese companies away from being able
Speaker 1: to make chips as advanced as this one. So it
Speaker 1: was a surprise that it came from Smick, and it
Speaker 1: was a surprise that it was this advanced. And it
Speaker 1: means that Huawei is able to get domestic supply of
Speaker 1: these semiconductors that are so essential to its smartphone business,
Speaker 1: and perhaps more importantly, could be used in other kinds
Speaker 1: of applications, to including military applications.
Speaker 3: So you described it as being a seven nanometer chip. Mackenzie,
Speaker 3: what does that mean, Like, how do we compare that with, say,
Speaker 3: what's in the iPhone.
Speaker 2: There's a handful of companies in the world that produce chips,
Speaker 2: and they use these many, many million dollar machines to
Speaker 2: etch tiny patterns onto silicon wafers, and the goal is
Speaker 2: to get the patterns as minute as possible so that
Speaker 2: the chips can be as powerful as possible. You can
Speaker 2: pack more onto a single wafer. And the most advanced
Speaker 2: ships are what we have in like the latest iPhone
Speaker 2: that Apple produce, and those are down to three nanometers,
Speaker 2: which is basically the equivalent of like a strand and
Speaker 2: a half of human DNA. Now, the US was trying
Speaker 2: to keep China's abilities at fourteen nanometers, which are considered
Speaker 2: more mature and legacy. Ships still really important for consumer
Speaker 2: tech things like electric vehicles, but not powerful enough for
Speaker 2: like the super advanced military equipment that the US government
Speaker 2: really doesn't want China to have.
Speaker 3: Peter, this new phone, the Mate sixty pro, is made
Speaker 3: by Huawei, which itself is an important thing.
Speaker 1: That's right. Huawei has really been at the heart of
Speaker 1: US China tensions for many, many years. You recall, Hawei
Speaker 1: really made its name by developing telecom equipment that was
Speaker 1: very good, very inexpensive. It was known to have very
Speaker 1: good customer service behind it too. Huawei took on companies
Speaker 1: like Ericson and Cisco in particular, and expanded around the world.
Speaker 1: But it became a boneu of contention because the US
Speaker 1: began to try to convince its allies that Huawei's equipment
Speaker 1: was dangerous, that perhaps they could be using it for spying,
Speaker 1: for monitoring exactly what was going on, not just in
Speaker 1: the US but in other countries too, So the US
Speaker 1: took it upon itself to go out and try to
Speaker 1: get other countries to ban Huawei's equipment. These tensions simmered
Speaker 1: for many years, and European companies were not so crazy
Speaker 1: about going along with this because Huawei's equipment was inexpensive,
Speaker 1: it was very good, particularly in five G wireless technology,
Speaker 1: so there are many companies that wanted to continue buying
Speaker 1: want weight gear even as Washington was trying to get
Speaker 1: it banned. So it was effectively out of the smartphone
Speaker 1: business for years. It had been the largest smartphone company
Speaker 1: in the world at one point, and it was essentially out.
Speaker 1: Its business was really decimated by these US controls. And
Speaker 1: what we saw this year in August was essentially while
Speaker 1: we getting back into the smartphone business, showing that they
Speaker 1: were going to be able to get some of this equipment,
Speaker 1: at least domestically, so that they could come back, they
Speaker 1: could be a player in the smartphone business, and they
Speaker 1: could take on companies like Apple and Samsung and McKenzie.
Speaker 3: China found a way to very publicly respond to some
Speaker 3: of the US export controls.
Speaker 2: Yeah, so the Chinese government recently placed restrictions on using
Speaker 2: iPhones at state backed companies and agencies. So if the
Speaker 2: US takes aim at one of its most important taech companies,
Speaker 2: they're going to do the same right back.
Speaker 3: Which is kind of ironic because, of course, very famously,
Speaker 3: the iPhone has been made in China for many years.
Speaker 1: Yeah, the Chinese government has not said anything publicly about this.
Speaker 1: In fact, they said there isn't aficial ban on iPhones
Speaker 1: within the government, But what our reporting has shown is
Speaker 1: that they are expanding controls on the iPhone within certain
Speaker 1: government agencies and within some state owned enterprises. So it's
Speaker 1: a big deal. For Apple, the most valuable company in
Speaker 1: the world. They get about twenty percent of their revenue
Speaker 1: from China and now it looks like some of that
Speaker 1: could be in jeopardy.
Speaker 2: And of course, the fact that Huawei, a Chinese company,
Speaker 2: has produced such an advanced phone is a huge source
Speaker 2: of patriotism for people in China. We talked to several
Speaker 2: customers shortly after the launch day for this phone who said,
Speaker 2: I don't want to buy an iPhone, I want to
Speaker 2: support China's tech.
