The Six Five team discusses the latest news in Semiconductors.
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Transcript:
Patrick Moorhead: The China chip meltdown with some of the new rules that the Biden administration has brought out.
Daniel Newman: And by the way, Pat, this is a constant moving target. This is not a thing that any of us, even all of us that spend our time in semis every single day have every answer to. But what is going on is we have microaggressions going back and forth between the US and China right now. The China is aggressively pushing its policy. It wants to be the world’s leader in advanced semiconductor manufacturing and development.
But here’s the thing, Pat. Well, we may depend on China to make our smartphones and get them shipped to the US. They are heavily dependent on the US for key intellectual property and equipment that they’re able to utilize to do things like advance this agenda.
Patrick Moorhead: Yeah.
Daniel Newman: So Joe Biden, President Joe Biden is basically putting a number of policies in place that is going to limit the capacity for US chipmakers and equipment-makers for semiconductors to be able to provide that equipment to China. Now, when we went through the whole CHIPS Act thing, we talked a little bit about the number of fabs in development about the amount of equipment being purchased.
Well, here we go. We’re also trying to advance our own semiconductor manufacturing here in the US. We’re building new plants and new facilities. And I think some of this in the backdrop, at least some of this has to be, “Hmm, who are we going to give our best talent and most available equipment to? Are we going to send it all to China for a short-term revenue win for these companies or are we going to make sure it stays here and it’s outfitting the factories that are being built here in the US?”
Now, I think that’s only part of it. I think the long and short of it is Xi Jinping is basically saying, “We’re going to lead the world.” And the US is saying, “Well, okay, but you’ve got a lot of work to do because now you’re going to have to figure out how to get all this intellectual property and source all this equipment without our help.”
Who does this effect? Well, the effect of the constraining of the chip technology being sent to China is mostly on the supercomputing and on the AI side. Those are the areas that I think we feel are most risky. And this is where you start to see the policy ties between economic advancement and national security.
Patrick Moorhead: Yeah.
Daniel Newman: And so, we understand that we need to be the leader in these particular areas, the leader in supercomputing, high-performance computing, artificial intelligence. And by basically enabling China to continue to spend so aggressively on the development, we’re basically facilitating them to become the world’s leading technology development and economy.
And I think we want to put the brakes on that while we figure out what we are doing here. So, Xi Jinping got his own semi factories. By the way, Apple loves working with China. I think it was YTMC, that company that Apple had to slow down its partnership with most recently because of these particular sanctions? But basically, Xi Jinping brought them in to talk to them about, “Hey, how are we going to withstand this?”
And it seems like everyone’s trying to understand right now how big of a deal of is this, how big of a risk does this create? And of course when you start to hear this all happening, Pat, you can’t not think about Taiwan. What does this mean, obviously, us putting pressure on China and us knowing that China could potentially put a big strain on Taiwan? And it comes full circle, Pat, that we now have economic development policies and national security policies converging at a scary aggressive rate.
And by the way, in the middle of having potential nuclear war in Europe, what are we doing? Is this the right thing? I’ve got more questions than I have answers, but boy is it getting interesting out there right now.
Patrick Moorhead: Daniel, I had to give credit where credit is due. That was an amazing breakdown of that topic. And one thing I’m just going to be additive here, there is definitely a relationship between what’s going on in Russia and what Biden’s doing in China here.
So, the US was looking for China to help us deescalate Russia. And while China didn’t give a French kiss to Russia, it also wasn’t very overt and that it didn’t accept what’s clearly an invasion of a sovereign country. And then the US couldn’t be too happy about that because when Western Europe cut off energy, well, they couldn’t completely cut it off but they cut it off as much as they could, who stepped up to buy more of Russia’s oil? It was China. And that’s essentially funding the enemy to build more arms.
One interesting thing we saw in the rearmament of Russia was they couldn’t build tanks and missiles because they couldn’t get the chips that they needed. And I thought that was a real-time example of the issues of not having sovereign chip design and sovereign chip manufacturing.
