Semiconductors are at the heart of America's geopolitical rivalry with China.

They're vital to products we use every day, including smartphones and computers, and for advanced technologies like AI, electric vehicles and defense systems.

China's made in twenty twenty five policy a decade ago called for aggressive manufacturing and self sufficiency in this space.

That's been worrying Washington ever since, with both the Biden and Trump administrations adding tougher rules like cutting access to American technology and certain semiconductors, and it's been met with limited success.

Chinese firms are still finding ways of getting the hands on US and Taiwanese advanced semiconductors, and the Chinese government continues to double down on its own industry.

So where are we in a great chip war?

Who's winning?

If anyone?

Could we see more thawing in the relationship as China and the US try to negotiate a trade deal, and how can regions like Taiwan, South Korea and Japan benefit from this rivalry.

You're listening to Asia Centric from Bloomberg Intelligence.

I'm Katydmitreva in Hong Kong.

I'm John Lee also in Hong Kong.

And today we have Chris Miller, who wrote the book on Justice.

He's a professor at Toft University and the author of Chip War, The Fight for the World's Most Critical Technology, often seen as required reading for understanding this space.

He joins us in Boston.

Thank you for joining us, Chris, Thank you for having me.

Chris in your own words, why are semiconductors so important to the great powers?

Well, I think there are two reasons why.

The first is that chips are just important for the global economy writ large.

If you look at the world's biggest companies by market capitalization, they're all either designers of chips, producers of chips, or companies that really couldn't function without chips.

Look at global trade.

The largest single flow in all of global trade is the flow of chips into China each year, from Taiwan, from Korea, from Southeast Asia.

And so you can't understand modern economies without chips.

That's one reason.

The second is that when you look forward towards the application of artificial intelligence to every aspect of the economy, what you find here too, chips are central the advances that we've seen in AI over the past couple of years have been driven by better and better semiconductors, which are both used to train these ultra capable AI systems but also in deploying them at scale.

And so, just like all of the world's governments, tech CEOs too are betting that if you want to be able to build and deploy the best AI systems, you've got to be able to access to large numbers of high quality AI chips.

And so these two factors, the macroeconomic centrality and the importance to AI, have put chips not just on the radar screens of Silicon Valley leaders, but also of the world's top political officials.

And just sort of a historical point for those who haven't read the book yet, when did this all begin?

In terms of this importance of chips, Well.

In some ways it dates back to the origins of the chip industry.

The first ships were invented in the late nineteen fifties.

The aim was to miniatureize computing powers.

You could fit a computer in the nose cone of a missile and guide it more accurately towards its target, and this was critical for the Cold War competition between the United States and the Soviet Union.

But it really kind of kicked up a notch about ten years ago when the United States was the dominant player in the chip supply chain, not the dominant manufacturer of chips, but the dominant producer of many of the key inputs into chips, the ip the design know how, many of the key tools, and China realized that it's economy was becoming more and more dependent on ships that at the time it was almost completely an importer of.

It produce many at all domestically in the chips that it did produce were all low end, and so in twenty fourteen, China launched a major industrial policy effort trying to develop more self sufficiency in semiconductors.

It set up a very large central government investment fund, and each of the provinces set up their own investment funds to try to build a self sufficient industry.

And this was seen not just by the US but also by other key players Taiwan, Korea, Japan is a economic and potentially down the road, a security threat.

And where is China now in its aims to become self sufficient?

How would you grade the efforts so far?

Well, the chip industry is large and complex, and you get a different answer depending on which corner of the hip industry.

You look at.

So there's different types of chips.

There's processor chips, there's memory ships, and there's also different segments of the supply chain, the design process, the manufacturing itself, the production of the tool rules that are used to make chips, and you need to kind of look at each of these segments individually to really understand how China stacks up against other competitors.

At a high level, I would say this, On the one hand, China's import of chips from the rest of the world, which means largely from Taiwan and Korea and their assembly facilities in Southeast Asia, generally hits a new high each year it's grown for most of the last decades.

China is importing larger numbers at least larger dollar values, of chips from abroad.

But China is also producing more at home as well, and so when it comes to lower range and mid range ships, China's building a lot of self sufficiency in the types of ships that go into cars and to refrigerators and industrial equipment, but the high end ships are getting even more important.

Both the chips that go in phones and PCs, but also critically the processors and the memory ships that make AI possible in data centers, and for these cutting edge ships, China is still mostly importing the chips that its tech firms need to deploy advanced computing at scale.

