The US has banned semiconductor sales to China

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Semiconductors or microchips are in everything. Whatever you're using to listen to this podcast, it has a semiconductor. They are the brains of modern electronic devices and are necessary in communications, computing, healthcare, transport, energy. Look, basically, every industry.

Audio clip: [00:00:24] Almost everything we use depends on silicon semiconductors called chips. 

Audio clip: [00:00:30] From your iPhones, your fridge, your L4 to. 

Audio clip: [00:00:34] The most advanced supercomputers, the most basic toaster ovens. What's turning on your indicators? What's turning on your radio and your car? That's a chip. 

Sascha: [00:00:43] The Internet is often pinpointed as the great technology that's driven the past three decades of innovation. But really, semiconductors have been an equal part of that story. And over the past year, the supply of semiconductors has become geopolitically sensitive and governments around the world. I found that securing them has become a critical national security issue. This escalated this week after the US government banned semiconductor companies from building factories or even selling to Chinese customers. It's Friday, the 9th of September and today I want to know why has America put such a restrictive ban in place? And more selfishly, how is this going to affect me? To do this, I'm joined by my colleague and the co-founder here at Equity Mates. It's Alec Renehan. Alec, welcome to the dive. 

Alec: [00:01:32] Hi, Sascha. How's it going? 

Sascha: [00:01:33] It's going well. I'm really curious about this topic today. I've got to admit, until we started talking about it, I just didn't realise what a huge issue this was. 

Alec: [00:01:42] Yeah, massive issue. The brains of modern electronics. But before we start, we should acknowledge the Queen. Sadly, she passed. There's not really a business story there, so nothing for us to really talk about. But it's worth acknowledging. 70 Years on the throne. Pretty sad day. 

Sascha: [00:01:56] Yeah. And a massive cultural shift. I think globally it's hard not to acknowledge what an impact she had on the world stage. 

Alec: [00:02:06] But let's get to semiconductors, because the queen's life was marked by the rise of technology, and semiconductors were a key part of that. 

Sascha: [00:02:15] So the first question I think, that we should establish is what exactly is the difference between a semiconductor and a microchip?

Alec: [00:02:23] It's a good question because you hear those terms used interchangeably so much. And for our purposes, for most purposes, they are the same thing. Semiconductors, microchips, sometimes just chips. You hear them used interchangeably, but they mean the same thing. Today we're going to use semiconductors as the term just for simplicity. [00:02:43][20.4]

Sascha: [00:02:44] And when we're talking about semiconductors, I think it's really important to understand the geography because it really explains why they've become such a national security issue. [00:02:53][9.1]

Alec: [00:02:53] Yeah, that's right. Now, in your mind, imagine a map of Asia taking up. The majority of the map is China. To China's east. There are two tiny countries. Well, tiny in comparison to China, at least to the south east there is Taiwan and then directly to the east, about halfway between China and Japan, there is South Korea between those two countries. They produce over half of the world's semiconductors and they're both right on China's doorstep. They rely on the waterways that China claims as their own to export semiconductors around the world. And that is why it's become such a national security issue. [00:03:31][37.5]

Sascha: [00:03:31] And it really is just two companies. There's Samsung from South Korea, which has about 20% of the world's market, and TSMC, which is short for Taiwan Semiconductor Manufacturing Company. I love a straightforward name. They are from Taiwan and they have, by some estimates, up to 65% market share. How do you see this meeting and tensions over Taiwan really impacting the supply chain issues involving semiconductors here moving forward? [00:04:00][28.4]

Speaker 4: [00:04:00] Taiwanese tech giant TSMC warns that invasion of the island would render its factory inoperable, devastating global supply. Well, as you mentioned, people. [00:04:08][8.0]

Alec: [00:04:08] Here do have concerns. [00:04:09][0.7]

Speaker 4: [00:04:10] About a shortage of chips. Well, this is not because of the tensions in the region comparatively. [00:04:14][4.7]

Sascha: [00:04:16] China just has 4% of the world's market share and the United States has 10%. [00:04:21][5.0]

