You may have seen the reports about how the Biden administration is trying to keep China from accessing American semiconductor technology and equipment. We all know that China is a huge market for semiconductors, and U.S. companies like Qualcomm and Nvidia make a lot of money selling their chips in China.
If you look at the share prices of U.S. chip companies, they’ve all sold off because of these new rules. Investors judge regulations by how related stock prices react. The formula is pretty simple: new regulation + rising share price = good regulation, or new regulation + falling share price = bad regulation.
So it might be tempting to look at the stock price declines from semiconductors companies and think, “well, these new regulations are clearly bad.” And honestly, I’m often in that camp…
But not this time.
Even though I first recommended my beloved Qualcomm at $51 a share in 2017, I’m happy to grin and bear the current $110 share price. Because this move by the Biden administration is a hammer stroke of incredible significance.
Greed vs. Security
I hope we all agree that China is a bad actor. Motivated by simple greed, corporate America has long turned a blind eye to China’s duplicity. American companies have helped China spy on its people, providing the technology to build a true surveillance state. We’ve let Chinese companies list their companies on the U.S. stock market even though some of these companies are complete frauds.
And if China does decide to act on its stated ambition to take over Taiwan, already embedded American technology will help.
These new semiconductor rules will cripple the Chinese tech sector and completely recast its economic and militaristic ambitions.
Now, if you’ve read a few articles about all this, I’m guessing you probably still have questions about what it all means. I’ve found news reports to be not very helpful.
For instance, Reuters says that the new semiconductor regulations are designed to “…cut China off from certain semiconductor chips made anywhere in the world with U.S. equipment, vastly expanding its reach in its bid to slow Beijing's technological and military advances.”
Reuters also says that the new rules for “… top toolmakers KLA Corp (KLAC: Nasdaq), Lam Research Corp (LRCX: Nasdaq) and Applied Materials (AMAT: Nasdaq), effectively requiring them to halt shipments of equipment to wholly Chinese-owned factories producing advanced logic chips.”
Here are a couple more snippets from Reuters:
“The new regulations will also severely restrict the export of U.S. equipment to Chinese memory chip makers and formalize letters sent to Nvidia Corp (NVDA: Nasdaq) and Advanced Micro Devices Inc (AMD: Nasdaq) restricting shipments to China of chips used in supercomputing systems that nations around the world rely on to develop nuclear weapons and other military technologies.”
“The rules published on Friday also block shipments of a broad array of chips for use in Chinese supercomputing systems.”
Ok. That’s fine. But what does it actually mean??
The End of Chinese Tech
The most important thing to understand is that China cannot make high-end chips. It does not have the technical know-how to manufacture so-called “high-end” semiconductors, the basic building blocks for artificial intelligence (AI) applications, smartphones, servers, and satellites.
These chips are not even made in China by foreign companies. High-end chips come exclusively from the U.S., Japan, South Korea, and Taiwan. And most of these chips are designed by U.S. companies.
Next, there are mid-range chips, like the kinds that go in cars and planes. These mid-ranges are made mostly in Thailand and Malaysia. Like high-end chips, these mid-range chips are not made in China.
Finally, there are low-end chips that power the basic electronics that you find in your home. Almost all of these low-end chips are made in China.
So, the new semiconductor rules from the Biden administration have three simple applications.
- China can no longer buy high-end and mid-range chips without special case-by-case permits.
- China can no longer buy the equipment needed to make high-end and mid-range chips.
- China is being greatly restricted in its ability to buy the tools that allow it to operate the equipment that uses low-grade chips.
So, in a nutshell, the situation is that China can’t make and use any semiconductors without at least some imported equipment. And the Biden administration just made it nearly impossible for China to import any of this equipment.
Without U.S. technology, China’s ambitions for AI, hypersonic weapons, and automation will, as one expert put it, “…wither on the vine and go away.”
I can barely believe such foresight came from politicians…
Until next time,
The Profit Sector