So how far behind is China behind global leaders in terms of being self sufficient?

Well, it really depends again on what exactly one wants to measure.

If you ask how far behind is China when it comes to designing smartphone processors, I would say it's hardly behind at all.

The smartphone processors that Huawei's high silicon arm designed are by a lot of metrics, almost as good or just as good as what Apple or Qualcom would design, And for every different category of chip you get a different rough metric.

But there's a couple places where China remains meaningfully behind, and it's been struggling to replicate the capabilities of industry leaders.

And I'll flag two of them which are the most critical.

The first is in the production of the machines that make chips.

If you go inside a chip making facility in China today, to the complex machines, especially at the high end, are imported imported from Japan, from the Netherlands and from US firms, and China has been trying to build out its own suite of machines that can make chips.

But this is extraordinarily complex equipment, and it's been struggling to make a lot of progress in replacing foreign chip making tools with domestic variants.

And because of that, China's also struggled to ramp up cutting edge capacity to manufacture chips itself.

And so you can look, for example, at the leading Chinese firm, SMIC, which is a chip maker, and compare it to the leading Taiwanese firm, which is the world's leader, t SMC, and they have similar manufacturing trajectories.

And so you can look at what SMIC does this year and look at what TSMC did several years ago and measure the gap between them as a way of assessing where China stacks up.

And here you find that SMICK right now in Shanghai has got a seven nanimeter process that it has just ramped at scale.

It's producing ai chips, producing smartphone processors.

But TSMC and Taiwan did that six years ago.

So there's a five or six year gap between what Smith can produce at scale and what TSMC can produce a scale.

So those are two segments where it's clear there is still a significant gap between China's capabilities and the leading Taiwanese US Japanese firms.

But those are only two ways you could measure the gap.

And in other segments, especially design, China's got very impressive capabilities, and I would argue it has been closing the gap in recent years.

Maybe a technical point, but you mentioned that China kind of legs behind in the equipment that makes chips.

So could you describe just a bit why these machines are so complex and why China is perhaps behind in it.

Because when you think of China as a manufacturer, I mean the world's factory floor, it's really got the supply chains down.

So what is it about the equipment that they're not able to do now?

Yeah, it's a great question.

When I first myself began studying the industry, it was kind of a puzzle, why could Chiny to make everything except for these tools?

And the answer, it turns out, is that these are the most complex and precise tools humans have literally ever produced.

So if you take, for example, the most complicated and expensive tool called an extreme ultraviolet photo lithography tool.

These are tools produced by just a single company in the world, ASML of the Netherlands.

They have hundreds of thousands of components, including the flattest mirrors humans have ever made, the most powerful lasers ever deployed in the commercial device, the capable of manufacturing at nanometer scale that's billionths of a meter with close to perfect accuracy.

And that's just one of the tools you need to make chips.

There are many others that are only scarcely less complex, and so when you start to look at these tools, you realize that there's nothing that comes close in terms of complexity and really any other industry.

And so it's not a surprise that China hasn't caught up because most of these types of tools, there's just one or two companies in the entire world that can undertake this activity.

And people have been ask why hasn't China cut up and the production of extreme multi violet photo lithography tools, Well, no one else has caught up either.

There's just one company that can do it.

Others have tried and failed because the engineering is so complicated and the business model is so hard to make work, and so it really is the fact that we're at the frontiers of engineering the frontiers of physics that explain why it's not easy for China to replicate this, even though China's a course, very good at manufacturing many other types of machinery.

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If you like what you hear, don't forget to subscribe and chair Chris, Look, I read your book, But for the uninitiated who didn't read your book, can you explain why like this industry lends itself to monopolies like you mentioned that ASML pretty much like no one else makes these you know, lithic of methography on machines, and I think you said no one else makes these TSMC also manufactures over ninety percent of the advanced AI chips.

Why is this the case?

That there are monopolies formed in the supply chain.

Yeah.

I think there are two factors that lend the chip industry to these sort of oligopolistic rin monopolistic markets.

The first is the capital expenditures are often tremendous.

So for TSMC, every new factory they build is the world's most expensive factory because each factory is more expensive and breaks the prior record.

We're talking twenty or twenty five billion dollars per FACI, and so this scope for a new startup firm to compete is approximately zero.

