In 2000, Humanity achieved a technological Milestone with the launch of the International Space, Station or ISS. The project costs an estimated $100 billion to develop. The costs were split between the US Russia, Japan, the European Space agency, and Canada Once operational, the space agencies from all those countries were able to send scientists to conduct experiments in zero gravity in the 2000s, China invested heavily in its nent Space Program wanting to accelerate its scientific development and establish its position as a global power. China wanted to buy into the project as well, but in 2011, the US Congress passed a law prohibiting NASA from collaborating with the Chinese Space Agency, effectively prohibiting China from entering the ISS.

This was due to concerns that China would steal NASA's intellectual property, thereby threatening America's technological leadership. Almost immediately after being rejected by the ISS China began work on its own space station, the T Gong, which became operational in 2022. Having been launched more than two decades after the ISS, it is considered to be far more technologically advanced. The Chinese Space Agency says they will allow scientists from other countries to come to Tanong, but even if China wanted them to come, NASA scientists will not be allowed to go because the ban on collaboration with China is still in effect.

The ISS is expected to be retired in 2030, after which point, the Chinese Tong will be the only operational space station in the world. The reason we bring up the space station example is because since 2018, the US has been implementing a very similar policy restricting the ability of China to purchase Advanced Us semiconductor equipment. citing National Security concerns. At first, they blacklisted specific Chinese companies such as the telecommunications companies ZTE and Huawei which are believed to be suppliers to the Chinese military.

In 2022, this technology War increased substantially when the US effectively banned all Chinese companies from buying Leading Edge semiconductors and related equipment that contains Us technology. Due to the global nature of the semiconductor supply chain, almost all advanced microchips have at least some Us technology and now China isn't allowed to access any of it. It was widely believed that this would the Chinese technology sector sing them behind 10 or more years. This would put Chinese tech companies at a severe disadvantage compared to their Us counterparts.

Yet, in September of 2023, the Chinese smartphone giant Huawei which has been under Us sanctions since 2018, launched the Mate 60 Pro which boasts a 7 nanom chip. In fact, due to design Enhan an MS and advanced packaging techniques, its performance is on par with some 5 nanometer chipsets. This puts it roughly on par with the iPhone 12 released in 2020. The chip was designed by Huawei and manufactured by the Chinese state-owned Semiconductor Manufacturing International Corporation or Smic.

This means that China is only 3 years behind the Leading Edge Western chips making the technology Gap far less than most people had previously assumed. This shouldn't have come as too much of a surprise. Over recent years, China has spent well over $100 billion subsidizing domestic semiconductor companies including Smic and Huawei specifically so that they can achieve self-sufficiency. In this video, we'll take a deep dive into the US China Tech War and why cutting China off from the US semiconductor industry may be just as fruitless as cutting them off from the International Space Station.

Pretty much any electronic device from smartphones to computers to data centers are all powered by a variety of semiconductors. There are many different types of semiconductors, and the exact details of how they work is beyond the scope of this video. The simplified version is that all computers have logical integrated circuits, including CPUs and Gpus. These devices store and calculate information in the form of binary code or zeros and ones.

for complex calculations, the computer needs to Crunch massive quantities of zeros and ones. Each digit is stored on a microscopic transistor. The smaller the transistors, the more you can fit in a given space and thus the more efficient your chip will be. The size of the transistors is commonly measured in nanometers, which is 1 1 billionth of a meter.

However, when people say a given chip is 7 nanom, this doesn't mean the size of the transistor is actually 7 nanom. Other factors beyond the size of the transistors can influence performance. So nanometers is really a short-hand term meant to describe the performance of the chip based on industry standard benchmarks. The more advanced the microchips, the better the performance the computer will have.

This has a wide range of practical applications, including the ability to run graphically intense video games. more efficient chips consume less power, allowing for greater battery life on mobile devices deves. The more powerful the chips, the more efficiently you can run data centers to host websites and power cloud workloads. And finally, Advanced AI models require exceedingly powerful microchips to Crunch trillions of pieces of training data.

As semiconductor technology has advanced, the process of creating micro processors has become exceedingly complicated. Let's take the example of Apple's proprietary M1 chips which are used in its MacBooks and iPads Apple's Engineers designed the chip based on the technical specifications that they want to achieve, but they don't manufacture it themselves. In the case of Apple, manufacturing is outsourced to a company called the Taiwan Semiconductor Company or Tsmc. Other contract manufacturers include South Korea based, Samsung Intel and Global Foundaries, which are both headquartered in the US and of course the Chinese company Smic, which made the 7 nanometer Huawei chip.

These manufacturing facilities are massive and cost billions of dollars to develop. They're full of expensive equipment sourced from all over the world. The main countries that produce Advanced semiconductor manufacturing equipment are from the United, States, Japan, Germany, and the Netherlands, but they are important components that come from well over a dozen countries. Even if a manufacturer has access to all of the equipment at once, the process is still extremely complex and difficult to master.

