The battle global investors can't ignore

It’s fair to say geopolitics is the most fraught it’s been in the last two decades.

Nancy Pelosi’s recent visit to Taiwan has set the US and China on a pathway of competitive escalation.

Semiconductors and tech independence play a critical role in US/China relations, and this cannot be resolved quickly given both countries are dependent on Taiwan – or specifically Taiwan Semiconductor Manufacturing Company (TSMC) – for the manufacture of leading-edge chips.

For some time now the US has prevented a small number of Chinese firms from accessing US designed semiconductors and the equipment to make these chips where it was assumed this technology was being used for military purposes. As tensions between the two global superpowers soured further, we noted the tail risk was how far the US would push to more broadly limit China’s ability to innovate.

The US has indeed now taken a further step – introducing sweeping new controls that can limit exports to China of critical technology used to manufacture semiconductors.

Here’s what the US Department of Commerce said in an announcement regarding the move.

“The Department of Commerce’s Bureau of Industry and Security (BIS) is implementing a series of targeted updates to its export controls as part of BIS’s ongoing efforts to protect U.S. national security and foreign policy interests. These updates will restrict the People’s Republic of China’s (PRC’s) ability to both purchase and manufacture certain high-end chips.”

The details of the new controls show the US is targeting GPU, CPU, and DRAM (memory) chips designed in the last five years and the equipment to make these chips, as well as NAND (memory) chips designed over the last three years. There are also specific rules limiting China’s ability to import certain AI chips widely used in data centres and critical to many modern consumer applications.

While this policy stops short of a blanket ban, the goal is to restrict China’s access to chips and other technology related to advanced AI and super-computing as these have military applications.

What are the consequences?

Most leading-edge semiconductor chips essential for high performance computing are designed by US or European companies such as Nvidia, AMD, Broadcom, Marvell, and Intel but the chips are not necessarily manufactured by these companies.

In fact, at the leading edge, these semiconductor chips are almost entirely manufactured by TSMC.

TSMC has actively retained its leading-edge chip capacity at home in Taiwan, a strategy referred to as the “silicon shield”. But what’s interesting here is that more than half of the equipment used to manufacture globally critical chips comes from the US, with the rest from Europe and Japan.

If Europe and Japan choose to follow the US’ lead, it places China in an extremely challenging position. The inability to access chips and furthermore the equipment used to manufacture these chips will meaningfully hamstring not only China’s ability to keep up with tech developments in the West, but also hinder China’s capacity to develop tech independence.

At first blush, the development of Chinese hyperscalers such as Tencent, Alibaba, and Baidu could be impacted as the bulk of data centre spend is AI-centric even for current consumer use around content creation, search, and natural language programming. Chinese EVs may also see progress curbed relative to Western peers as ADAS chips (advanced driver assistance systems) could be affected. At this stage, restrictions on handset chips appears unlikely given the limited crossover with military applications. The language framing these restrictions, which are some of the most comprehensive we’ve seen to date, suggests these restrictions could be part of a rolling series.

Much remains up in the air

How rigorously will the US enforce these license approvals? Will Europe and Japan follow suit? How might the US expand export restrictions or worse initiate bans? Will China retaliate, and on a longer-term basis can China develop this technology internally?

China could choose to respond in a targeted fashion directed at high profile US brands with large profit pools in China such as Apple, Tesla, Nike, and Estee Lauder amongst others.

China could limit US access to strategic markets that it dominates such as rare earths in the EV battery supply chain.

If the US were to escalate further via an embargo on all investments in China, it would be an extremely negative outcome not just for China but for the global economy and asset markets.

At this stage Antipodes still considers a Taiwan “hot war” scenario relatively remote given the US and China’s co-dependence on Taiwan, or should we say TSMC.

For now, China and the US are critically aligned in maintaining a stable Taiwan for the sake of their respective economic stability.

We’re at a major juncture in this tech cold war and it is critical for investors to monitor developments closely and consider global vulnerabilities should China choose to retaliate.

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