Most people in the US have no idea what’s really going on here, other than what they see in the news — and depending on your political ideology and what your sources of news might be, for sure that’s going to be colored.

Background

The US runs a continuous political game on its citizens in which the world is painted as zero sum, and there have to be winners and losers, and by god we’re going to win and anyone standing between us and victory is The Enemy. And this is completely side-of-aisle agnostic – D, R, X – doesn’t matter. It’s the game. It’s part of the giant distraction that keeps people from looking around and saying “hold on there… how did things get to this state??”

I digress. And yet, not.

China? They’ve got their own agenda. And it’s not completely inscrutable despite what other may say. It’s pretty easy to find the core thesis document — America Against America. You can find it in dead tree or e-book editions, and it’s required reading to understand China’s view on the US. The author, Wang Huang, really wanted to understand the US and man, did he do a deep dive. It’s slightly dated, as most of the footwork was done in the late 80s, but the core? Solid.

Don’t read this if you actually believe that America is the greatest country in the history of the world. And don’t read it if you are not amenable to taking on serious volumes of disconfirmatory information that will make you question well, everything.

What they’re doing with that? Well…. that’s not completely clear. But they are not playing the same game we are — I talk about this a lot, the US and EU and Russia play chess, proxy for “kill the king”, and China plays Go, which is “surround and absorb”. Different modalities, different timelines, and it looks like you’re losing until that final move when you drop one stone and turn the entire board.

Then we’ve got a classic case of “Law of Large Numbers”. If you think that the US has a lock on genius talent, think again. There are about 331M people in the US; there are about 1.4B people in China. If you want to believe that the statistical distribution of “genius” is uniform, which is a solid bet, then China will have 4x more of them than the US; if that terrifies you and you want to stand on “quality of education” then you’re even more fucked because China outperforms the US in math and science education, and is at even levels with reading and social sciences.

Summary: there are more really smart people in China and they’re better educated, and that’s just table stakes. China is objectively planning for the future; the US is objectively playing games to preserve the glories of the past.

Taxes and Greed and Policy, Oh My!

If you press rewind to the 1970s, China is mostly lower level manufacturing and a lot of agriculture, and the US is sending men to the moon. The difference is stark.

Shenzhen 1970 vs 2020. My. That’s.. different. That’s approximately NYC 1870 to 2020. How?

Well… China has a planned economy, not pure communism. It’s fine for certain people to take ideas and run with them, with the support of the government, and even make a shit ton of money doing it — as long as you’re coloring inside the lines. (Look at Jack Ma, for example)

They also don’t have a governing body that’s perpetually trying to spend money in ways that makes money for the people that are paying the elected officials to be elected. So when someone says “we should have better houses and more cars” then levers get pushed and if you’re favored, you can get government backed loans to build apartment buildings and car factories and fly to Europe and hit partnership deals with major global manufacturers… Same with power systems, and improvements to agriculture and transportation…. if a need is recognized, the appropriate division of the government more or less points and grunts and says “make it so” and steps back, providing funding and encouragement to those who are successful and compliant and well… not that to those who are not.

Here, if we determined that we were by god going to rectify the mistakes of the past and create safe nuclear power… for starters there would a giant “yes we are” / “no we aren’t” political fight, which means nothing could happen for a long time until enough “pork” was packaged to mollify the supporters of the objectors. And then we’d have un-ending lawsuits by others who objected. And then we’d have regulators changing the rules which increased the costs which would lead to massive budget over-runs at at about 2x original price and 5x the original timeline the annual appropriations bill would fail and that would be that.

Kind of a huge advantage, no? To China.

Technology

Do you remember these?

circa 1960, super cheaply made, badly designed transistor radios from Japan were one of the hot ticket items for teens and young professionals – you could listen to the radio station you wanted, using an earpiece, rather than whatever was being played in the room you were in. Cheap injection molded plastic, shitty construction, the post-WW2 zeitgeist was “cheap Japanese junk”…. which, by the 1980s had turned into this

That’s a Nakamichi Dragon, one of the most sophisticated and precise cassette tape units ever made. About a thousand bucks in 1982 money, there’s still and active market and pristine units are pushing $10k.

How did “Japenese electronics” to from $2 three transistor radios to THAT? (And if you don’t like that example, feel free to substitute say a Honda N600 for an Acura NSX, etc)

China was largely, from the US perspective, cheap manufacturing, once the market shifted in Japan. If you wanted to make high volume electronics, and you didn’t want to do that in a union shop in the US, with US EPA regulations and the like… you needed to find someplace else. China saw an opportunity – strategically – and said “How about we fund some factories to build things?”

By the mid-1980s, the path was set. However, there was still institutionalized distrust of China as a partner — and largely well founded. The trademark and patent protections that US companies could count on in most of the rest of the world were largely non-existent, and you “just knew” when you sent products for manufacture in China that they’d be copied and someone else would be making all the money from selling those copies besides you.

The US figured out that it was strategic to try to fix this, and by 2001 China had joined the WPO and it was at least theoretically possible to protect your IP in China, with appropriate levels of effort (and cash). Going to 2005 and the “Great Wall of Patents” position paper, the US policy shifted again, and we decided to openly license just a metric fuck ton of IP to China, or Chinese companies via the central government, as further inducement for them really get their shit together.

There’s a popular view that China “stole” a ton of IP – the reality is that most of it was a gift. Now, mind you — there remains a bunch of industrial (and possibly state) espionage for acquiring trade secrets, but frankly not disproportionate to that happening elsewhere (note: I’ve never had IP stolen by a Chinese company but I can’t say the same about Silicon Valley)

Anyway. As part of a free interchange of IP, and a ton of government support (which can look like “we need to build a 5nm fab” or “we need housing for 2.4M assembly line workers” or “it would be ever so spiffy if kids could do differential calculus by at 13”), China has progressed.

