How The Escalating U.S.-China Tech War Could Hurt American Companies

Summary

The video explores the critical role of semiconductors, or microchips, in powering modern technologies, from smartphones to AI. It delves into the ongoing tech war between the U.S. and China, where trade restrictions and geopolitical tensions have escalated competition in the semiconductor industry. As the U.S. imposes export controls to limit China's access to advanced AI chips, China ramps up efforts to boost its domestic semiconductor production. The video highlights the economic and national security implications of this global chip rivalry, emphasizing its impact on companies and future technological advancements.

Takeaways

• 📱 Semiconductors are essential to modern technologies, powering everything from smartphones to fighter jets.
• 💡 Microchips are regarded as the 'brains' of modern tech, making them crucial for industries such as AI, computing, and telecommunications.
• 💵 The semiconductor industry is valued at $574 billion and is expected to surpass $1 trillion by the end of the decade.
• ⚔️ US-China tensions have heightened over control of semiconductor technology, with the US imposing trade restrictions on China's access to advanced AI chips.
• 🛑 The Biden administration has tightened restrictions to limit China's access to AI chips, impacting companies like Nvidia, which now anticipates reduced sales in China.
• 🇨🇳 China's government has invested heavily in developing its domestic semiconductor industry but remains behind countries like the US, Japan, South Korea, and Taiwan.
• 🔨 The US export controls have significantly slowed China's tech development, though China has made strides, such as Huawei's production of advanced chips.
• 🛡️ The US is focused on preventing its technology from bolstering China's military capabilities, viewing AI and semiconductor technology as key to maintaining a defense advantage.
• 🤖 AI is a central focus of the tech war between the US and China, with both nations understanding its critical future role in military and civilian applications.
• 🌍 The growing divide between US-led and China-led technology sectors is expected to lead to a bifurcation in the global tech landscape, particularly in areas like AI and advanced computing.

Q & A

What common feature do smartphones, cars, toasters, and fighter jets share?

They are all powered by advanced semiconductors, also known as microchips or chips, which are crucial technologies driving modern industries.

Why are semiconductors referred to as the 'brains' of modern technologies?

Semiconductors are essential components that power various devices, including smartphones, cars, and AI systems. Without semiconductors, many technologies would not function, making them critical to the tech industry.

How has the semiconductor industry grown in recent years, and what are its future projections?

The semiconductor industry is currently valued at $574 billion and is projected to surpass the trillion-dollar mark by the end of the decade, reflecting its rapid growth and increasing importance.

What actions has the US taken to limit China's access to advanced semiconductor technology?

The US has imposed trade restrictions, including limiting the export of advanced AI chips and other key technologies to China. These restrictions aim to slow China's technological advancements, particularly in areas like artificial intelligence.

Why did China start focusing heavily on developing its semiconductor industry?

China recognized its reliance on foreign technology for semiconductors and saw this as a vulnerability. To reduce this dependence, China began heavily subsidizing its semiconductor industry in 2014, aiming for self-reliance and technological independence.

What has been China's strategy to boost its semiconductor industry, and how successful has it been?

China's strategy has involved investing hundreds of billions of dollars in subsidy funds to build up its semiconductor manufacturing capabilities. Despite this effort, China still lags behind other major tech powers like the US, Japan, South Korea, and Taiwan.

What impact have US export restrictions had on Chinese companies like Huawei and SMIC?

US export restrictions have limited access to advanced semiconductor technology for Chinese companies. However, despite these restrictions, Huawei was able to produce a smartphone with a seven-nanometer chip in 2023, signaling that China can still make technological progress, albeit slower than the US.

How are US semiconductor companies like Nvidia affected by the restrictions on exporting to China?

Companies like Nvidia have seen significant financial impacts from US export restrictions. Initially, Nvidia circumvented the restrictions by designing chips that fell just below the performance thresholds, but new rules have since closed this loophole, further limiting their ability to sell advanced chips to China.

What role does AI play in the US-China tech war, and why is it a key focus?

AI is seen as a critical future technology with widespread implications for industries and military capabilities. The US is particularly concerned about China's access to advanced AI chips, as they could be used to enhance Chinese military power, making AI a central focus in the tech competition.

What are the potential long-term consequences of the semiconductor trade war between the US and China?

The semiconductor trade war could lead to a bifurcation of global technology markets, with the US and China each developing separate, competing ecosystems. This division could affect global supply chains and make it harder for companies to operate in both markets.

