When the U.S. Trump Administration’s recently attempted to slam the door on Huawei, China’s leading telecommunication and technology loaded company, he and his China advisors broke the heretofore gold standard in international collaboration; and that has been the world’s semiconductor industry.
The U.S. Department of Commerce recently announced that henceforth, any semiconductor chips made with equipment built by American companies cannot be sold to Huawei without prior approval and license from the DOC.
This new regulation is unprecedented and in violation of normal sales contract between the buyer and seller of the equipment. And difficult to know if the DOC has any legal ground to stand on.
Depending on the complexity of integrated circuit, the manufacturing process could easily take a dozen steps or more. Many of the critical steps use high precision equipment designed and manufactured by American companies. In effect by requiring a license in order to sell to Huawei is to threaten the supply of semiconductors to Huawei.
Silicon Valley in the San Francisco Bay Area gave birth to the semiconductor and American companies continue to dominate the manufacturing of equipment needed to fabricate the increasingly complex semiconductor devices. There are five major semiconductor manufacturing equipment (SME) companies in the world and three of them are American.
The mantra of the semiconductor industry is to make successive generations of integrated circuits that are faster, smaller, cheaper and more powerful, doubling in performance roughly every 18 to 24 months. To keep this trend going, the fabrication equipment has to become more intricate and more powerful and therefore more expensive.
Writing off an obsolete fabrication line and investing in the next generation technology became a hurdle only highly capitalized multinational companies can play. Along came Taiwan Semiconductor Manufacturing Company with a new and unique business proposition.
TSMC revolutionized the semiconductor business
They announced that they will invest and keep investing in the state-of-the-art equipment to make the semiconductor chips as a “foundry” service to anyone that wishes to take advantage of such “toll” fabrication.
Thus, TSMC irrevocably altered the business model for the industry. No longer having to invest in a “fab” (industry lingo for a production line), companies can concentrate on designing new chips to perform new functions and tasks. A million dollars for computerized design tools can now launch a startup with an idea to meet a market opportunity; whereas to own a semiconductor fab, the company would be looking at minimum investment well north of $1 billion around a decade ago to now north of $10 billion.
For the last 30 years, “fabless” companies proliferated. Some, such as Nvidia, concentrated on proprietary chip designs to be sold on the market. Others, such as Huawei, can afford to design specialized chips for their own internal use.
With no exaggeration, the independent foundry model enabled the recent boom in the economy driven by high technology companies.
The entire world benefitted from the virtuous circle made up of innovative chip designs by fabless companies, to be made by independent foundries and then sold to gadget makers such as Apple and Huawei.
Advances in chip design take advantage of advances in the semiconductor manufacturing equipment which are then incorporated into new end-uses and novel applications. Each step on the chain goads the next to stretch and attain the next level of technological advances.
Digital currency, autonomous driving and applications on the drawing board based on artificial intelligence are all waiting for the introduction of the next generation of semiconductor devices.
That is, until the Trump administration abruptly changed the rules of the game. Suddenly, American made SME cannot be used to make semiconductor chips for Huawei.
In the process, TSMC became an unwitting victim caught in the squeeze play between the Trump White House and Huawei. Huawei has been one of the most important clients for TSMC accounting for as much as 20% of its annual revenue.
TSMC may have decided to finally yield to the White House pressure and agree to locate a fab in Arizona to help Trump look good and hopefully in exchange for the good will that would allow the company to protect its business with Huawei.
TSMC outsmarted by Trump?
Surprise, surprise. Just the day after TSMC signed the agreement to invest $12 billion and build a fab in Arizona, the DOC made the announcement that could force TSMC to stop selling to Huawei.
Less than two weeks earlier, the DOC also gave Huawei a head fake by signaling that American companies will be allowed to participate in organizations along with Huawei to set industry standards for 5G, the latest wireless technology.
This action suggested that DOC had finally recognized how far Huawei has come to dominate the development of 5G. By agreeing to work with Huawei would seem to hint that some sort of peace agreement was in air.
Not so. It seems double dealing and in bad faith has become the hallmark of the Trump Administration.
Of course, the estrangement with Huawei will materially impact sales of all semiconductors to China. America has remained the world’s leader and biggest supplier of semiconductors and China has been America’s largest customer. Before the pandemic in 2018, US sold $75 billion worth of semiconductor chips to China or about 36% of the U.S. output.
When China retaliates by buying less from the U.S., the generous trade surplus enjoyed by the American side will shrink. Lower sales mean less profit and less funds to spend on R&D and that will erode America’s leadership in this high-tech sector.