That has really kept competition down because the number of players that could even conceive of taking on TSMC is very small, and the same dynamic is true in other segments of the supply chain.

The dollar values are lower, but not much lower.

Even if it's only three billion dollars for a new factory that makes the ultra purified a silicon wafers, for example, that's still a monumental capital expense for most companies, and it deters new entrants from even trying.

The second factor is that the R and D is really extraordinarily highly specialized, and for a lot of the process steps and making chips, the only way you learn about how to undertake that specific step is by having already been in the industry and learning alongside your suppliers and your customers.

And so, if you think of.

The way the chip industry's R and D works, every year, the entire industry works together to bring a new process that's more capable than the prior years, often dramatically more capable in terms of the computing power it produces.

And so you've got really tight alignment between the existing chemicals producers, existing machinery producers, existing chip manufacturers themselves to make sure that these processes arrive on time and that all the necessary components are together.

There's a lot of shared learning inside of that small circle.

But if you're an outsider who's never been part of that learning process, there's no way to do it on your own.

You can't just test on your own very easily whether your new chemical will work with a existing extreme ultraviolet photogthography machine.

If you want to buy one of those machines yourself, it costs you one hundred and fifty million dollars.

And moreover, companies aren't going to let you run a lot of tests in their fab because they just spend twenty billion dollars building a fab they.

Need to run that at full capacity.

So it's really hard to break in from an R and D perspective, And when you combine that with the capital intensivity, it means that many of the firms that have key roles in the supply chain have had them for the last decade or in some cases the last three or four decades, and that has kept competition down in the hip industry.

So you wrote your book in twenty twenty two, that was under the Biden administration.

We're now under the Trump administration two point zero.

What are the big differences you've seen in how both administrations have handled this issue?

Are there some similarities that come up, but also some of the big big differences, because of course under Biden we had the Chips IRA Act, But under both administrations it seems like a bipart is an issue.

Yeah, I think it is, and I think that the similarities are to me more substantial than the differences.

So first, there's a focus on domestic manufacturing in the United States, an effort to reduce reliance both on the lower end ship produced in China, but also dependence on high end chips produced in Taiwan the Chips Act.

Although Biden claimed credit for it, it actually emerged under the trumpetministration.

That was when the Congress first started discussing the bill, and people like Secretary of State Mike Pompeo played a major role in some of the early investments that the Taiwanese from TSMC announced the United States.

So there's been a through line of support for manufacturing chips in the United States that has been bipartisan.

I think that's a point of continuity.

I think the second point in continuity has been a desire to stop China from accessing the most advanced ship making technologies.

The export controls on ASML tools, for example, started under the first administration, were expanded under Biden, and we'll see they could well be expanded further at some point under the current TRUP administration.

So that's also a through line.

And I think the third is concern about Chinese industrial subsidies in the chip industry and implications for trade policy.

The Trumpdministration in round one imposed higher tariffs and Chinese ships imported the United States.

Biden expanded those tariffs, and of course President Trump right now is considering what he's going to do.

On chip tariffs.

But there's widespread expectation that there will be another round of chip tariffs coming at some point later this year, and so that's also a through line of concern about Chinese subsidies.

I think there are differences.

Obviously, you know, we're going to see where exactly Trump's chip tariffs land, and they might end up being much broader on a whole range of different countries, not just China focused.

If so, that would be a difference.

But I think when you zoom out, you actually end up seeing a pheromounta continuity, despite some nuances that are different.

Chris.

President Trump seems to be dialing back on some of the policies now.

Under the previous administration, they banned the export of high end in Nvidia chips into China, but Donald Trump recently suggested that they could allow the export of certain Age twenty chips back into the country.

What does this mean, Well, I.

Think it's too soon to have a confident judgment.

I would say when the Biden administration left office, in Videau's H twenty were still legal to sell China.

Then in month four of the trumpdministration, the President banned the export of Age twenty chips, and now there's suggestions they might be allowed again.

As of today, we're still at a tighter restrictive policy than when the Biden administration ended.

When the Trump administration started.

We'll see exactly how this plays out, but I think it speaks again to a continuity, which is that both Biden and Trump feel like they need to balance action on chip issues with the broader.

US China relationship.

So into the Biden administration, it was regularly the case that the Commerce Department would have a new regulation ready that would limit this or that aspect of the chip trade, and then it would wait for three months or six months or nine months while the State Department found what they thought was a quote unquote good window in which to roll out a new restriction that the Chinese wouldn't like.