Speaker 3: Peter like Mackenzie said, the US has been trying to
Speaker 3: prevent China from getting this kind of technology. Exactly how
Speaker 3: is the US responded to the fact that they're able
Speaker 3: now to produce chips at a higher level than they
Speaker 3: wanted them to be.
Speaker 2: Able to do.
Speaker 1: This all really accelerated last year when the Biden administry
Speaker 1: introduced a whole new round of export controls on China,
Speaker 1: and that stopped them from getting access to certain kinds
Speaker 1: of chips, including the most advanced AI chips and the
Speaker 1: kinds that you could use and other kinds of advanced applications. Also,
Speaker 1: the Biden administration wanted to cut off Chinese customers from
Speaker 1: being able to buy the machines that actually make chips,
Speaker 1: and those come from American companies, and particularly this Dutch
Speaker 1: company ASML. That's so important to this story. What happened, though,
Speaker 1: is that as the Biden administration imposed these controls itself
Speaker 1: on American companies, it left the door open for the
Speaker 1: Dutch companies and the Japanese companies. It had not gotten
Speaker 1: the allies on board in terms of agreen to those controls.
Speaker 2: And so basically what that allowed the Chinese to do
Speaker 2: is import a ton of pretty advanced chip making equipment
Speaker 2: from the Netherlands and from Japan, and now there's this
Speaker 2: massive stockpile that it seems like they've basically used to
Speaker 2: produce this seven nanometer chip. And so the reaction that
Speaker 2: you're seeing now in the US is a WHOA, our
Speaker 2: export controls did not work as planned? How do we
Speaker 2: ramp these up? Do we ramp these up? At the
Speaker 2: same time that the Bide administration is trying to pursue better,
Speaker 2: more normal diplomatic relations with China, And so earlier this month,
Speaker 2: the Commerce Secretary testified on Capitol Hill and talked about
Speaker 2: the Huawei phon. She said she was upset that it
Speaker 2: came out while she was in China, but she doubted
Speaker 2: the Chinese ability to produce seven nanometer chips at scale
Speaker 2: because they're using less advanced machines than you know, a
Speaker 2: US company or a Taiwanese company might have access to,
Speaker 2: and so it requires massive, massive infusions of capital from
Speaker 2: the Chinese government to keep it going, and she basically said,
Speaker 2: we have doubts about whether they can do it.
Speaker 3: After the break, some chip makers push back against US restrictions. Peter,
Speaker 3: can you explain how this isn't just a story about
Speaker 3: the US versus China, but really the US versus its
Speaker 3: own friends.
Speaker 1: Yes, So there are a very small number of companies
Speaker 1: that produce the machines that are able to make chips,
Speaker 1: really just five key ones. Three of those are American companies,
Speaker 1: and then there's one in the Netherlands ASML, which is
Speaker 1: very important, in one in Japan Tokyo Electron that's also
Speaker 1: very very important. So when the US announced it's export
Speaker 1: controls last year, that immediately cut off the American companies
Speaker 1: from selling into Chinese customers. However, it did not have
Speaker 1: the Dutch on board, and it did not have the
Speaker 1: Japanese on board. As discussed, they began negotiating these things.
Speaker 1: The CEO of ASML has been very outspoken in his
Speaker 1: opposition to these controls. ASML is not just another company
Speaker 1: in the Netherlands, it's the most important company there. It's
Speaker 1: the most valuable tech company in Europe. So when the
Speaker 1: CEO speaks out against these things, they certainly get the
Speaker 1: politician's attention. So ASML has not been able to sell
Speaker 1: its most advanced machines. This gets a little technical, but
Speaker 1: these are extreme ultraviolet lithography equipment or EUV machines. It
Speaker 1: has been able to continue selling its next most advanced machines,
Speaker 1: which are called DUV or deep ultraviolet lithography machines. So
Speaker 1: this year it has been selling a bunch of those
Speaker 1: DUV machines into China to Chinese customers, and you can
Speaker 1: see this in China's import data. The sales from the
Speaker 1: Netherlands and from Japan in particular have spiked this year.
Speaker 1: They reached a record four billion dollars in July alone,
Speaker 1: so you can see that Chinese chip companies are stocking
Speaker 1: up on all this equipment that's going to help them
Speaker 1: make as advanced chips as they can possibly make.
Speaker 3: McKenzie what if the government, say of the Netherlands, decided no,
Speaker 3: we're just going to allow our manufacturers to sell to China.
