China vs. USA – Pawn to king four.

The Biden administration makes its first clear move on China

• The Biden administration has made its first move against China in what looks like a warning shot rather than any real attempt to hobble a part of China’s technology industry.
• The USA has placed Tianjin Phytium IT, Sunway Microelectronics, Shanghai High-Performance IC Design Center and four regional facilities of the National Supercomputing Center on the entity list.
• Crucially, the USA did not employ the foreign direct product rule which leaves open a number of workarounds.
• It was the addition of this rule in August 2020 that finally sank Huawei’s valiant efforts to circumvent the roadblocks the USA kept on throwing in its way.
• This rule essentially requires that any company in the world that uses a piece of US technology (hardware or software) must obtain a licence to sell to a company on the entity list.
• Huawei was dependent on TSMC to make its cutting edge chips and because TSMC is also dependent on US equipment to make its products, it had no choice but to cut Huawei off.
• Being just on the entity list stops well short of this as it means that if the product or technology in question is created outside of the USA, the company can still sell it to these entities.
• While this gives these companies ways to get around this restriction, there are going to be some problems.
• The biggest one of these is likely to be their reliance on the USA dominated Electronic Design Automation tools industry.
• These are software tools that help chip designers quickly design the transistor layout of an integrated circuit so that it can optimally perform certain tasks.
• 4 USA companies (Synopsis, Mentor, Cadence and Ansys) dominate this industry with a 90% share and all of them are US companies.
• This creates a problem because while of these companies have representative offices in China, the real IP that goes into these tools is created in the USA.
• This means that these entities will no longer have access to software updates or new products although they will still be able to use the tools that they have already purchased.
• This is going to be a problem, but I suspect that it is one that these entities can manage one way or another.
• This is a confirmation of Radio Free Mobile and Alavan Independent’s view that the current administration remains very hawkish on China despite the recent commentary and there may be more to follow.
• However, the fact that this action does not go all out in terms of blocking these entities also indicates that to some degree, this is a reminder that China is at a great disadvantage when it comes to critical semiconductors and that there is more the USA could do.
• The USA needs to press its advantage now because the current supremacy that it enjoys in semiconductors is not applicable in other areas of the technology industry.
• In areas like AI, autonomous driving and Quantum computing, the Chinese are demonstrably as good as anyone else and the USA has no meaningful leverage.
• However, silicon-based semiconductors are not going anywhere anytime soon meaning that for at least the next several years, China will be at a great disadvantage.
• Hence, I think the best strategy for China will be to do a deal now and then look to renegotiate when the semiconductor overhang is less relevant, and China can negotiate from a stronger position.
• One advantage of not having elections is that China can think and plan far further into the future than any administration that has to get re-elected every 4 years or so.
• We think that this would be a much more effective way of increasing one’s influence as opposed to any militaristic manoeuvre on Taiwan.
• The big question is how patient can President Xi be?