Alec: [00:04:21] That's right. These two companies dominate the market and they've become a real national security issue because semiconductors don't just power our consumer electronics, our phones and laptops. They also power critical pieces of infrastructure like electricity grids and hospitals, and they also power up military weapons. More and more weapons these days are just really advanced electronics. So cutting off a country's access to semiconductors would be like cutting off their access to technology altogether. [00:04:51][30.0]

Sascha: [00:04:52] And there's one more really important piece of context, and that's that making semiconductors is hard, really hard. [00:04:59][7.0]

Alec: [00:05:00] Really hard. A semiconductor industry joke goes, it's not rocket science. It's much more difficult, almost impossibly difficult. It takes years and billions of dollars to build a semiconductor fabrication plant. A former CEO of Intel once said that semiconductors were one of the most complicated devices ever made by humans. Individual transistors that make up semiconductors are many times smaller than a virus. Some of the layers on a semiconductor are just one atom thin. Wow. Manufacturing a semiconductor typically takes months, multimillion dollar machines and uses molten tin and lasers. One speck of dust can ruin a semiconductor, and these wafers of silicon can't be touched by humans or exposed to air. [00:05:48][47.8]

Sascha: [00:05:48] It's just astounding when you understand the context of just how complicated this industry is. So how are countries responding? Yes. [00:05:57][8.8]

Alec: [00:05:57] So semiconductors are hard to make, but they're critical for everything. So they've become a real national security issue. And countries around the world are trying to secure their supply of semiconductors. Europe, not a country. [00:06:10][12.7]

Sascha: [00:06:11] Europe clarified that for us. Alec, I was worried about your geography for a second. [00:06:15][3.3]

Alec: [00:06:15] Yes, you have. But the European Parliament have recently passed a Chips Act. They put €43 billion aside to secure their supply of semiconductors. 11 billion of that is to research new technology, but 32 billion. The majority of this package is to secure the supply of semiconductors by attracting companies to build semiconductors in Europe. They don't want to rely on importing semiconductors from Asia. They want to make the chips at home. [00:06:42][27.3]

Speaker 5: [00:06:43] Compared to the 1990s, Europe's position today is a lot less, and Europe is currently taking steps to regain some of its previous position by setting a goal for a 20% market share for semiconductor manufacturing by 2030. [00:06:55][12.5]

Alec: [00:06:56] Similarly, in India, they've allocated 30 billion USD to build up their semiconductor supply chain in an effort to not be, quote, kept hostage by foreign providers. [00:07:06][10.4]

Alec: [00:07:07] Tata motors, the largest electric vehicle producer in India, has joined hands with Renesas Electronics, a Japanese chip maker, to design and develop semiconductor solutions. [00:07:18][10.8]

Alec: [00:07:18] China has allocated 97 billion USD to build its own domestic semiconductor companies and manufacturing capabilities. A lot of it is focussed on Wuhan, Sacha Wuhan, which became famous with COVID. This really indicates how strategically important semiconductors are. While the rest of Wuhan was locked down in 2020, the one industry that China allowed to continue operating. Semiconductors today, about a trillion chips are made a year, all 128 for every person on the planet. And China's government is lending the industry the same strategic importance it gave to its atomic bomb programme. Going around the world, Japan has allocated $6.8 billion to attract semiconductor manufacturers to their shores. South Korea, already a semiconductor powerhouse, has introduced 6 to 10% tax breaks to keep building the industry onshore. And really, that brings us to the news of today, which America has now passed their Chips Act, which includes $52 billion in funding for domestic semiconductor capability. [00:08:24][65.2]

Speaker 4: [00:08:24] Meantime, senators yesterday approved funding for the CHIPS Act, including $53 billion to build semiconductors in the United States and $24 billion in incentives. [00:08:32][8.0]

Sascha: [00:08:33] So in summary, after that global tour, every country around the world wants to have semiconductors made at home so they don't have to rely on importing them from other countries. Something you can understand when you hear how complicated that process is. [00:08:48][14.3]

