Gavekal Technologies: Chips

Europe fears that subsidized and efficient Chinese high-tech companies will de-industrialize the continent. But the “second China shock” is arguably even more of a threat to northeast Asia, where China’s lead in batteries, electric vehicles and solar has Tokyo and Seoul incumbents worried that machine tools, robots and displays could be next. But Japan and South Korea should be able to hang on to large and profitable chunks of their industrial bases, thanks to both technological factors and geopolitics.

The “constructive strategic stability” from last month’s Trump-Xi summit is better understood as an uneasy stalemate, as core flashpoints such as export controls and Taiwan remain unresolved. Despite Trump’s effort to sideline China hawks, Congress is advancing several export control bills. The most significant one is the MATCH Act. Even in a scaled-back form, with targeted controls on ASML’s advanced deep ultraviolet lithography (DUV) systems, the bill will almost guarantee a strong response from Beijing. Likely retaliations from China include tighter critical minerals controls targeting US-led advanced semiconductor and AI supply chains, and invocation of supply chain security-related regulations.

Nuclear power is back in business, thanks to the AI datacenter boom and renewed worries about fossil-fuel security following the closure of the Strait of Hormuz. Despite brave talk in the US, China is at the forefront of that revival and will remain so for another decade.

China upgrades outbound investment rules; loopholes remain with BIS new AI chip guidance.

As Washington discovered with semiconductors, export controls that aim to maintain a technological lead are double-edged. They may slow a rival’s catch-up, but they also incentivize the rival’s innovation and harm domestic interests. And they are hard to enforce. China is rapidly expanding its export controls to include not just rare earths but many other technologies where it has a lead. But the more controls it imposes, the more it risks choking off revenues and paths to innovation for its leading tech companies.

Huawei's “Tau (τ) Scaling Law” signals China’s ambition to redefine semiconductor progress and claim a leadership role in global technology competition. The proposal is more a Huawei-branded framework that systemizes existing post-Moore ideas than a reflection of groundbreaking innovations.