Outlines

00:00

📱 The Pervasive Role of Semiconductors

Semiconductors, or microchips, are essential components in various technologies, from smartphones to fighter jets. They power modern tech, forming the foundation of a $574 billion industry expected to reach a trillion dollars by the decade's end. Semiconductors are at the heart of a geopolitical rivalry between the US and China, with US trade restrictions significantly impacting companies like Nvidia. These chips are also critical for AI applications, and their development has become a focal point in the US-China competition.

05:03

💻 AI and National Security Concerns

Artificial Intelligence (AI) is seen as a future-defining technology, with potential applications across industries. The US is focused on preventing China from accessing the advanced chips needed for AI development due to concerns about their use in military applications. China’s civil-military fusion system poses a challenge, as the line between private and military technology is blurred. As China expands its military capabilities, the US is determined to maintain a technological edge to secure its national defense.

10:04

🔨 US Export Restrictions and Loopholes

The US has imposed export restrictions on advanced chip sales to China, affecting both Chinese manufacturers and US companies. Nvidia found ways around these restrictions by designing chips just below the regulatory thresholds, but new rules in 2023 have tightened those loopholes. While the immediate financial impact on companies like Nvidia may be limited, long-term sales to China are expected to shrink. The tension between maintaining access to China’s market and complying with US regulations creates challenges for companies caught in this trade war.

Keywords

💡Semiconductors

Semiconductors, also known as microchips, are critical components that power most modern technologies, from smartphones to fighter jets. They are often regarded as the 'brains' of devices, making them essential to everything from daily appliances to complex systems like AI. In the video, semiconductors are described as a $574 billion industry, pivotal in the tech competition between the US and China.

💡Artificial Intelligence (AI)

Artificial Intelligence refers to the development of computer systems capable of performing tasks that typically require human intelligence, such as decision-making and speech recognition. AI is presented in the video as a future-defining technology that both the US and China are heavily investing in. The US is particularly focused on restricting China’s access to advanced chips used for AI applications, as they have military implications.

💡US-China Tech War

The US-China Tech War is a competition between the two nations to dominate critical technologies like semiconductors and AI. It has intensified over the past decade, with the US placing trade restrictions on China to limit its access to advanced semiconductors. The video discusses how this rivalry is driven by economic, technological, and military interests, with both countries aiming to secure global leadership in these sectors.

💡Trade Restrictions

Trade restrictions refer to measures imposed by one country to limit or regulate the trade of goods and technologies with another country. In this context, the US has placed export controls on semiconductors to prevent China from accessing advanced chips, which are seen as crucial to AI development and military applications. These restrictions impact companies like Nvidia and affect the global supply chain.

💡Nvidia

Nvidia is a leading US semiconductor company known for its high-performance chips, particularly for AI and gaming applications. The video highlights Nvidia's struggle to navigate US trade restrictions, especially as the company faces potential revenue losses from reduced sales in China. Nvidia’s ability to produce 'less advanced' chips to bypass restrictions is also mentioned.

💡Chips and Science Act

The Chips and Science Act is a US law signed by President Biden to boost domestic semiconductor manufacturing and reduce dependency on foreign supply chains. It represents a major investment in American semiconductor technology, aiming to counter China's efforts to dominate the chip industry. This act is part of broader US strategies to maintain technological leadership and national security.

💡Export Controls

Export controls are legal restrictions placed by a country on the export of specific goods or technologies to other nations. In the video, the US has implemented export controls to limit China's access to advanced semiconductors used for AI, supercomputing, and military applications. These controls are central to the ongoing US-China technology conflict.

💡Chinese Semiconductor Industry

The Chinese semiconductor industry is the sector in China focused on the research, development, and manufacturing of microchips. The video explains that China is heavily investing in its domestic semiconductor industry to reduce reliance on foreign technology, especially from the US. Despite these efforts, China remains behind other major tech powers like the US, Taiwan, and South Korea in advanced chip production.

💡National Security

National security refers to the protection of a nation’s interests, particularly in the context of technology and military advancements. The video emphasizes how semiconductors and AI are seen as vital to national security, especially in the US, where policymakers are concerned that Chinese access to advanced chips could enhance its military capabilities. This concern drives US trade restrictions and export controls.

