USA vs. China – PR Game

USA gets revenge for Raimondo’s embarrassment.  

• The Netherlands turned the screw on semiconductor equipment exports to China just as the US National Security Advisor was meeting with President Xi in what looks like perfect timing to remind China that it is not alone in being able to play the PR game.
• The government of The Netherlands has a relatively new Prime Minister called Dick Schoof who has already signalled his “wariness” towards China and is generally considered to be more hawkish than his predecessor who was more mercantile in his approach.
• The new government has let it be known that it may not renew some of ASML’s China export licenses when they expire at the end of the year.
• The licenses under review are concerned with ASML’s after-sales services such as maintenance and the provision of spare parts for its machines.
• This measure has teeth mainly because it would transform all of the deep ultraviolet machines at 20nm and below in China into very expensive paperweights.
• 20nm is very far from the cutting edge these days but these machines are still ultra-precise and require constant maintenance, software upgrades and spare parts to remain effective at producing semiconductors at high yields.
• China is not yet advanced enough in semiconductor manufacturing to make its own machines and so all the chips that it manufactures at these nodes and below are still dependent on machines from ASML, Nikon and Canon.
• This also means that it is also unable to service and manufacture spare parts for them which is why a complete ban on after-sales service could cause further serious problems for China in its quest to become self-sufficient in advanced semiconductors.
• The Netherlands and Japan have been under pressure from the USA to tighten their restrictions further and here the heavy hand of the Foreign Direct Product Rule (FDPR) has been lurking in the background.
• When deployed, this means that any product containing any technology or software created in the USA may not be exported without a license, face import bans in the US, or lose access to the technology.
• It is this combined with a more hawkish Dutch government, that has led to this possibility which came on the same day that Jake Sullivan (US National Security Advisor) was meeting with President Xi and other senior members of the Chinese state.
• Almost exactly one year ago when US Commerce Secretary, Gina Raimondo was on a state visit to China, Huawei launched the Mate 60 Pro which claimed to have 5G technology and a 7nm chip.
• Both of these are technologies that the USA has sanctioned and the extraordinary amount of press and social media coverage that the Mate 60 Pro generated made the USA look foolish.
• It turns out (and as RFM and Alavan Independent have pointed out on many occasions) that there was far more fluff than substance to the technological claims, but the PR damage was done nonetheless.
• This time the shoe is on the other foot and although I suspect that the timing is nothing more than a coincidence, it will raise questions in China as to why it is rolling out the red carpet for representatives of a state that is deliberately hindering its technological and economic development.
• When it comes to the economy Alavan Independent and RFM continue to think that China has done more to harm its technology sector than the US and its allies could ever hope to achieve on their own.
• The net result is that this will further distance the two sides from one another making the likelihood of any form of rapprochement whoever wins in November, even less likely.
• 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.