Instant Karma Comes for the U.S. Semiconductor Industry

Here is our best investment tip. We wish we could say it was based on inside information, but unless being old and experienced count as cheating, we’re afraid that even under the Biden Securities and Exchange Commission, this advice is strictly street legal:

Always bet against the force-fed fancies of politicians.

Currently those include the alleged U.S. beneficiaries of our leaders’ attempt to monopolize supposedly cutting-edge (actually often long in the tooth) semiconductor devices and the machines and methods that make them.

A law of technology advancement is that any technology that can be readily stolen has lost most of its value. Blaming China for stealing our intellectual property (most Chinese “theft” consists of reading open-source technical and scientific journals), we reveal we are no longer pushing forward with innovations that render the old tools obsolescent.

The array of sanctions we have imposed on China, mostly consisting of forbidding the Chinese from giving American companies money, has already run up quite a score, alas consisting mostly of “own goals.”

We banned China from importing state of the art wafer fab equipment — the machines that make the chips. China now increasingly makes its own gear and even exports it. In 2023, the Chinese semiconductor equipment industry increased revenues by some 40% while U.S. wafer fab equipment firms lost 30% of their revenues.

In one of the more blatant lies of the national security state, in 2019, the United States claimed that Huawei’s network infrastructure equipment included a secret “backdoor” by which the Chinese Communist Party could listen in on American phone calls. This claim, obviously false even at the time, has long been abandoned, yet the sanctions against Huawei, allegedly justified by the lie, remain in place. With karmic justice, those sanctions may turn out to be the best thing that has ever happened to that brilliant Chinese company:

• Micron (MU), the only large memory chip maker that manufactures in America, was banned from selling chips to Huawei, costing the American company circa $2 billion a year in sales.
• Micron’s compensation for this loss is a promised $30 billion subsidy to build a $100-billion wafer fab in New York, of all the inhospitable locales, which Micron probably can’t afford and likely does not need.
• Qualcomm (QCOM) ranks as one of the most magnificent achievements of the U.S. semiconductor industry, at one time all but monopolizing the most challenging chips for mobile communications. This achievement was largely powered by sales to China, which, until recently, accounted for roughly two-thirds of Qualcomm’s revenues. Before the Huawei ban, Qualcomm was the supplier for most advanced 5G chipsets to Huawei. Today, these chips are made by China’s largest chipmaker: Semiconductor Manufacturing International Corp (SMIC). Qualcomm has been relegated by the sanctions to supplying unregulated, low-margin 4G chips. It is not clear it will be able to hang on to even that market.
• Huawei recently released a new premium 5G smartphone, the Mate 60, featuring a Huawei-designed and Chinese-manufactured chipset, the SoC Kirin 9000S. The Huawei phone has helped drive a circa 30% decline in Apple iPhone sales in China this year. Apple (NASDAQ: AAPL) is slashing prices and margins to stanch the bleeding.
• Huawei’s handset business got a competitive edge when, in retaliation for U.S. sanctions, Chinese government agencies were forbidden to buy Apple phones.
• As of Q3 2023, Huawei’s smartphone sales had grown 37% year-over-year on the back of the Mate 60 series.

Nvidia, which makes the chips that make AI practical, is arguably the most important U.S company at the moment. It has been forbidden to ship not only its best but also its second-best AI chip for datacenters to Chinese cloud-computing companies, including Alibaba (NYSE: BABA) and Tencent (OTCMKTS: TCEHY).  The first reaction of the Chinese firms was to stock up on the chips before the ban went into effect. Their second reaction was to begin sourcing the AI chips they need from, you guessed it, Huawei.

Now, amazingly, U.S. lawmakers are outraged that Chinese chipmaker SMIC is manufacturing chips for Huawei, which, under U.S. sanctions, no company is allowed to do, even if they are Chinese.

In response, Mike Gallagher, GOP Chairman of the House Select Committee on Competition With China, in a valiant attempt to vindicate  the Republican reputation as the stupid party, now wants to ban all U.S. sales  to both Huawei and SMIC. This would include chips  made using legacy technologies, which are not currently banned and which the Chinese already have mastered.

This perfectly aimed shot to the foot, says Rep. Gallagher, “will make clear any firm that flouts U.S. law and undermines our national security will be cut off from our technology.” Apparently the Chinese can live with that.

To China, which we increasingly blame for the effects of our own socialism, we have outsourced our capitalism: our ever-profitable CO₂ emissions and much of our mining, manufacturing and high-tech enterprise, all ruled too deadly to Mother Earth to be practiced inside our borders.

Now after imposing, for years, a regulatory scheme brutally hostile to manufacturing semiconductors (lots of chemicals are entailed), the United States is spending at least $50 billion, and in the end probably several times that, to subsidize what, until five minutes ago, it penalized.

Intel will get at least tens of billions to build new wafer fabs to expand its “foundry” (contract manufacturing) business. Meanwhile, Taiwan Semiconductor, which already holds a +50% share of the global foundry market, and is the company most likely to thwart Intel’s foundry ambitions, is getting billions from Washington as well. TSM already complains it can’t find the skilled workers it needs to get its new Phoenix foundry running. Perhaps it can pirate them from Intel (NASDAQ: INTC). That will work out well.

Socialism always leads to poverty, which politicians then disguise by militarism and war. China is obviously not exempt, as Xi Jinping is discovering as he flirts—or worse—with a socialist revanche. Contemplating war against our chief supplier and best customer is the end game for the suicide trip of emergency socialism.