And cour we're seeing the trumpministration as something similar.

Right now.

The President wants to negotiate a trade deal with China.

Their White House is trying to get rare earth magnets flowing again, and so there's concern in the White House that if they were to take punitive steps on chips or on chip making tools, that this would disrupt the US China relationship.

One can debate whether that's the right approach, but I think it is a striking similarity to a lot of the delays and the kind of half hearted decision making that you saw in the Biden administration when it came to whether or not to restrict certain types of tools or chips.

So, after the Trump administration recently allowed the export of H twenty chips, very closely afterwards, China called in Nvidia staff to have a discussion with them behind that is at least partly the Trump administration suggesting to track these chips.

And this is all happening within the context of a trade war and trade negotiations.

So one of the questions we've been thinking about is, you know, why are the US and China right now fighting over what are essentially kind of third rate chips.

I mean, these aren't like the most advanced chips out there.

As John ass like, how should we read this kind of back and forth.

Well, I wouldn't say it's right to consider the H twenties third rate chips.

I think if you're a Chinese tech company, these are first rate.

These are the US you can get at scale can you smuggle in small volumes of the higher quality H one hundred yes.

Can you access small volumes of Huawei ASSN chips Yes?

But can you access either by the tens or hundreds of thousands, No, both because Huawei can't produce that efficient scale and because smuggling you can do a medium scale, but not at the scale you need.

So you know, judging by the purchasing patterns of byte Edance and Ali Baba Intense, these are great chips, which is why they really want to spend hundreds of millions or billions of.

Dollars on them.

And I think that that is why this is such a critical issue, both for the US and for Chinese tech firms.

If they really were third rate, we wouldn't be talking about them.

Chris like and Vidia CEO Jensen Huang was very critical about the US ban on chips to China.

He said it hurts US businesses, and he also insinuated that it's going to accelerate China's domestic semiconductive development.

Do you agree with him?

Do you think these mergers are in some way self defeating?

Well, I think there's no doubt that in the short run it reduces in video sales.

That's certainly clear.

So does it hurt that business?

I think the answer is yes.

One of the dilemmas that any sort of export control regime faces is that if you restrict the sale of a certain tool, you hurt the tool makers, but you benefit the domestic companies that use that tool, who have less foreign competition.

So, for example, if you restrict the sale of chip making tools, it's bad for the companies that make chip making tools, but it's actually better for chip makers in the West, including in Taiwan and South Korea, because they don't have strong competition in China at the cutting edge.

And if you thought about the counterfactuals pose the Trudministration had not leaned on the Netherlands in twenty nineteen and said the Netherlands don't sell UV tools to China, China would be operating today a fleet of many UV tools, possibly the second largest behind Taiwan in the world, and that'd be a totally different landscape for the world's chip makers.

It'd be better for sellers of chip maker tools, but worse for chip makers.

And we're in a similar dynamic right now with chips.

If you sell more chips it's good for chip makers, but it's probably worse for the companies that use chips, which are the big tech companies, cloud computing companies.

And AI labs.

Why is it that.

We haven't seen large deployments of AI chips buy Chinese firms outside of China's because they can't produce enough, because they haven't been able to access large volumes of the high end tools that foreign firms have.

And so I think that the trade off that the US has to navigate is, Yes, it's true that it's worse for your chip makers if you don't allow sales to China, but it's also probably better for your tech firms that use those ships because they won't have strong Chinese competitors or as strong Chinese competitors, and that's a trade off.

I think there's no doubt about that.

I think the other question is is US policy accelerating China's technological development?

And here I look for empirical data points.

We know that in twenty fourteen, China launched its first national level Integrated Circuit Investment Fund.

It's been re upped now twice.

Since then at the national level, and each province has If you ask yourself is it clear from the data, and the data's kind of messy, but is it clear that there's been a major increase in Chinese government subsidies towards the ship industry after export controls?

It's not really clear because it started in twenty fourteen and it's been, as far as we can tell, roughly steady since then.

If you ask, has there been a noticeable increase in the Chinese government pushing companies to buy domestic chips after export controls?

I don't think it's clear.

I think you've seen from twenty fourteen to present a steady push to buy a local And so if you ask, you know, what's the evidence that there's been a major uptick in self sufficiency, either support or pressure from the Chinese government.

Around export controls?

