The Trump Administration seems intent on heaping on punishments to the Chinese economy, especially the technology sector. These punishments are hurting not only China but the entire world including America. Perhaps next will come some type of sanctions on Ant Financial, a planned $35 billion joint offering on Hong Kong and the Shanghai SMART exchanges. Ant is a massive on line finance company that among other things is a payment vehicle and a small business lender. Assuming it overcomes certain technical issues involving the Chinese and Hong Kong authorities, the Ant IPO would be the world’s largest and reflects China’s growing importance in the global economy. The US is going to have to come to terms with this instead of enacting what seem like spiteful attempts to halt Chinese progress. But still as this blog goes to press the Screw China Squad in the US State Department is reportedly hard at work trying to find ways to hurt the Ant IPO. Ant operates almost solely in China and in the world of finance. Supposedly the implausible argument will be made that Ant threatens US security. We’ll see.
By the way, the lead bankers on the Hong Kong leg of the Ant IPO will reportedly be Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Citibank. All likely to be viewed as traitors in the screwed up minds of the Screw China Squad and extremists like Steve Bannon. Heroes in my mind.
5G – Thanks To America In Slow Motion
In an event with the hoopla that only Apple can muster, Apple announced the introduction of four new 5G phones. The new phones reflect Apple’s legendary design and engineering capabilities. Just one problem. Apple’s new 5G toys need 5G networks to show their 5G stuff. And globally the introduction of 5G networks is being slowed by the American war on Huawei. Countries all around the world such as Brazil and Mexico have Huawei equipment installed. The UK and even the US are going to spend fortunes ripping out Huawei equipment. Huawei it should be noted leads the world in 5G patents.
The US has imposed an embargo on all exports to Huawei by American and foreign producers who depend on American parts. The US has said export to Huawei and you die. US firms of course must obey but so also must the foreign firms. The US controls the dollar, the world’s global currency. If foreign firms like Taiwan Semiconductor export to Huawei they will die if choked off from US dollars. Many would view this US action as an abusive exercise of extraterritoriality but nowadays the US does what it pleases.
Unfortunately for Huawei, it depends on American parts and parts made by foreign producers who themselves depend on American parts. A just completed “tear down” by Nikkei Asian News of Huawei’s core 5G base station has revealed that US suppliers make up nearly 30% of the product in value terms. Moreover, the key central processing unit was made by Taiwan Semiconductor which now can no longer supply this product.
Huawei faces the Herculean task of weaning its dependency on overseas suppliers. An endeavor if successful bound to increase costs. For now Huawei needs to make do with stockpiled inventories which won’t last forever. A better solution would be for the US to relax its embargoes on Huawei. Hopefully that will be the eventual outcome. The US is entitled for its perceived national security reasons to keep Huawei equipment out of the US. But why does the US have to destroy and/or delay 5G for the rest of the world?
Nokia and Ericson are considered Huawei’s leading competitors. They are reputed to have higher cost operations and to be technologically behind Huawei. If the world has to depend on them, a global 5G rollout will be more costly and much slower. The Trump Administration treats these firms as if they were American. US Attorney General Barr even suggested the US take a controlling stake in one or both of these. Admittedly this is a straw man as the idea has apparently gone nowhere. But the fact that it was seriously proposed is a tribute to distorted thinking. This would be an odd sort of industrial policy considering neither firm is American. Nokia is headquartered in Finland, Ericsson in Sweden. Neither country is in NATO and therefore not formally an American ally. Barr might argue that these companies are headquartered in countries which are democracies and therefore should be treated as American.
I might argue the fact that these are Caucasian countries might be in Barr’s subconscious. The yellow hordes must be stopped. Moreover, there is an irony here. Asia Times, a leading publication out of Asia, has asserted that both Nokia and Ericsson rely heavily on manufacturing facilities In China. Whoops!
The Tech War on China Will Severely Damage the American Semiconductor Industry
Semiconductors are the cornerstone of the entire computer economy. And more or less, they are an American creation. Free markets, the world’s best university system, liberal immigration, globalization – these were the ingredients that made America undisputed number one in semis. And there is no reason if left in place why they cannot keep America number one in the future. In recent years China was stepping up to join the semiconductor party. But China is way, way behind America regarding semiconductors. The Trump regime should be bragging about this American success story and encouraging those factors which created the success. But instead, the Trump regime, acting on what I believe is a racially based fear of Chinese ascendency, a complete misunderstanding the dynamics of the semiconductor industry and a troglodytic view of international economics in general, has rained a series of restrictive embargoes on semiconductor and semiconductor equipment exports to key Chinese companies. The objective is to halt China’s economic and technical progress, which in the short run it will do. But in carrying out this objective the Trump Administration will do irreparable damage to the American semiconductor industry. And long run will ensure the growth of a Chinese semiconductor industry. America will cease to be number one in semis.
Consider the following negatives:
The embargoes are resulting in a major loss of markets for American semiconductor companies. For example in 2019 Huawei purchased some 12 billion dollars in foreign, mostly American, equipment. This loss of the Chinese market will translate into a drop off in R&D on the American side. Congress, in a bill called the Chips for America Act, is considering a $10 billion handout to the semiconductor industry. This is supposed to offset the loss of the Chinese market. It is not clear that this will pass or what the exact dollar amount will be. And not clear how it will work. But it is likely to be a political boondoggle vastly unequal in size or efficiency to lost Chinese revenues. One semiconductor fab at a minimum costs $10 billion. If America wants to abandon its free market principles and play the industrial policy game – and imitate China—it had better be prepared to pay.
My last blog stressed the next point but it is worth repeating. From CEO’s to founders to top engineers and scientists, the American tech sector is heavily populated (dominated?) by immigrants. But the Trump regime hates immigrants and has greatly slowed the flow of technically trained immigrants into the United States. The H-1B program, a route that young foreign brains take to gain American employment, has been turned into an obstacle course with a soaring rejection rate. Brains are what make for semiconductor progress. A large percentage of US graduate students in the STEM subjects are of foreign origin, largely China and India. Historically, the majority have wanted to stay and work in the United States. Now the unwelcome mat for foreign students is out. Senator Rick Scott of Florida has opined that all Chinese students are spies. Perhaps he could troll the Everglades to find local more trustworthy replacements. The trouble is alligators can’t do software.
China’s cooperation in what has been a global industry may cease. For example, will China allow the merger of Nvidia and ARM? This merger is viewed by many as having the potential of creating the world’s most important semiconductor company. But ARM is a British headquartered company and is currently owned by Japan based Softbank. China apparently does have a veto on this merger. Will China view this merger as putting ARM directly under the control of the Americans and therefore oppose it?
Many in Asia think the US is fostering the growth of the Chinese semiconductor industry which some day will compete with the American. Necessity is the mother of invention. A desperate China will throw money at this problem in an attempt to gain self sufficiency in semis and then compete with the Americans. This is not the most efficient use of resources. We will all be poorer.
The US embargoes have disrupted what up until now been an incredible global market-based phenomenon. In semiconductors the US, Japan, China, South Korea and Taiwan have hosted what author Dieter Ernst calls a global innovation network. There may be nothing like it in history. The wide reaching and draconian US embargoes have disrupted this network, to the detriment of all these countries and humanity in general. For example, the IPO of memory producer Kioxia had to be canceled because of an embargo based prohibition on exports to Huawei. This IPO was expected to total some $3.6 billion and would have been Japan’s largest in 2020. Media sources from Asia have reported that numerous Asian firms located in this global innovation network have been hurt. Sony is one example. These firms except the Chinese are located in countries which are American allies. Well, too bad for allies. America First!