Speaker 3: Can the US bring any pressure to bear if they
Speaker 3: simply don't go along.
Speaker 2: So there is one potential option for the Biden administration,
Speaker 2: and that's invoking what's called a foreign direct Product rule,
Speaker 2: which basically allows the Commerce Department to regulate products of
Speaker 2: companies based in other countries because they use a share
Speaker 2: of US technology. But that could be seen basically as
Speaker 2: extra territorial bullying. The US Netherlands relationship is important to
Speaker 2: both governments. It took a lot of time and legwork
Speaker 2: to get them on board the first time around, and
Speaker 2: that would be a pretty diplomatically risky move for the
Speaker 2: Biden administration to take. They would much much rather get
Speaker 2: the Dutch government on board. But as Peter said, this
Speaker 2: is their most valuable company, and this is really a
Speaker 2: US China fight, not a Netherlands China fight.
Speaker 1: And there are similar tensions in Japan too. Of course,
Speaker 1: Japan and the Netherlands are considered allies of the United States.
Speaker 1: They tend to be on the same side of most
Speaker 1: political issues, including when it comes to China. However, In Japan,
Speaker 1: the Prime Minister Kashida has a similar kind of dilemma
Speaker 1: where there are about a dozen Japanese companies that are
Speaker 1: very dominant in key parts of the semiconductor's supply chain. Kashita,
Speaker 1: in theory, could go to these companies and say, hey,
Speaker 1: you should cut off your Chinese customers, you should pull
Speaker 1: back from them, and that way they won't be able
Speaker 1: to run the chip making equipment as efficiently as well
Speaker 1: as they could in the past. They may not be
Speaker 1: able to run at all. But there's a political dilemma there.
Speaker 1: He's going to essentially the pillars of the economy asking
Speaker 1: them to pull back loose sales when you know that
Speaker 1: the Chinese government is investing in competitors and would accelerate
Speaker 1: any kind of investments and competitors to create competition for
Speaker 1: these Japanese companies if they went ahead and did this,
Speaker 1: and that's a political tension for Kashita that he has
Speaker 1: to sort out with the White House.
Speaker 3: McKenzie, one thing you write is that even though China
Speaker 3: isn't able to import the most advanced machines, they've gotten very,
Speaker 3: very creative with trying to squeeze as much as they
Speaker 3: can out of the machines they're able to buy.
Speaker 2: That's right. So, you know, as Peter explained, these kind
Speaker 2: of holes in the overall export control regime between the US, Japan,
Speaker 2: and the Netherlands allowed China to massively massively stock up
Speaker 2: on equipment that could be even if it's not the best,
Speaker 2: good enough. And so when the US is casting doubt
Speaker 2: on China's ability to produce these chips at scale, We've
Speaker 2: talked to some analysts who say they might just be
Speaker 2: able to do that. And you have to bear in
Speaker 2: mind the Chinese government is massively backing these companies. They
Speaker 2: plan to invest more than one hundred and fifty billion
Speaker 2: US dollars into their domestic semiconductor industry by twenty thirty. Now,
Speaker 2: take it all with a grain of salt. The Chinese
Speaker 2: economy is not doing well. A real estate meltdown might
Speaker 2: squeeze government funding at all levels. But they've shown so far,
Speaker 2: and they've shown over decades, not just in ships but
Speaker 2: also in products like electric vehicles, that they're willing to
Speaker 2: put a lot of state money behind their tech companies.
Speaker 1: The concerns are not just that the export controls are failing,
Speaker 1: but that the export controls are backfiring on the US.
Speaker 1: What Beijing has decided is that they're at a point
Speaker 1: of no return. They need to invest in their own
Speaker 1: chip industry because they need to become self sufficient.
Speaker 3: When we come back, Can the US actually curb China's
Speaker 3: chip trade? Peter If China can't get the most advanced machines,
Speaker 3: but they're working to make them, that's going to take
Speaker 3: some time. What happens in this intermediate period where they
Speaker 3: do appear to be somewhat throttled in what they're able
Speaker 3: to produce.
Speaker 1: We are entering into uncertain territory for China. As much
Speaker 1: as Huaweiho's demonstrated the ability to make some progress here,
Speaker 1: Smick is helping them with these seven nanometer chips. We
Speaker 1: don't know exactly how far they can get on their own,
Speaker 1: but come the end of this year, they won't be
Speaker 1: able to get new machines, and they won't be able
Speaker 1: to get the of services and support that you would
Speaker 1: typically get from the companies that supply those machines too.
