Quick Summary: The US has banned the export of several AI computing chips to China. This decision is the latest escalation in an emerging arms race for technological superiority between the two nations. But with Taiwan still dominating global production, it seems the US is going all in on investing in local semiconductor manufacturing.
Dear Reader,
The US’s two leading GPU makers made a shock revelation this week.
Apparently, both NVIDIA and AMD have been mandated by the US government to stop selling certain computing chips to China. This measure seems to be aimed particularly at hampering Chinese artificial intelligence (AI) research.
Here is how Reuters reported the story:
‘The U.S. Department of Commerce would not say what new criteria it has laid out for AI chips that can no longer be shipped to China but said it is reviewing its China-related policies and practices to “keep advanced technologies out of the wrong hands.
‘“While we are not in a position to outline specific policy changes at this time, we are taking a comprehensive approach to implement additional actions necessary related to technologies, end-uses, and end-users to protect U.S. national security and foreign policy interests.”’
In other words, without specifically saying it, the US has just stepped up the tech arms race. And just like the semiconductor shortage of 2020 and 2021, there will be big winners and losers as a result.
This decision could set the tone for major market moves…
The manufacturing dilemma
What makes this chip ban so awkward is that the US doesn’t actually manufacture many chips locally.
Both NVIDIA and AMD work with Taiwan Semiconductor Manufacturing Company (TSMC) to make their products. In fact, TSMC has a 53% market share of all semiconductor production. This means that half of the world’s computing chips are built by this one company.
Given the geopolitical tension between Taiwan and China, you can understand why this is precarious.
This is why the US is so involved in trying to support Taiwan. They know that if they lose access to TSMC, in particular, they will absolutely fall behind in this semiconductor arms race that they are spurring.
Which begs the question, why stoke China’s aggression even further with this new ban?
The answer is simply that the US is betting big on scaling up its own chip production…
See, this ban comes in the wake of the gargantuan CHIPS and Science Act of 2022. This new policy passed by President Biden will provide US$250 billion to cultivate research and development in the semiconductor industry.
And it’s not just government funding pushing forward with new US chip-making facilities.
Micron announced this week that it would invest US$15 billion in a new US-based plant. This is on top of TSMC’s plans to build a second US plant of their own that will come online in 2024. These are just two examples of the rapidly emerging market for US-made semiconductors.
And while it will obviously take a few years for these facilities to reach maximum output, it is a clear long-term commitment.
The US is pinning its hopes on their ability to become a semiconductor powerhouse.
Winners and losers
Now, the reason you, as an investor, should pay attention to this chip war is because of the opportunity.
Back when the US and the Soviet Union had the space race of the ‘60s, it lifted the US aerospace industry out of relative obscurity to major corporate titans. The likes of Boeing, Grumman (now Northrop Grumman), and TRW (later acquired by Northrop Grumman) all owe a lot of their initial success to the space race.
As academic Peter Kline comments:
‘Grumman built the Apollo Lunar Lander, TRW built or collaborated on several different satellites, Boeing was heavily involved in the Apollo program and the construction of the Saturn V Rocket,
‘The major events of the Space Race and the stock value of the companies involved in the aerospace industry were deeply intertwined.’
Right now, I believe we’re seeing the early stages of a similar development in the semiconductor sector. These are the first steps toward a major chip-making boom that could herald a new era of computing.
That’s why you need to be paying attention.
Because an investment in the right firm right now could be like investing in Boeing before it became a household name. It’s the kind of investment that delivers once-in-a-lifetime returns…
That is not something to be taken lightly.
This is why, despite the geopolitical ramifications, this semiconductor arms race is going to result in major winners and losers. And if you play your cards right, you can make sure you end up in the former group, not the latter.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