As of this writing, Chinese companies are right at the top in nearly all fields of endeavor in engineering and technology and manufacturing — and in some cases, we can’t catch them they’re so far ahead BECAUSE WE PAID THEM TO DO THAT.

Chips

Arguably, the best chips are from New Mexico and parts of Mexico where the zey mays blue corn is most easily grown. Oh. Damn. I’m thinking about food again. BRB.

Better. As I was saying, the tippy-top leading edge chip fabricatation is in the US and Taiwan. And the leading chip architectures and designs are in the US and the UK.

Apple: chip architecture is ARM (UK), the Mx and Ax chips are designed in California, and the TSMC fabs are in Taiwan. For now.

Samsung: ARM architecture, captive CPU design, captive fabs — but they may be in China as well as Korea.

Huawei: Let’s look at the P30, “phone of the year” in 2019 before the festivities started… ARM Cortex architecture, CPU Kirin 980 captive design, captive fab. And weirdly, the phone was mostly made in Japan(!)

So when the Trump administration decided to “get tough” on China, and cut off key chips from Qualcomm and licenses for ARM chipsets and the like… what would you guess the Chinese response might be? “Ohhhse noooose, take pity upon us Mr Orange Man!” or…. “Fuck those guys”

Mmmm? Anyone? Bueller?

Yeah. So. With one single highly destabilizing move, designed to inflict maximum pressure on the most valuable ecosystem in both countries, a monster was awakened.

That sort of resource allocation I talked about earlier? The new directives are “we want to be independent of Android” and “we want to have all our electronics use CPU architectures that are not subject to licensure from foreign entities”.

Now, those are big wheels, and it’s going to take a while for them to turn… but they’re turning

China has the current 7th fastest supercomputer on the TOP500, the Sunway TaihuLight, and has been a regular in the top ten for a very long time.

They just demoed a 66-qbit quantum computer, the Zuchongchi 2.1 and a 113 detected photo optical quantum computer, the Jiuzhang 2.0. Assertions are that that Zuchongchi is the current fastest quantum computer in the world.

In late 2021, Huawei officially replaced Android with HarmonyOS, and is actively licensing that to other Chinese phone makers. Fully expect that to kill Android in China other than for export within a year or three.

And on chip front… the Loongson architecture, based on MIPS but in a way that didn’t require licenses. is chugging along. We don’t see too much about it, because they’ve mostly been in non-export items, but just in case — exports are now banned. This is not some upstart either, these chips have been around since 2010.

Summary: they’re going to make their own chips, because we cut them off from the easier, and more economically advantageous path of just buying our chips. That we did it once is proof positive that they can’t afford to rely on the US as a partner because we’re clearly not. We, on the other hand, throw everything overboard except “how cheap can it be made and how much can we jack profits up as a result”

Conclusion

At this point the ship has sailed. China will apply much more cash and infinitely more focus to solving the problem of educating the smart people they have (which will then be better educated as well as more numerous than our smart people) and it will be like the US sourced chips never existed by the second turn of the technology wheel.

There will be some Qualcomm and Intel kicking around until they die, but there will be no more ARM architecture chips made except to sell, and Android will be no more. They’ll still allow import and sale of iPhones, because those are luxury items.

But… note that most of the 5G telecom patents are owned by… wait for it… Huawei. And you can bet that they’re well, well into the 6G stuff too. And the “xG” designation only matters insofar as you dance the dance with the ITU… and China *might* just decide to tell those guys to go fuck themselves too and not include their patents in the Standard Essentials Patents package but still litigate for infringement (sidebar: right now if I had to litigate a patent for infringement my number one choice of venue would be Germany, and number two would be China — never would have guessed that 20 years ago!)

So.

We have — by playing chest-beating glory-seeking no-one-ever-beats’-Murica heros over here have created this world in which China DOESN’T TRUST US and the rest of the world is increasingly willing to trust them.

If we’d played this differently and said “you guys pretty much own this precision manufacturing thing and we have a strong lead in innovation, how about we partner?” (sidebar: I was a GP in a fund set to do just that, nuked by the Trump administration rules) then odds are none of this would be happening.

For now? TSMC is going to do a massive, massive lift to start building fabs in Arizona. Foxconn has already made one abortive attempt do do precision manufacturing in the US, and maybe learned something and will be successful the second go-round. Apple is moving manufacturing to India (not a horrible idea in the main since it’s likely cheaper) which is also going to have unforeseen consequences. There’s a massive, massive shuffle – there will be continuing supply chain disruptions, there will be shortages, prices will increase, reliability will go down…

And inside China? The central planners will see all of that as the price of stability. And slowly, they’ll pull away from a US-centric tech world, and create their own, which will expand to their client states, and eventually to Europe which will be even more dependent on them for precision manufacturing.

And I know how this ends. The US has a default state of war – we’ve fought in 12 major wars since 1776. We’ve been at war, major or minor, for 225 years of the 243 years we’ve existed as a country. At some point, some flagwaving asshole will take the G10 extending an offer to China as an act of aggression and then the shooting starts. Maybe it’s over Taiwan. Maybe it’s over oil – I mean Navy bases, yeah that’s it – in the South China Sea.

It’s irrational to expect that the US will not materially decline. We are well under median in almost all the measurable quality of life metrics, and every move the government makes leads to further separation between the haves and have nots, and that trend line leads to authoritarian governments, and well… hey, we’re there, aren’t we?

This chip embargo is just a symptom of a much much bigger issue, and due to not understanding the game that we’re playing, we’ve made it about a thousand times worse for the US than it might have been.

I don’t like giving news like this. And with stuff like this, I don’t like being right. But the track record says… don’t bet against it.

Good luck.