💡Civil-Military Fusion

Civil-Military Fusion is a Chinese policy that aims to integrate civilian technology developments with military applications. The video discusses how this policy allows China to use advanced semiconductors, originally developed for commercial purposes, in military technology. The US is wary of this strategy, as it could enhance China’s military capabilities through technology transfers.

Highlights

Semiconductors, also known as microchips, power a wide range of modern technologies, from smartphones to fighter jets.

Semiconductors are the backbone of the technology industry, making the industry worth $574 billion and expected to cross $1 trillion by the end of the decade.

The US has imposed trade restrictions to limit China's access to advanced AI chips, impacting semiconductor companies like Nvidia.

The US-China chip war stems from China's push for semiconductor self-sufficiency, which started in 2014 with Xi Jinping identifying chips as a core technology for China.

China’s semiconductor industry lags behind the US, Japan, South Korea, and Taiwan, relying heavily on foreign technology for high-end chips.

In response to US restrictions, China has invested hundreds of billions of dollars in government subsidies to boost its semiconductor capabilities.

The US's 2022 export restrictions, particularly around semiconductors and AI technologies, marked a significant escalation in the chip war.

In October 2023, the US Commerce Department introduced further limits on the sale of advanced American-made chips to China.

China has retaliated by restricting exports of key materials like gallium and germanium, essential for chip manufacturing.

AI is a key battleground in the US-China tech war, with the US focused on limiting China’s access to advanced AI chips for military use.

The Biden administration's new restrictions target loopholes that allowed companies like Nvidia to sell less advanced chips to China.

US chip companies like Nvidia and AMD are seeing short-term financial impacts from these restrictions but face long-term challenges as China pushes for self-reliance.

China’s Huawei has developed its own seven-nanometer chips, signaling China’s progress despite US export restrictions, though the chips are not competitive on a global scale.

US concerns about China’s use of AI in military applications drive the ongoing tech war, with both sides racing to maintain technological supremacy.

The tech war could lead to a bifurcation in global technology, with one side led by China and the other by the US, especially in areas like AI and advanced computing.

The competition between the US and China over semiconductors and AI is expected to be long-term, with both governments heavily focused on national security.

Transcripts

Smartphones, cars, toasters and fighter jets.

Can you guess what all of these have in common?

They're all powered by advanced semiconductors, also known as microchips or

chips for short.

They're often regarded as the brains powering modern technologies.

Microchips or semiconductors are incredibly important technologies.

They are in things from refrigerators all the way to cars and the smartphones we use on a

daily basis, the entire technology industry.

Semiconductors is the fundament of all of that.

There's no tech industry without semiconductors.

A $574 billion industry on pace to cross the trillion dollar mark by the end of the

decade. Now caught in the crosshairs between two of the most powerful nations in the

world, US trade restrictions continuing to make an impact on semiconductor

companies such as Nvidia, Nvidia's CFO, warning that China sales will

drop significantly in the fourth quarter.

The Biden administration is trying to cap China's access to advanced AI chips.

But that said, are these curbs too little, too late?

They're getting increasingly sophisticated and are going to be needed and

required to power and underpin some of the artificial intelligence

applications that we know about going forward.

So just how did semiconductors with transistors on the most advanced chips now measuring the

size of a single DNA strand, become the centerpiece of a technological tug of war between

the United States and China?

And what are the potential implications for companies caught in the middle of it all?

You want to understand the chip war over the last decade, China is the player that made the first

move by very heavily subsidizing its industry and trying to achieve independence.

Semiconductors became a central area of competition between the United States and China

during the last decade, when China's desire to become self-reliant in the sector changed the

competition from one between companies to a rivalry between two of the world's largest

economies. 2014 was a key inflection point when the Chinese

government released a number of new policy documents.

Targeting semiconductors is what they call a core technology, and XI Jinping, the Chinese leader,

has given a number of speeches starting in that year, highlighting chips as central to China's

efforts to become self-sufficient in technology.

China's semiconductor industry is quite behind other major tech powers like the US,

Japan, South Korea and Taiwan.

It relies heavily on foreign technology to boost its own domestic

semiconductor industry as well.

And so China looks at the chip industry and sees extraordinary vulnerabilities, because it has to

import high end chips for its PCs, for its smartphones, for AI training

from countries that are competitors.

Since then, China has set up a series of vast subsidy funds from the government and state linked

private equity firms, measuring in the hundreds of billions of dollars, all with the goal of

boosting the Chinese chip industry.