It's hard to find.

Now, could you argue that domestic Chinese tech firms before export controls would have said, of course, we're going to test local products.

They would have bought local products and put them in the closet and instead relied on imported products.

And now if they can't import products, they've got no choice but to take the domestic products.

Seriously, I think you could argue that and perhaps that's happening to some degree, but I would say, again, the evidence for that is not super robust.

And so if you're just trying to be empirical and say, what's been the evident changed in Chinese policy or the approach of Chinese tech firms or export controls, I would say it looks pretty continuous over time.

In other words, export controls didn't obviously have a major impact.

Are the expert restrictions enough though?

Are there other things that you see the administration moving towards well?

I think a lot depends on the broader US China relationship.

There are certainly voices in the administration that want to do a lot more on the restrictive side.

There are also voices administration that want to do a lot more on the promoting US technological advances side.

But of course the administration has many priorities, and it's hard to see which is going to win out.

I think in terms of the restrictions, it's very clear that the White House is going to try to balance the Hawk's desire for restrictions with the broader US channel relationship.

And so as we approach what many people think is going to be a summit, this fall.

I think history would suggest you shouldn't expect freemen restrictions and then run up to a summit on the promoting technological development side.

I think there certainly are a lot of voices administration that want to see more money flowing to new firms with disruptive technology.

But there's also a desire for pretty dramatic budget cuts to science and technology in the USA, and that cuts in the opposite direction.

So how exactly these political priorities balance out is hard to predict with any certainty.

Just a quick follow up on the point you made about this balance or dichotomy between US producers and exporters of chips and tech firms, how do you see the Trump administration to serve the next few years navigating that?

Does it mean that they need to find other ways of supporting chip makers, for example, if they're going to be closing the route to China.

Well, I don't think any administration has done a great answer to that question.

I mean, China's obviously the second large economy in the world, and you know, twenty percent of GDP is a really large market to not be able to serve.

I think the US has tried to argue to tech firms.

Look, you can't serve this twenty percent.

You have the rest of the eighty percent you can serve.

And I think tech companies are inclined to serve that other eighty percent anyway to a large degree.

But is it right that companies.

Would be more profitable have high revenue if they could sell to the entire one hundred percent of GDP?

For sure, no doubt about that, Chris.

I'd love to talk about TSMC now.

The company became the first Asian stock to reach a market capitalization of one trillion dollars.

That was just you know recently.

Can anyone challenge TSMC's dominance in this space.

Well, not anytime soon.

I don't think TSMC's as you mentioned, of the outset ninety percent or so market share and high end chips for many of the key designers of chips, TSMC produces all of their high end chips.

That's true for Apple, that's true for Nvidia, that's true right now for Qualcomm's high end chips, for AMD.

It's this absolutely central producer and so deeply internit into the rest of the tech sector, into how Silicon Valley functions.

It's just very hard to see it being displaced, and rather than being displaced, I think it's more plausible that we end up in a situation in ten years where it's really the only player left stand at the cutting edge because it's two main competitors, Intel and Samsung are both facing real challenges to their business of manufacturing high end processor chips.

How did we get here?

Like, how did TSMCA become this giant?

Yeah, it's an extraordinary story.

I mean it really goes back to one individual and a unique business model.

So Morris Chang, the founder of TSMC, spent most of his early career in the United States, but was passed over for the CEO job at Texas Instruments and was approached by the Taiwanese government in the mid eighties, where he made a number of professional contacts and they said, would you like to start a business in Taiwan And he said, yes, but only if I can try a new business model, which was called the foundry business model.

The intuition was that if you didn't design any chips, you only manufactured them, you could become a manufacturing partner for multiple different chip design companies.

Therefore you could build up scale drive down costs but also improve your manufacturing process because you were gathering data and know how across a larger number of chips.

And that business model was radical at the time.

Most people thought it would fail.

At the time, Morris Chang went to the leadership at Intel and other titans of the chip industry for investment.

Most of them turned him down, but it turned out it was the right business model.

And so today TSMC is both the most advanced and the largest producer of processor chips, and those dynamics are deeply interlink because it has more data about chip manufacturing, so it can hone its production processes to a much greater degree than its competitors can.

And how important is Morris Chang to TSMC now?

The reason why I'm saying is that he is ninety four years old.

There's going to be a time when TSMC lives without Morris Chang.

Will this interrupt the business at all?

