China vs. USA – Economics is Everything

China blocks the USA with no viable alternative.

• China has moved to remove Intel and AMD from its data centres but with Huawei and the rest of the semiconductor struggling to come up with a viable alternative, China’s technology sector may take yet another hit from this move.
• On December 26^th China’s Ministry of Industry and Information Technology (MIIT) issued guidelines that followed up on the removal of Windows from government computers with a new requirement to remove Intel and AMD from government data centres.
• An interesting thing to notice is that Nvidia is absent from this list highlighting that for AI, China is far from being able to replace it.
• As always in China, it is not the ruling itself that matters but whether the relevant departments begin to follow it, and in this case, this has now begun.
• The MIIT has issued a list of 18 approved processors from Huawei and others which use a whole range of architectures including x86, Arm and some homegrown.
• I suspect that it will be the x86 architecture that will be chosen in this instance as this will make software porting from Intel or AMD much simpler.
• However, if China is going to do a complete revamp and rewrite the software, it may as well go with something homegrown.
• RISC-V is the most likely candidate here, but it will need a lot of work to get a data centre class processor from its current condition.
• This sounds like a good strategy from China’s perspective in terms of its desire to rid itself of foreign technological dependence, but as always the devil is in the details.
• Huawei is emerging as one of the lynchpins in the strategy to make advanced semiconductors, but this is also fraught with problems.
• For example, Huawei has recently filed patents for a manufacturing technique known as quadruple patterning which is a way of making 7nm or 5nm semiconductors on older deep ultraviolet equipment (DUV).
• Both Intel and TSMC tried this technique for 7nm, but they found that while you could make the chips, the yields were so low that it was not possible to make the chips and lose vast sums of money.
• This was the mistake that started all of Intel’s current problems.
• This is the distinction that the technology press always seems to ignore which is in the long run, if you can’t make the chips at break-even or better, then the chip being made has no practical use.
• Consequently, China is capable of making advanced chips and has proved to be very successful at using them for publicity purposes but using them to support a completely domestic technology industry is a fantasy.
• This is the case because the Cold War was won by the US economy as the Soviets simply could not afford to keep on pouring money into non-economic endeavours.
• Hence, China needs a booming economy to continue financing chips that haemorrhage cash, and this is not the case today.
• The combination of demographics, the real estate crisis and the deep depression that seems to cast its shadow over anyone active in the private sector leaves me very pessimistic about a Chinese turnaround.
• Hence, I think that the Chinese economy will continue to limp along and remain incapable of financing the massive capital requirements of manufacturing leading-edge chips on old equipment.
• This means that data centres are going to be more expensive to build or they will use older technology which will again make them less economical.
• This will be crucial as it will make Chinese technology less competitive meaning that other countries are less likely to select it.
• This is a crucial part of the ideological struggle as we are heading into a world where there will be competing technology standards as opposed to the single global standards in use today.
• Countries in Africa, Asia and the rest of the developing world will have to choose between China and the West and historically, the Western standard would have been much more expensive.
• However, by using older or much more expensive technology, this edge will be greatly diminished meaning that 3^rd party countries are much more likely to pick the Western version.
• However, in the long run, multiple and incompatible standards are bad news for everyone because the total opportunity for value creation will be orders of magnitude less.
• This means lower long-term growth for the entirety of the technology sector unless there is a rapprochement of some sort.
• At the moment, this is a very distant and dim hope.