Biden’s Decapitation of Chinese Semiconductors
Dear Bidhop Rene Henry Gracida
If the current U.S. policy to cut off China’s access to advanced Artificial Intelligence chips and even force U.S. citizens and companies working with China’s semiconductor industry to leave China continues, expect the following results within 10 years:
- China, which already makes extraordinarily capable AI chips via firms such as Alibaba, will lead the world in the design and manufacture of such chips.
- The global semiconductor ecosystem—the thousands of interwoven vendors, customers, designers, manufacturers, and capital equipment makers now centered around the U.S—will rearrange itself. China will replace the U.S. at the center.
- The most important U.S. firms, such as Nvidia (NVDA), AMD, and Applied Materials will decline in sales, size, intellectual capital, and influence as their exclusion from the emerging China-dominated ecosystem will limit their output, their progress on the learning curve, and their access to talent.
- None of the European nations or companies currently indicating cooperation with U.S. policy will continue to do so for long. As China grows to dominate the ecosystem, firms like Holland’s ASML (ASML) (the ONLY maker of the advanced photolithography machines capable of etching single-digit nanometer circuitry needed for multi-billion transistor chips) will have no choice but to sell every machine they can to China.
- As China’s leverage grows it is more likely that ASML will find itself politically unable to sell to the U.S. than to China. The same pattern will emerge throughout the new ecosystem.
- South Korea, already one of the more pro-China Asian states will grow closer to China. Most western commentators emphasize the very real importance of Taiwan and Taiwan Semiconductor (TSM) in manufacturing the most advanced single-digit nanometer chips. But Korea’s Samsung is at least as proficient as TSM and may even be pulling ahead. As the ecosystem is reoriented around China, Samsung will see a steady increase in the proportion of its chip-manufacturing and design revenue coming from China. Samsung will expand its facilities in China.
- Korea will strengthen its political ties with China. China may emerge as a more reliable guarantor than the U.S. of South Korean security against North Korea.
- Taiwan will be forced to choose between the Chinese and U.S. semiconductor ecosystems. It will choose the Chinese.
- Already the U.S. has granted exceptions to Samsung and TSM to continue to manufacture in China and sell chips to China. This “reasonableness” is the first indication of many to come that the U.S. has overestimated its influence.
- Concessions like those made to Samsung and TSM will not change the message the Chinese (or the Koreans or Taiwanese) are hearing: They must replace the U.S. as a supplier and intellectual partner.
- U.S. politicians will not learn their lesson. Both the politicians and the national security lobby, which is funded by fears it deliberately flames, will scream all the louder as each of the predictions above become truer. They will demand even more restrictions further isolating the U.S. semiconductor industry, which will continue to decline.
- The U.S. will cede not only leadership of the semiconductor industry but its global political leadership as well as Europe and Asia are drawn more closely to China.
The last couple of weeks have seen repeated triumphalist headlines—all too often from conservative publications that should know better—to the effect that the Biden administration has “decapitated” the Chinese semiconductor industry. Within a decade we will see who has decapitated whom.