Do you think?

Well?

I think TSMC is now and it's a second leader post Morris Cheng, so it's had multiple leadership transitions.

Now, of course, it's still a company that has in the past been profoundly influenced by the sets of principles.

The operating model the culture if you will, that he set up.

But I think it's operated independently of his leadership since he's been retired now for some time.

So do I think it can continue, Yes, but what's continuing as an organization that he set up with the culture that he established in a business model that he also deserves credit for, and for now it looks like both that culture and that business model are working extraordinarily well.

We've touched on some regions outside of Taiwan and China in the US, you know, there's also Japan, South Korea.

Are there ways that countries can kind of take advantage of the Chip War?

Do you see scope for new alliances, potentially jee political alliances as a result of this.

I think if you ask most other countries, they will describe themselves as having been taken advantage of.

In the context of the Chip.

War, the metaphor of when elephants fight, the grass gets trampled, that type of thing is often cited.

I think there are those aspects of both.

Certainly, it's the case that for medium sized countries Korea, Southeast Asian countries, India, they've got to be responsive to the decisions that both China and the US are making You can't take either one on head on, either from a business perspective or from a geopolitical perspective.

But I think also there's a lot of companies that have realized the industry is going to shift a lot.

Already has shifted a bit, and it's going to shift a lot more over the coming years, and that will open up opportunities.

I think India is an interesting example.

India until recently played an absolutely marginal role in electronics manufacturing, including in ship assembly and chip production.

But India is looking at the desire for diversifying supply chains away from China and has attracted some big US companies as well as some big Taiwanese companies to set up manufacturing facilities in India as part of that diversification play.

So there's an example of a country trying to capitalize on the US China rivalry.

But for every example I could give you of a country capitalizing and give you another example on the opposite side of a country feeling it was getting squeezed between two larger powers in a struggle over which it had no control.

How are they getting squeezed?

I mean, what does that look like.

Well, I'll give you an example with Korea.

So you know, Korea is getting squeezed in a couple of different ways.

On the one hand, Korean firms have to follow US export controls that impact China because every advanced Korean chip is made partly with tools that are imported from the United States, and therefore the US claims export control jurisdiction on basically every ship made in Korea, basically every shipman globally.

And so for both Samsung and Skhiinex, the two leading Korean shipmakers, they've had real impacts on both the facilities they currently operate in China, which can't upgrade with the types of tools they would like to because those tools are now illegal to ship to China.

But also certain types of memory chips that are used in AI servers they now can't sell to China, and so that's locked them out of some potential revenue.

It's just like in Nvidio has been locked out of some potential revenue in China.

So that's how the US has impacted Korean firms.

On the flip side, if you ask yourself, who's the one of the key potential losers from China self efficiency drive.

Well, it's Korean firms.

Korean firms e support large volumes of chips to China, especially in the memory category, and that's where Chinese firms like CXMT and YMTC have made really impressive strides at catching up technologically and displacing Korean firms from at least the low and mid range of the memory markets.

You've seen already really substantial price impacts in the memory market, pushing down margins for Samsung and eskhaiinix because of this increased competition from Chinese firms.

And so that's how Chinese industrial policy is also squeezing companies that previously had access to the Chinese market in theory still have access, but in reality are being displaced by Chinese firms.

How big of a part of the trade talks do you think this issue is?

Because we just had, you know, the reciprocal tariffs announced on much of the world, we've also seen more attempts by the Trump administration to kind of target China's manufacturing kind of throughout the supply chain, and also this idea of secondary tariffs coming up as well as well as tariffs on transshipt goods, which seems to be.

They haven't said China in relation to that, but we can guess it's probably China.

So how do you think that's coming up in trade talks?

And do you think tariffs maybe act counter to like it disincentivizes countries in a way from targeting this, You.

Know, I think it's it's really complicated based on which country one is talking about, and because the tariffs are still all in flux, it's difficult to draw I think, confiding conclusions.

We still don't know, for example, what the US is going to do on chip specific tariffs.

Right now, there are basically no.

Tariffs on ships, with the exception of some old tariffs on Chinese ships.

But President Trump as repeatedly says there will be.

And so where exactly that lands we don't yet know.

Is it going to be only on China, It's going to be on the entire world, is going to be ten percent, fifteen percent, fifty percent, who knows?

And those numbers, those details really really matter.

And so I think we're still as of early August in two studtel territory just because some of the key tariff decisions have yet.

