China vs. USA – Tit for Tat pt. III

The cure for high prices is high prices.

• The Chinese export restrictions on Gallium and Germanium are tight enough to have triggered significant price rises which will in time incentivise production to resume outside of China both fixing the price problem and demonstrating that the Chinese restrict strategy will have no long-term impact.
• In July 2023, China restricted the export of Gallium and Germanium to gain negotiating leverage in its battle to secure leading-edge semiconductors to support its technological development.
• It resumed exports in November 2023 but with enough regulatory oversight such that exports have become much more complicated which in turn has led to the increase in prices observed and the worries about shortages.
• RFM Research and Alavan Independent are of the opinion that the USA’s strategy to slow China’s rise as a technological and geopolitical power by restricting semiconductors is reasonably effective.
• Although China can still make chips at leading-edge nodes, it is unable to do so at scale and profitably making this workaround ineffective in the long run.
• We think that this is already beginning to play out in Gallium and Germanium.
• This leaves China in a position of needing to get access to foreign technology and we see three potential strategies to achieve this.
• First, recreate where China recreates the entire semiconductor value chain from scratch, second replicate, where pieces of equipment are acquired and then reverse-engineered and third, restrict, where raw materials that China controls are subject to export bans in order to achieve negotiating leverage.
• Although China is actively trying to recreate the pieces of semiconductor technology that it no longer has access to, it has spent most of its retaliatory efforts on restriction.
• China produces the vast majority of different minerals such as rare earth metals, Germanium and Gallium all of which are used in semiconductor manufacturing or electronics manufacturing.
• However, while China produces the vast majority of these products, it does not control anything like a majority of the reserves, and this is where this strategy comes unstuck.
• For example, it is estimated that there are around 38,000 tonnes of Germanium in proven mineral reserves across the world of which China controls roughly 6,800 tonnes or 18% although it produces around 60% of global supply.
• This is nothing like enough to be able to control the mineral as the impact of high prices and export restrictions will be to make previously uneconomic reserves viable and incentivise production outside of China.
• These take time to come online meaning that while China can cause price spikes, it can only do so temporarily as the market can and will self-correct over time.
• Unless China can establish control of essentially all of the reserves of an essential mineral, the restrict strategy is unlikely to bear fruit, as in this case.
• If the Chinese state is serious about proper retaliation, its most effective move would be to ban imports of all of Apple’s and Qualcomm’s products into China.
• While this would have a real impact on the USA, it would probably do more damage to Chinese companies as well as the state’s standing with the population.
• Hence, we see this is a very low risk although recent events have led us to think that the risk of an Apple ban is rising slightly.
• This continued rivalry means that the days of global standards are numbered and going forward we are likely to see one standard outside of China and another, competing, and non-compatible standard inside China.
• This is bad news for everyone as two incompatible networks will generate much less value than one global network.
• Consequently, long-term growth for the entire technology sector over the next 10 to 20 years will be lower than it otherwise would have been.