Speaker 1: So Chinese companies are going to be in a risky
Speaker 1: position as they try to function on their own produce
Speaker 1: these chips under trying circumstances. It is, as we've talked
Speaker 1: about a bit, it is less efficient to do it
Speaker 1: with the kind of DUV machines that they have right now,
Speaker 1: and there's a limited period of time where they can
Speaker 1: use these foreign machines to be able to make these chips.
Speaker 1: At some point, if the US keeps up the pressure
Speaker 1: and its allies keep up the pressure, they're going to
Speaker 1: run out of the stuff that they've bought from overseas.
Speaker 1: They're going to run out of their stockpiles, and then
Speaker 1: they need to have established the domestic industry that can
Speaker 1: help them pick it up from there support them as
Speaker 1: they go forward in making these chips in the future.
Speaker 2: And the question for the US is what kind of pressure.
Speaker 2: There's this debate happening in Washington right now over is
Speaker 2: it just that we didn't enforce export controls well enough
Speaker 2: or are ATO controls not actually the right tool to
Speaker 2: deal with this, And there's this kind of push and
Speaker 2: pull with industry and the Biden administration over how tight
Speaker 2: can we go? How much are you willing to hurt
Speaker 2: the revenue of American companies, And then there's this pressure
Speaker 2: mostly from Republicans on Capitol Hill who say the Bide
Speaker 2: administration is soft on China. This is a huge political
Speaker 2: liability for the president, it's a liability for the Commerce Secretary,
Speaker 2: Gina Raimondo. And it's all happening at the same time
Speaker 2: as the Bide administration has been sending cabinet official after
Speaker 2: cabinet official to Beijing trying to restore diplomatic relations, and
Speaker 2: then this feels a little bit like a slap in
Speaker 2: the face. In the backdrop of US China relations, there's
Speaker 2: always the looming question of Taiwan, and relations between Washington
Speaker 2: and Beijing have been souring for months. There was a
Speaker 2: spy balloon in February, the Secretary of State canceled his
Speaker 2: trip over there. But Taiwan is really the central question,
Speaker 2: and there's a fear that if China ever invaded Taiwan,
Speaker 2: the US and the world could lose access to the
Speaker 2: most advanced chips, which are produced by a Taiwanese company
Speaker 2: called TSMC. That's part of why the US is looking
Speaker 2: likely to issue subsidies to TSMC, which is building a
Speaker 2: plant in Arizona.
Speaker 3: Was it ever realistic to think that export controls could
Speaker 3: keep China from advancing this technology?
Speaker 2: If you talk to people who have been watching the
Speaker 2: industry for a while, none of them are surprised, and
Speaker 2: they say that the US government shouldn't be either. China's
Speaker 2: been trying to produce advanced indigenous semiconductor technology for years,
Speaker 2: and the fact that they did it so soon after
Speaker 2: the US imposed its controls, some people would say, means
Speaker 2: that the controls came too late.
Speaker 3: So, Peter, where do you see all this headed? Obviously,
Speaker 3: the stakes couldn't be higher, the tensions couldn't be higher
Speaker 3: between the US and China, even between the US and
Speaker 3: its allies. What happens next?
Speaker 1: It seems right now that Beijing is growing in confidence.
Speaker 1: Huawei is showing that it is possible to make breakthroughs
Speaker 1: in some of these key areas that are important to
Speaker 1: the technology industry in China. They were able to come
Speaker 1: out with this seven nanimeter chip, So there is a
Speaker 1: bit of a rallying cry around Huawei right now. They
Speaker 1: seem to be not just a national champion, but a
Speaker 1: national champion that's been able to take on some of
Speaker 1: the constraints of the US and break through. After the
Speaker 1: Mate phone came out, there were all sorts of memes circulating.
Speaker 1: Some of them mocked Gina Ramundo, who was in China
Speaker 1: at the time, as we discussed as a new brand
Speaker 1: ambassador for Huawei, you also saw caricatures of Uncle Sam
Speaker 1: being left behind as Huawei busted through the barriers that
Speaker 1: were being set up. So from Beijing's standpoint, they are
Speaker 1: certainly planning on accelerating their investments in some of these
Speaker 1: key areas. They want to be able to get a
Speaker 1: stable domestic semiconductor industry that can supply all sorts of things,
Speaker 1: certainly the tech industry and smartphone companies like Huawei, but
Speaker 1: beyond that very important areas like artificial intelligence like super
Speaker 1: and especially the military activities that they are going to
Speaker 1: develop in the future.
Speaker 3: Peter mackenzie, thanks so much. I learned a ton from
Speaker 3: this conversation.
Speaker 1: Great, thank you, weis, thank you so much.
Speaker 3: Thanks for listening to us here at The Big Take.
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