To be made.

One example, right now, we've got US tariffs on Taiwan that have been announced.

Those could change, but ships aren't part of that because there's a separate process happening in the US, And of course, the most important decision that the US will make visa the trade of Taiwan is the potential tariff on ships being discussed.

So I think we are in two studitel territory.

I think the one other dam I that's interesting though, I think to me is that when it comes to the question of Chinese content in other countries' supply chains, there's an interesting alignment of interest between what the trumpministration says that it wants and what businesses in many third countries want, which is they want more value produced domestically rather than by Chinese companies.

So you go to Vietnam, for example, and none of the business leaders in Vietnam want to be transhipping goods from China to the US.

They want to be making the goods and capturing the value themselves.

Now do they know how to do it?

Not always?

Is it easy to do not necessarily, But there's actually an interesting alignment between what Trump Minstration vis will say they want and what the Vietnamese business class would like to be doing.

And so whether or not the Trump ministration has the diplomatic finesse to actually make that potential alignment into a reality, I'm not sure, but I think it is true to note that it's not only the trumpministration that has been looking nervously at the expansion of Chinese companies market share across the region and perceiving as much throughouts Upper Unity.

Chris, I know you get this question all the time, and I read the book and I think I know what the answer is.

But a lot of people.

Are probably thinking, you know, if China, for example, does take over Taiwan and none of the factories of TSMC are damaged, does that mean that China dominates the semiconductor manufacturing space.

I think the first thing to note is that, you know, the factories themselves are only a small part of what you need to actually make the advanced ships.

You need the people, critical input, you need materials flowing from Japan.

You need the.

Spare parts and software updates flowing from the US and the Netherlands and elsewhere.

So you've got to think about the entire ecosystem.

But in that scenario where you've got a takeover without any disruption to the chip supply chain.

It would be an extraordinary asset to China.

Right now, the US can tell TSMC don't sell your most advanced ships for phones or for PCs or for AI to certain Chinese firms, which means sell them to US firms or Korean or European firms, and Chinese firms are a disadvantage.

Well, that would flip if China were to take control over Taiwan.

It could say.

TSMC provide your most events capabilities to Huawei and none to Apple, or your most Huawei for GPUs and none to in Nvidia, And that computing advantage I think would be fundamentally important, especially as AI relies more and more on vast volumes of computing power.

So we've talked about the US export controls.

One thing we haven't talked about is how Chinese companies are avoiding them.

So somehow there are still factories in China and in Southeast Asia that have chips that are not supposed to be there from the US.

How are they able to do this?

Yeah, you know, I think that the key with assessing chip export controls is that if you want a high end AI data center, you need tens of thousands of chips, so we shouldn't ignore when there's one or five or ten, but they're not strategically relevant.

The key question is how can you get access to tens of thousands of cutting EDGI chips?

And the best evidence we have is that this is mostly not happening by smuggling in.

Tens of thousands.

It's mostly happening by accessing data centers abroad in places like Malaysia and Thailand and perhaps elsewhere in Southeast Asia that can legally buy.

Large volunes of chips.

So if I were the US government think about this problem, I would say, of course I want to crack down on the ten ships here, ten ships there, But you really want to find are the ten thousand ships and where they're flowing.

And it isn't obvious that we have chips flowing by the ten thousand increments into Chinese data centers, but it is obvious that there are chips flowing by increments that large and larger to countries in Southeast Asia that don't have domestic demand for that volume of chips.

And so I think when you think of smuggling, you should think, yes, some people putting an extra chip in their suitcase and flying it across the border.

But that's probably the less important challenge than the question of how can you confirm that a data center built in a third country isn't providing the compute to be in cloud computing services to a Chinese customer you are hoping to cut off.

And that's part of the debate that is a bit more technologically complex and therefore not discussed, but probably more significant in the long run.

It makes you such interesting stories though.

You know, the men with suitcases full of chips boarding your next axetally happening.

So the students caught in Dubai with chips.

And that's why you know the US is you mentioned the outset Congress is considering legislation to require location verification for AI data center chips precisely with that in mind.

You know right now there's a single.

Sport Control verification official posted by the US government and all of Southeast Asia, and that single individual is expected to track the flow of thousands of chips.

It's just a hopeless task.

And so you need if you want to actually address the problem of physical smuggling, you need some sort of technology to enable it.

That's fascinating.