Alec: [00:08:48] Yeah, that's right. No one wants Chinese blockade of Taiwan and South Korea to disrupt their access to technology. So all the big countries are investing. But even the smaller countries, even here in Australia, our government is trying to encourage companies to build semiconductor foundries here at home. [00:09:06][17.4]

Sascha: [00:09:06] And like you alluded to before, the story of today is that America has told companies that if they are to receive funding under the Chips Act, they then cannot sell advanced semiconductors to China or build factories to make advanced semiconductors in China. [00:09:23][16.8]

Alec: [00:09:24] Yeah, that's right. Any company receiving money from this $52 billion fund will not be able to build factories in China for ten years. And what the US government is really worried about is China stealing the technology and then using it to improve their own home-grown semiconductor companies. [00:09:41][16.8]

Sascha: [00:09:42] So America don't want China to steal this technology. So I take it then America has a lead in semiconductor technology? [00:09:48][6.7]

Alec: [00:09:49] Yeah, that's right. America does have a lead. America and its allies, if you include Taiwan and South Korea in that, definitely have a lead. America used to be the semiconductor. Powerhouse of the world. In 1990 they made about 40% of the world's semiconductors. They've really lost that lead in the past few decades. They now make about 10% of the world's semiconductors. But they're really worried about China catching up. So they don't want American companies or companies that are from American allies like South Korea and Taiwan sharing their technology with China. [00:10:21][32.0]

Sascha: [00:10:21] Well, I think, Alec, that's the perfect place to take a break. And then when we come back, I'd like to understand how China has responded. And as I said, selfishly, I want to understand what the effects will be for people like you and me. [00:10:35][13.2]

Speaker 4: [00:10:44] The U.S. Senate on Wednesday passed sweeping legislation to bolster America's edge in tech and counter China, especially in the chip industry. [00:10:52][8.1]

Sascha: [00:10:53] Welcome back to The Dive. Today, we're talking about semiconductors. So, Alec, America has put this ban on semiconductor companies that are receiving money from the Chips Act from then doing business with China. Who is this going to affect? [00:11:08][15.1]

Alec: [00:11:08] So the main American companies that are really going to be affected first are Intel and Video and AMD. And we're already starting to see the effects. NVIDIA disclosed last week that they've been told by the US government to stop exporting two of their really advanced semiconductors to China that were being used to work on artificial intelligence. But we should acknowledge that this has been a longer running concern from America. And foreign companies are also being caught up in America's concerns. There's a European company, ASML, which make ultraviolet lithography machines, which are these multimillion dollar machines that are critical to make semiconductors. And ASML announced a couple of years ago now that they had been blocked from selling their machines to one of China's big chip making companies, Semiconductor Manufacturing International Co. Sascha, I know you love a straightforward company name, but ASML had been told to stop selling their machines to this company due to U.S. pressure. [00:12:10][62.0]

Sascha: [00:12:11] These machines are the only way to print minuscule designs on these chips. They cost up to $200 million, and they're only made by a single company, Advanced Semiconductor Materials Lithography or ASML. Interesting. So that's the American context. How has China responded to this? Yeah. [00:12:27][16.4]

Alec: [00:12:28] So China have said that America's move is reminiscent of a Cold War mentality. And really, we need to put this move in the context of a longer running technological dispute between Washington and Beijing and a longer running American concern about Chinese theft of American companies IP. But really, at this stage, China has really just responded with words. [00:12:51][23.1]

Speaker 4: [00:12:51] I think to be fair, we should step back and realise that these announcements are fairly consistent with the administration's broader semiconductor strategy, which they've been talking about for almost two years now. [00:13:04][12.5]

Sascha: [00:13:04] So it's words now, but is there anything that will happen beyond that? [00:13:07][3.2]

Alec: [00:13:08] So it's difficult if we just look at semiconductors because China is playing catch up. So if they put a similar ban in place and said American companies can no longer by Chinese semiconductors, I imagine the world would just shrug. American companies don't rely on Chinese semiconductors the same way that Chinese companies rely on American and her allies, semiconductors. So that wouldn't really have an effect. But, you know, China is a massive manufacturing powerhouse. It's the second biggest economy in the world. There's certainly other things China could do, but we haven't really seen anything yet. [00:13:44][36.2]