For example, despite investing billions of dollars, Intel has had to repeatedly delay its 7 nanometer processors which were finally released in 2023. To get a sense of the difference in performance between chips of different nanometer classifications, the iPhone 4 was released in 2010 and its chipset was manufactured with a 45 nanom processor says the newest iPhone 15 released in 2023 has a 3 nanom chipset China is the largest semiconductor Market in the world. Each year, it is estimated that the country Imports about $300 billion of semiconductors and related products and produces about $50 billion worth of semiconductors itself. This is due to the large amount of electronics Manufacturing in China China Imports semiconductors from abroad.

It uses them as inputs to manufacture electronic devices such as smartphones, computers, televisions, Etc which are then exported around the world. As of 2019, 35% of all semiconductors sold globally were sold to Chinese factories, which Ed them to assemble electronic products. In addition to being the world's largest manufacturer of electronic devices, China is also a massive consumer market for end products. As of 2019, 24% of all electronic devices sold globally were sold in China.

This puts it slightly behind the Us, but it has likely taken the top spot in recent years due to the relatively simple nature of assembling electronic devices. Profit margins are low and workers are generally paid low salaries If China continues to import all of its semiconductors, there's a limit to how profitable their electronic sector can become. But breaking into the semiconductor manufacturing industry requires many years and tens of billions of dollars of investment before ever hoping to see any profits. This is well beyond the capabilities of the private sector to do by itself.

So the Chinese government has spent tens of billions of dollars subsidizing partially state-owned semiconductor companies such as Smic. This is not an original. Playbook Both Samsung and and the Taiwan Semiconductor Company received billions of dollars of government subsidies in their early years. China's investment in its semiconductor industry has born through as of 2019.

Chinese Chip makers have about 8% of global market share, representing about $50 billion of annual revenue. However, the bulk of China semiconductor production consists of cheap and unsophisticated chips. These include chips for Budget Pric smartphones, as well as televisions, washing machines Etc which by their nature require less Advanced chipsets. More advanced chips still have to be imported.

The chips and Flagship phones made by Chinese smartphone makers including Xiaomi, Oppo and Vivo are still designed and manufactured abroad. Most of the manufacturing happens in South Korea or Taiwan. The semiconductor conflict between the US and China really started to heat up in 2017 when the Trump Administration placed crushing sanctions against a partially state-owned Chinese telecommunications company called ZTE ZTE makes budget Pric smartphones and at the time almost all of them contained Us design chips. The US accused ZTE of purchasing Us-built technology and re-exporting it to Iran and North Korea in violation of Us export controls.

ZTE was no longer allowed to purchase Us design chips with its chip Supply cut off ZTE was unable to produce smartphones, causing its Revenue to collapse almost overnight. Its share price declined by 2/3 unless the US sanctions were lifted. The company faced a prospect of bankruptcy as it turned out Trump was using the ZTE sanctions as a bargaining chip in his broader trade negotiations with China. After receiving concessions on unrelated trade topics, the US ended the export restrictions on ZTE after the company agreed to pay a fine and stopped doing business with Iran and North Korea.

This event served as a major wakeup call for the Chinese authorities. ZTE had a market capitalization equivalent to about 20 billion and employed over 50,000 workers in China. The fact that such an important company could be crushed at the whims of Us export controls exposed a massive vulnerability in China's economy. These fears were realized in 2020 when the Trump Administ Ation banned an even bigger Chinese telecommunications company called Huawei from buying Us design chips.

The justification was Huawei's alleged violation of Us export controls by re-exporting Us technology to Iran Huawei was one of the largest tech companies in China generating about $120 billion of annual revenue at the time. They produced both telecommunications equipment and smartphones which they sell around the world. Much of the Telecommunications equipment and substantially all of their smartphones contain Us design chips. These sanctions were catastrophic for Huawei.

In the second quarter of 2020, they were the single largest smartphone maker in the world, representing 20% of global shipments. This went to zero almost overnight. They spun off one of their smartphone sub Brands called Honor. As an independent company, it is not subject to the sanctions and can resume importing Us design chips.

But the survival of Honor is a small consolation compared to the destruction of Huawei's core smartphone business in 2022, The export restrictions were increased still further when the US Commerce Department effectiv banned all Us companies from selling Capital Equipment capable of making Advanced semiconductors to any Chinese customers. They also banned high-end processors capable of Performing Advanced artificial intelligence workloads from being sold to any Chinese customers. This notably includes the massive Nvidia Gpus which power AI models such as chat. GPT Regardless of the rationale, the export restrictions have created a new sense of urgency for China to achieve Semiconductor self-sufficiency In the case of Huawei, they have a subsidiary called High Silicon, which designs chips for its own smartphones.