I mean that person must be traveling quite.

A bit or busy person.

Yes, hard chat.

So one thing we haven't talked about is rare earths.

They're crucial to semiconductors and AI data centers, and of course it's an area that China dominates as well.

So I wonder can the US hope to become or can any country become a leader in chip semiconductors without having a rare earth's monopoly or at least having a larger share of the world pie of rare earths.

Yeah, I think it depends a lot on which specific mineral you're looking at, So that rare earth magnets are mostly used in chip making equipment, not chips themselves.

There's a bunch of other materials.

Tungsten, gallium, germanium used in the chip making process, which are also largely processed in China.

For a lot of these, what you find is that the chip industries demand is a small share of overall demand.

So for rare earth magnets this is the case.

There's a lot more demand that goes to the auto industry than the chip industry.

My sense is that most of the companies in the chip industry that used rare earth magnets have than a fair amount of stockpiling in contrast to the auto industry, and so for the magnet side, I think the industry is better insulated than the auto industry certainly was in response to China's shut offs.

But for other materials like gallium germanium, it's less clear.

There's not good data what exactly the disruption might be if China were to impose comparable restrictions on gallium and germanium, and it hasn't really yet in terms of the severity.

It's threatened restrictions, but they haven't been biting yet, and so I don't know, and I don't really think the Chinese government's sure if it were to try to do the same thing for these other materials, how impactful or not would it be.

The key question for all these is first how easy is it or hard is it to do without a given material?

And second how quickly could you bring online alternative supply and sort of like for rare er it's not actually rare.

They're just polluting and capital intensive to produce, and that's why they've concentrated in China.

The same with gallium and Germanium.

It's not geology that dictates that these are in China, it's the economics of the mining and processing industry, which means that these are probably much less solid monopolies.

If you will, then is the Netherlands monopoly on UV lithography tools.

So Chris.

Earlier this year, China had its Deep Seek moment.

It came out with this LLM that really challenged the status quo.

How impactful was this too, you know, like the whole AI system, I.

Think it was very impactful.

It represented a shift in the axes of progress in AI.

So for the most period.

From chatchipt up until the start of this year, advances in AI were largely driven by what's called pre training, so training models on larger and larger quantities of data.

And Deep Seek as well as the one reasoning model from open AI that was released in twenty twenty four, represented a shift towards reasoning after a question is asked.

So rather than training your model in large quantities of data, you still do grint and large, but you're you're focusing more on spending your compute resources on the thinking about the answer.

And this really matters because it has very different implications for how you use compute and where you position your compute.

So deep Seek they predominantly open source their model, which means that most queries to deep seak models take place not in deep seak servers but on the devices that deep Seak models are run on, so you can download their model computer use in your phone, and this has led to its rapid spread both in China but also globally.

But it also poses an interesting business model question.

If everyone's downloading your model, they don't need you after they downloaded the model, and the model downloads for free, and so you've now had a number of Chinese companies Alibaba's quin Models series for example, and others that have been very permissive in terms of open sourcing and downloading, and as a result haven't built businesses despite having really massive distribution of their models.

The US firms, with the exception of Meta, have taken an opposite approach.

They've kept mostly closed source, which means that customers need to call back to open AI servers every time you want check sipet to ask you a question, and so there's very different business models system from this.

But there's also implications for the types of computing controls that we've been discussing earlier.

The initial computing controls were intending or hoping they could slow the pre training process in China, but then everyone's pre training process slowed for technological reasons, and so instead what we've seen is that the controls have actually been the most impactful on the ability of Chinese firms to build out their own inference infrastructure.

So you actually saw after deep Seek released its model It's our one model in January, they had to cut off access to using their servers to run their model because they didn't have enough servers to meet the demand of the entire world.

And so they've actually been pushed in the direction of open sourcing more, I think by the controls, which had a contradictory and interesting effect of encouraging use because it is open source, but also undermining the long term business viability because right now it's unclear what the funding mechanism will be for either deep Seek or the other open source models in China in the long run.

Fascating discussions.

Thanks so much for joining us today, Chris.

Well, thank you for having me.

You've been listening to Asia Centric from Bloomberg Intelligence and Kai Di Dimitriva on Hong.

Kong, also in Hong Kong.

You can listen to all our episodes on Apple Podcasts, Spotify or review listen and this podcast was also produced and edited by Clara Chen.

Thanks for listening.