That's been the dominant strategy of China over the last decade.

Keep spending huge sums each year trying to build up China's manufacturing

capacity and the level of technology, and that's primarily the focus of Chinese government

today. But things escalated, really, in 2022, when the US introduced sweeping

restrictions aimed at cutting China off from accessing key technologies

around semiconductors to do with artificial intelligence.

For example, the export restrictions announced in October 2022 came months after

President Biden signed the Chips and Science Act into law, which was designed to boost American

semiconductor investment and development.

The Biden administration has since further tightened its initial restrictions.

In October, the US Commerce Department unveiled additional limits on the sale of advanced American

made chips to China in an effort to further restrict Beijing's progress on supercomputing and

AI. So continued sanctions on the export of things like these to

China has certainly held back the development of China's own domestic semiconductor

industry. China's response, meanwhile, has been sporadic.

One of the biggest things that happened was in May 2023, China's cyberspace regulator said chip

maker micron poses a major security risk to China's critical infrastructure

supply chain.

They've done things like slow walk M&A.

So, for example, Intel was trying to buy Tower Semiconductor and they just sat on it and didn't

give approval in July 2023 as well.

China put some export restrictions on two metals gallium and germanium.

Those are metals that are required in some instances for the manufacturing of these

chips as well. There is not a whole lot that China can do really within semiconductors.

There's these things at the margin around some of the raw materials and things they can do.

But in general, China doesn't have leadership in semiconductors, so there's not really a lot that

they can do. From

powering our cell phones, cars and laptops to kitchen appliances, it's hard to imagine a world

without semiconductors.

But there is one area of use in particular that has the US concerned artificial

intelligence. Ai is seen as a critical technology for the

future, and it's aiming to impact all sorts of industries across the

board. And the US really is looking to restrict China's access to some of these chips that may

power these future artificial intelligence applications.

Clearly, there are a lot of potential implications on military end use and that sort of

thing that we want to try to control access to.

The other part here, the US has said, is that this is about national security.

The US wants to make sure that some of this technology doesn't end up in Chinese

military applications.

For the US, this matters because its military invest more than any

other on trying to maintain a technological edge.

And in particular, as China builds more ships, more planes, fields, more missiles in the

region, the US technological edge is more important than ever.

Ultimately, China has a civil military fusion system that blurs the line between the

private and the public sector, which is essentially fancy talk for

buying our sophisticated chips, which are supposedly for commercial purposes, and putting

them into military equipment to advance their military.

If you buy the thesis that there's a strong relationship between chipmaking and defense

capabilities that rely on semiconductors, sensors, communications, computing, then you can

understand why the US government was not excited about the previous status quo,

in which US firms were actively supporting the upgrading of China's microelectronics

capabilities.

In terms of where the financial impact on US companies has been, the biggest

impact has actually been on the equipment companies.

For example, its manufacturers in China need equipment that comes from Europe and the US.

Its tech companies need design tools to design their chips, and it was several billion

dollars of revenue impact that companies like Applied Materials and Lam Research and those kinds

of guys did see because of this.

Meanwhile, Nvidia, makers of the world's highest performance chips, was initially able to

work around US export restrictions last year by producing slightly less advanced chips just below

the performance threshold.

These export controls have very specific technology thresholds around things

like computing power and memory bandwidth and that sort of thing that if you exceed those

thresholds, the part is not legal.

Nvidia was able to design new parts that came in sort of just below the

thresholds, and so they were legal to sell.

In response, the new rules announced by the Biden administration in October 2023 were

aimed in part at closing that loophole.

They basically control virtually every data center or GPU

that Nvidia is selling into the China market today, as well as offerings from

folks like AMD and Intel.

Basically limits everything that Nvidia is selling right now in a regulatory filing.

Following the announcement, Nvidia said while it didn't anticipate the new restrictions to have a,

quote, near-term meaningful impact on its financial results, it may affect product

development in a timely manner and require the company to relocate certain operations.

The China restrictions for Nvidia are going to affect them in the near term because their supply

constraints. There's plenty of customers who want what they have over the long term.

Look, I think you have to consider China as potentially impaired.

Chip giant Nvidia may be forced to cancel billions of dollars in chip orders meant for

China next year because of new US export controls.