Chips suppliers from Japan and Korea will be happy to fill the void left by the U.S. and China will be more determined than ever to invest in the development of semiconductor technology that will break the dependence from the U.S.
The short-term outcome is lose-lose, but the long-term consequences will be disastrous for both sides. The virtuous circle where everybody gains will be replaced by vicious competition and market fragmentation.
At the so-called Rose Garden press conference on Friday, Trump read a statement on his position on China, World Health Organization (WHO) and Hong Kong. He didn’t specifically threaten to tear up the phase one trade agreement signed in January with China, but it would be difficult not to conclude that the bilateral relations are heading toward decoupling.
Painful future awaits both parties
Once Beijing gets weary of continuing to be conciliatory and hope for reconciliation, their retaliation will be nasty and directed to where it would cause most pain. It won’t just be not buying soybeans and Boeing aircrafts.
As Macau News Agency points out, gaming licenses are up for renewal over the next two years. By merely starting rumors that the renewal for Sands China is problematic and it would devastate majority owner, Sheldon Adelson’s net worth.
Adelson has been Trump’s most important underwriter of his political fortune, to the tune of over $100 million for each election cycle. Trump will feel the sting of Adelson’s pain.
What will the world look like, when the bilateral relations split into an American sphere of influence and a Chinese sphere of influence?
The U.S. sphere is best represented by the “charm” of smooth-talking top diplomat, State Secretary Mike Pompeo. He struts around the world offering no carrot, just the threat of sanctions if the hapless country doesn’t go along with whatever is in American interest that he dictates.
Some small nations do get intimidated and fall in line because they fear the might of U.S. sanctions. Under Trump, these sanctions can be arbitrary and at the whim of Trump.
Others fall in line because they feel the need for the security promised by the presence of American military, as for example the case for Taiwan. Despite the feckless nature of the Trump Administration, the Taipei government willingly submit to being violated by letting Washington coerce TSMC and their crown jewel to Arizona.
However, there is no reward to be an economic ally with the U.S. If you, such as Vietnam for example, sell more to us than buy from America, we get upset and put a tariff on your goods. If you happen to have a comparative advantage that we don’t have, we will ask Congress to enact a regulation to erase your advantage. We are the hegemon and we can do whatever we want.
Trump’s majority of one not looking great
But America’s presumption as the leader of the world is starting to breakdown, brick by brick. Whether the issue is climate change, weapon non-proliferation, open sky inspection, covenants with Iran and others, European Union nations resent having no say in America’s decision. They are expected to abide by whatever Washington decides as in America’s best self-interest, sometimes without so much as a courtesy consultation.
Doesn’t matter to Pompeo if the interests of EU and the U.S. are not aligned. But with increasing regularity, when Pompeo makes a declaration, the EU members pretend to be hard of hearing.
As Asia Times pointed out, China and the Asian countries are far ahead of the West in recovering from the coronavirus epidemic and well on to economic recovery. China’s trade with Asian countries is three times what China has with the U.S. The writer goes on to say that the long-term driver of Asian growth is China’s emergence as a tech superpower.
Certain members of Congress along with Trump seem to think that China desperately needs to send students to the U.S. to steal American technology. They probably don’t know that China is already first in the world in supercomputing, quantum computing, 5G telecommunications, hypersonic weaponry, civil engineering, high speed rail, electric vehicles, self-drive cars and buses, along with a myriad of other disciplines.
At the Friday press conference, Trump announced that he will sever the relationship and stop funding the WHO because, he claimed, WHO is in China’s pocket. He was not fooling anyone, of course. He has to double down on blaming WHO so that he doesn’t have to explain why more than 100,000 Americans have died from Covid-19.
At the World Health Assembly with representatives from 194 nations that convened just 10 days earlier, every member expressed support for the WHO as essential to safeguard world’s health, except the U.S.
China’s President Xi addressed the assembly. He didn’t know at the time that the U.S. was going to withhold more than $400 million per year of financial support to the WHO. He announced that China would contribute $1 billion per year for two years to help WHO fight the pandemic.
Xi also reported that China has five potential vaccines undergoing clinical testing. Should any emerge as a safe and effective vaccine, then he pledged that China will make the vaccine available to everybody.
The U.S. also has vaccines under development. However, their position is that the owner of the intellectual property for that vaccine will decide. Asia Times has an excellent analysis of the vaccine “war” here.
If you are one of the 190+ nations having to decide which sphere of influence to become a part of, which would you choose?