Sascha: [00:13:45] So it's a watch this space. What will this mean for China, though, and their manufacturing processes? [00:13:51][6.1]

Alec: [00:13:52] So I think we're going to see China struggle to get the semiconductors to really work on some areas of advanced technology. A key one that a lot of people are talking about is China's work on artificial intelligence. Invidious chips are some of the best in class for artificial intelligence, and China has essentially been cut off from accessing those, the two chips that Nvidia reported. They have been told by the government they can't sell to China. The A100 and H1 chips are designed to speed up machine learning tasks. Now these Chinese companies that were using those chips are going to have to use domestically made Chinese chips, which aren't as good. [00:14:31][38.2]

Sascha: [00:14:31] Okay, Alex, so here's the question. That's never really gone far from my mind. How does this matter for me? Is this going to affect any of the technology I'm buying? I mean, right now we're recording this podcast on two laptops in different parts of the country. Chips are clearly a big part of our lives. What does this mean? [00:14:48][17.3]

Alec: [00:14:49] Yes, I think for Sascha, the investor, it may affect you in some ways. The companies that make chips may report lower sales because they've been cut off from a major market. For example, we keep talking about in video. They report it to the market that they had booked $400 million in sales this quarter to China. That may be lost with this ban. So we might see revenue fall for some of the companies that people are investing in. So that's how it's going to affect Sascha, the investor, Sascha, the consumer. You're probably not going to be affected that much. There's a question about some of the companies that manufacture electronics in China, like let's take Apple, for example. They make iPhones in China. Are they going to need to move manufacturing if they can no longer send advanced semiconductors to China? We don't know what the answer to that question is yet. But realistically, Sascha, the. Consumer, at least so far, shouldn't be affected too greatly. [00:15:44][54.9]

Sascha: [00:15:44] I'm definitely going to refer to myself now in third person as both Sascha the consumer, Sascha the podcast, her, Sascha the investor. It's good to cover all my bases. [00:15:53][8.6]

Alec: [00:15:54] Well, Sascha, the podcast host, you're probably going to be affected positively because we're going to have more stories to tell. [00:15:59][4.9]

Sascha: [00:15:59] I love that. So before I let you go, have you got any final thoughts on this subject? China is really ramping up. [00:16:06][6.9]

Alec: [00:16:07] Its technology development. And there are four key areas where I would say the competition between China and the U.S. is joined. 

Alec: [00:16:14] I think beyond this story of the day, it's important to put this story in the broader context of what's happening between Washington and Beijing, because we are seeing escalating tensions. We are seeing a bit of a return to the Cold War mentality of not really wanting to share advanced technologies. And that's because science has become the front line of this brewing Cold War. We're talking about semiconductors today, but I'm sure in the minds of US policymakers, they're also thinking about other cutting edge technologies where America has a lead and how much they want to share with China. You know, artificial intelligence, 5G and six technology rockets, gene editing and other life science advances. Energy generation semiconductors is the story today, but we shouldn't be surprised if there are other stories like this in coming months and years. 

Sascha: [00:17:09] Well, let's leave it there for today, Alex. But as you said, this is probably an area where we're going to have many more stories. If you enjoyed this episode, please tell a friend about it. Word of mouth really is the best way for our podcast to go. And if you're listening because you've been referred, welcome, go check out our back catalogue. We've got some great stories there. You guys talked about the battle of the prequels. We did an update on the Elon Musk versus Twitter lawsuit and we talked all about Ryan Reynolds buying a football team. You've got to listen to find out what that's about. Remember, you can follow us on Instagram at the dive up business news. You can contact us by email, the diver Equity Mates dot com and you can subscribe wherever you're listening to right now so you never miss an episode. Thanks so much for joining me today, Alec. 

Alec: [00:17:53] Thanks, Sascha.