The market over the long term will likely be smaller for them if they can't manage to sell

stuff into China. Some US chip makers have warned additional controls may not only accelerate

China's path to become a self-sufficient chip industry, but also pave the way for a global

market dominated by Chinese made chips.

There's no doubt that this trade war and tech war has really boosted China's

ambitions to boost its domestic semiconductor industry, and you've seen stepped up

efforts in that area.

The real challenge that US companies face is at what point does China

find a way to design them out and replace them with domestic competitors?

Perhaps a preview of that came in late August 2023, when Chinese tech giant Huawei

released the mate 60 Pro, a new smartphone containing an advanced chip made by China's

largest chip maker, Semiconductor Manufacturing International Corporation, or

SMIC, for short.

So some people have looked at that, that Huawei effort to make seven nanometer chips for

smartphones, and they're holding that up as an example, that the sanctions that the export

controls have failed. Both Huawei and SMIC are on a US trade blacklist called the

Entity List, which restricts them from buying American technology.

This has really raised some eyebrows, I think, in Washington about how this was

possible. And I think the other bigger question is, while this has been achieved, how viable is

this on a large scale?

While Huawei's latest 5G phones are equipped with seven nanometer chips, this year's Apple

iPhone 15 Pros, by comparison, are powered by a much more advanced three nanometer chip

from Taiwan Semiconductor Manufacturing Company, widely regarded as the most advanced chip maker in

the world. A reduction in nanometer size can typically yield more powerful and efficient

chips. This has led some to believe that US controls have been effective at slowing down the

pace of China's technological development.

I think it's evidence that they're succeeding because look what they're being relegated to.

You would never do that if you didn't have to, because those parts will not be competitive on a

global scale. Huawei's breakthrough chip shows is that export controls will slow

China, but it won't permanently stop China from making advances.

And that's okay, because ultimately, artificial intelligence is a race between the US and China.

Things are not going back to the way they used to be.

I think it's clear that both the US and China are battling for technology

supremacy with some of these key technologies, like AI and semiconductors at the forefront of

that. Leadership in Washington and Beijing both understand that AI is the single most

consequential breakthrough paradigm shifting technology and military affairs in

80 years, and China views AI as central to leapfrogging to

use their term US military capabilities.

Because AI is seen as such a groundbreaking technology and one that could impact

different industries across the board.

I think this is an area where you may see further sanctions potentially in place, further

export restrictions come in.

So companies have come to terms, I think, with that fact and are increasingly trying to position

themselves in a very complex balancing act where they can serve all the customers they're

legally allowed to serve. But also are cognizant of the fact that the geopolitical

situation could well get even more complex.

We cannot allow China to have our most sophisticated semiconductor chips for

use in the Chinese military.

That's where we've drawn the cut line.

I do think this is going to be a long term competition.

And when you listen to policymakers in Beijing or in Washington, that's certainly how they

conceptualize the competition and their strategies in it.

Above all, when we look at this space, we need to understand that a world in which the Chinese

Communist Party dominates critical technologies, particularly artificial intelligence, is a

very dark and dystopian world, and it's one that we don't want to live in.

Of course, we want American companies to lead in innovation, but national security comes

first. China, meanwhile, will likely continue efforts into strengthening its own semiconductor

industry while simultaneously boosting the country's advancements in AI.

There could be some impact going forward if the restrictions and the tech war

continues to ramp up between China and the US, and effectively, China

becomes quite a closed market to a number of semiconductor firms.

It basically means that in areas of advanced computing that have

significant spillover effects on the development of artificial intelligence and things like large

language models, which have potent military applications, we are going to see a

bifurcation in into a Chinese led technology world and American led technology

world. And so in an industry where the technology races forward so

rapidly, the key question is who can run fastest in this race?

For now, as the tech war between the US and China continues to ramp up, companies caught in the

middle will have to navigate uncharted territory and establish a new way of doing business.

Governments have shown a willingness and an ability to force tech firms to change their

business models when they conflict with the security priorities of those governments.

So while I agree we have a lead in this space, it's very narrow

and it's something we need to actually increase.

We don't have the luxury of pausing or stopping.

We are ahead of them.

We need to stay ahead of them, and we need to deny them this technology that they need to

advance their military.

It forces businesses to deal with a new reality where geopolitics is at the

forefront, and they have to make decisions based on that.

At the end of the day, if China's military gets what they want at the pace that they

want it, that's bad for every American company.