The problem is contract manufacturers such as Tsmc, Samsung and Intel all have to follow Us export controls. If they violate Us sanctions, they themselves would be blacklisted and would no longer be allowed to purchase Us made equipment. So their only option was to work with the Chinese company Smic, which was already under Us sanctions. Anyway, Up until recently, it was believed that Smic could only produce chips up to 14 nanom.

Tsmc, which is considered to be the global leader, was making chips of this size around 2016, putting Smic about 7 years behind. That's why it came as such a huge shock to the industry in September of 2023, when Huawei unveiled the Mate 60 Pro smartphone. It includes a 7 Nom chipset designed by High Silicon and manufactured by Smic, making it completely indigenous to China. In fact, due to design enhancements and advanced packaging techniques, its performance is on par with some 5 nanometer chipsets in terms of processing power.

This puts the Mate 60 Pro roughly on par with the iPhone 12 released in 2020. The Mate 60 Pro has been a commercial success, selling out almost immediately. Huawei's telecommunication equipment business has also recovered over the past couple years as they have replaced many of the banned Us chips with Chinese Alternatives. In 2023, the company is on track to generate $100 billion of Revenue or almost 80% of their pre- sanctions.

Peak. So does this mean that China has won the Chip War and is on its way to technological dominance? Not exactly as we discussed earlier, semiconductor manufacturing facilities are large, complex operations costing billions of dollars to build and hosting thousands of pieces of high-tech equipment. Much of the equipment is made by Us companies or contains Us parts or intellectual property. They are thus within the jurisdiction of Us Export Controls, and Smic can no longer buy them.

Of the thousands of pieces of equipment used to make advanced semiconductors, one of the most important is lithography. This involves using a highly precise laser to draw microscopic patterns onto the wafer. The smaller the transistor size, the more precise the laser must be. There are a few companies that can make lithography machines, with the most advanced ones being made by a Dutch company called Asml.

Under diplomatic pressure from the US, the Netherlands banned Asml from exporting certain of its most advanced machines called Euv machines in 2019. These Euv machines were thought to be necessary for making chips with transistor sizes of 10 nanom and Below. Up until this year, Smic was still able to buy less Advanced duv machines which were believed to be capable of making transistor sizes of no less than 10 nanom. SMI was able to make 7 nanometer chips with a Duv machine by running the wafer through the machine multiple times to increase the density of the transistors.

This method is slow and prone to defects, meaning that many of the chips have to be thrown away. This greatly increases the production cost. This is a common theme across China's domestic semiconductor industry. Due to less access to Advanced Western Equipment less experience and less economies of scale, many Chinese chips are far more expensive than those imported from abroad.

The Chinese state run Global Times admits that in some some cases, Chinese Chips can be up to 10 times more expensive than Imports. Despite the higher costs, the government supports domestic production with billions of dollars of subsidies and large orders from state-run companies. In the meantime, China is investing heavily in making its own semiconductor equipment. For example, they've given billions of dollars of subsidies to the Shanghai Microelectronics Equipment Group Orme.

This is China's leading lithography company. Currently, their best machine is capable of producing 90 nanom chips. 90 nanom chips were cutting edge in 20 4 and today are only used in things like automobile infotainment systems. and Home Appliances like washing machines, is working on a new lithography machine which will be capable of making 28 nanometer chips.

These were cutting edge around 2012. The machine was originally supposed to be released in 2021, then it got delayed in 2023 and again to 2024. The reason it's so difficult to develop these machines is because they contain hundreds of thousands of individual components, many of which come from Germany the US South Korea Japan and other countries which are particip Ipating in US Ledg sanctions. Unable to buy many of these parts has either had to make them itself or Source them from other Chinese companies.

Thus, they have a much more difficult job than Asml, which is free to import parts from anywhere. despite the technological difficulties involved. given enough time and money, China will eventually succeed Asml, CEO Peter Wining is against the sanctions. In his words quote, the more you put them under pressure, the more likely it is they will double up their efforts unquote.

to prove this point. China Unveiled a $40 billion Semiconductor subsidy program last year. Currently, Asml has a near Monopoly position in advance Theography Machines. If China was allowed to buy Asml products, they would have no need to develop their own.

Asml could keep its Monopoly position indefinitely, But now that China is forced to develop the technology on their own, they may one day surpass Asml. In the meantime, it is estimated that Chinese companies already own about 200 Asml lithography Machines of various types, which they bought before. The export restriction is undoubtedly taking apart some of these machines and trying to reverse engineer them. given that is already under maximum sanctions anyway, they probably won't be too concerned with patent infringement.

We may be seeing a repeat of the International Space Station debacle in a paranoid attempt to stay ahead of China. The US may end up achieving the exact opposite. All right guys, that wraps it up for this video. What do you think about the US China semiconductor competition? Let us know in the comments section below.

As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.