So, you hit it spot on by basically saying, “Hey, in the future, where did China come from?” So back in 1995, you couldn’t get even direct access to China. So when I was a compact computer, I worked through Taiwan to get to China. And at that point, we used to do metal bending and plastic injection molding there. That’s all they did.
I mean, not even breadboards or maybe for power supplies through whole type of electronics. They didn’t even have surface-mount technology for PCBs. And PCBs, the green boards that you see the popcorn chips on. But to their credit, many rock stars in China culturally are PhDs and people who are smart. And you compare that to who we fan over, sometimes drug-addicted rock stars and NBA folks or NFL folks.
So culturally, they’re all about moving ahead. And if you look at the GDP per person for any I would call them in-between first and second world, they’re absolutely the highest growth. And then you add to that our displeasure we’ve done nothing about. Essentially, China built an island in the South China Sea, which by the way is not owned by China. It is open. And they put landing strips, aircraft carriers, I mean, everything right there that essentially extended their territories out.
I’m wondering though, Daniel, what’s-
Daniel Newman: That’s microaggression by the way. That is-
Patrick Moorhead: I know. I did. Your piece was so good but I did notice that. And then I’m going to use that and steal that from you. But it’s the most novel use of a microaggression that I’ve seen. But I’m wondering now, what does China do? Do they dial down? Because they absolutely own the US for final assemble, right?
I mean, gosh, even back in 1997 when I was in China visiting a factory by Foxconn, they were doing Cisco gear, right? So, what is China going to do? Are they going to ramp down final assembly? And by the way, I talked to one of the smartest guys at Accenture site alum who just got a promotion to running all infrastructure at Accenture, basically says, “The calculus and the spreadsheets are changing. People are moving out of China at an alarming rate and going into India, Mexico and Singapore.”
So, this China chips-
Daniel Newman: How long does that take though? So, say we have a real issue. I mean, I’m actually curious.
Patrick Moorhead: It takes years.
Daniel Newman: Yeah.
Patrick Moorhead: And in fact, Foxconn employs a million people to assemble iPhones. And they don’t have enough people. So, you know what they do is they boat people in from Indonesia to do final assembly on iPhones. They don’t have enough people in South China. So, this would take years. I think the people who would be hurt the most will be the people who have tonnage. Smartphone manufacturers who do final assembly in China, they will be hurt the most.
When you’re selling billions of smartphones versus hundreds and millions of PCs and hundreds of thousands of servers, I think core infrastructure could move out in a year. I really do. We can do metal bending. We can do plastic injection molding. It might add an extra 5%, 10% to do it in Mexico. But you could absolutely do it.
Heck, Foxconn is building gigantic plants right over the border in Mexico getting ready for this. Heck, Lenovo who does their own SMT and final assembly, they opened up a gigantic facility in Juarez, Mexico. So, great topic. I love it. You nailed it. Somehow I found some additive stuff to talk about. So, let’s move to the next-
Daniel Newman: Right away, buddy. Just one last thought. You’d think that being in war as if the ultimate final product needs to land in the US, there would be some economies of scale though because it does cost a lot to actually put these things on containers and keep this stuff moving. It would also help the supply chain to not be so far away.
Patrick Moorhead: Well, and in fact the supply chain is so jacked up that smartphones and the first builds of notebooks are actually put on jets as opposed to boats. So no, you are right and I always talk about the spreadsheets changing and the calculus changing. That is in the spreadsheet. And I should dig up a spreadsheet from 1997 when I was actually headstrong in this business.
It’s funny, product managers used to actually run the show. We were many CEOs. We were deciding who did manufacturing. We were deciding how stuff was shipped. We would make the decision on whether it was put out on a boat or a plane or a train. By the way, HP has a fricking train that goes from the East Coast to the West Coast where they put goods on. They also have trains that connect Eastern Europe to Western Europe. So, God, I love this. Who thought supply chain could be so sexy?
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
