USA vs. China – The tell

China reveals its hand.

• China has banned Micron’s products from critical infrastructure in a move that clearly demonstrates just how weak its hand is in semiconductors which remains something it is not going to fix any time soon.
• The Cyberspace Administration of China (CAC) has announced that Micron’s products “posed significant risks to China’s critical information infrastructure” and as such, those that own and run such infrastructure have been ordered to stop buying from Micron.
• The CAC has conducted a seven-week investigation into Micron but its findings have not been made public other than to say that Micron’s products had failed a network security review.
• This opacity adds weight to the US Commerce Department’s view that the ban has “no basis in fact”.
• Hence, this looks to be merely a tit-for-tat retaliation to the recent substantial increase in limitations that have been placed on China’s ability to source advanced semiconductor manufacturing equipment and some advanced chips from the USA, Japan and The Netherlands.
• China has made this move safe in the knowledge that it can source the same memory chips that it was buying from Micron elsewhere, and so there is no real possibility of this ban hurting China.
• This is also why the USA recently encouraged Korea to limit its exports to China as this will probably be the first place that China calls to get replacements for the chips that are now banned from Micron.
• If Korea was to also limit its exports to China, then it would make the task of replacing chips purchased from the USA more difficult.
• However, there is no indication that Korea has implemented a restriction like this and so I suspect that China will be able to replace Micron chips in its infrastructure quite easily.
• While this may look like a win for China in the short term, all it really does is expose just how weak its hand really is when it comes to semiconductor components and manufacturing technology.
• If China really wanted to make a proper impact on the USA, it could do so by banning the sale of Apple products in China which were $17.9bn in FQ2 23 making up 19% of total revenues.
• It could also place restrictions on Qualcomm which also has a significant proportion of its revenues coming from China.
• Bans on either of these two companies would have a far bigger impact than banning Micron, but it is pretty clear that China has explicitly chosen not to take this course.
• The reason is pretty clear as not being able to buy Apple products would make a large number of wealthy Chinese citizens pretty unhappy while banning Qualcomm would hurt Chinese Smartphone makers’ (and soon car makers’) ability to make their products, especially for sale overseas.
• At the moment there is no real way to replace Apple products and no real way to replace Qualcomm with an on-shore Chinese headquartered company.
• In some instances, Qualcomm can be replaced with MediaTek, but this is not really a Chinese company in the same way that TSMC is not Chinese.
• Hence, I think it is clear that China acted on Micron because this is one company that it can be pretty sure that banning its products will cause no collateral damage.
• It further demonstrates that China remains dependent on imported semiconductors and that its efforts to make it’s own are many years away from being able to replace those that it imports.
• It further underlines my long-held view that China will never catch up while silicon remains the main substrate for the manufacture of integrated circuits.
• Silicon probably has decades of life left in it and so this is not an issue that is going to disappear any time soon.
• However, for other technologies like AI, 6G, Robotics, Autonomous driving, Quantum Computing and so on, China is competitive with the USA which is why the USA is looking to leverage its advantage in semiconductors to slow China’s progress in these areas.
• I continue to see a splitting of the technology industry into two pieces with China’s technologies and standards on one side and the rest of the world on the other.
• RFM research has indicated that this benefits no one as one network will now be split into two pieces with the amount of value creation for all concerned being materially less.
• This means lower growth for the technology industry in the long term which is optimal for no one.