US Government Tightens Semiconductor Chip Exports - What Are The Implications
The other big story this week was the tightening of US restrictions around chip exports.
We actually found it surprising how little attention this news received. It might seem hyperbolic with what is going on elsewhere in the world but the US effort to cut China off from the most sophisticated semiconductors is a very big deal.
The logic is deceptively simple: By limiting the level of sophistication of chips China can purchase on the open market you are de facto limiting the level of sophistication and progress for the Chinese economy.
In other words, the US is trying to put a ceiling over what China can achieve technologically. In the 21st century that is sort of the whole ball game.
We wrote about this recently on the subject the sudden release of a new and very impressive phone by Huawei. The new device had 5G characteristics and in our opinion it demonstrated that the current sanction regime likely wasn't working as we intended.
We continued on to argue that China's clear and impressive advances in this area argued for more restrictions.
In fact here is how we ended our piece:
Add it all up and perhaps the most basic conclusion is to expect further sanctions on China and especially and specifically in the area of high tech hardware.
Is the most basic takeaway here then not: Apple is in real trouble but that Nvidia (or TSMC or AMD etc) could be as well?
If you have been looking for what could harm Nvidia's sky high expectations around growth and profits then an ever worsening trade war and global decoupling could be it.
Well, we didn't have to wait long!
The US government came out this week with a raft of new measures to try and limit the ability of China to buy the most advanced semiconductors.
The aim, Commerce Secretary Gina Raimondo said, is to limit China’s “access to advanced semiconductors that could fuel breakthroughs in artificial intelligence and sophisticated computers.”
Once again, this outright attempt to throttle China's advance has worrying implications for how China responds.
Guess what? Nvidia's investors didn't like it.....
Nvidia's stock fell from over $460 to just above $420 almost immediately and has been struggling ever since. The stock was, on that day, the single worst performer in the S&P 500. In fact, it was the single worst day for the company's shares in well over 2 years.
That is quite a reversal for this year's market darling.
This underperformance might reverse somewhat as lawyers and experts pore over the new regulations and try and figure out how and where the new loopholes will emerge.
But the real story is not about whether the regime is truly iron tight or not. The real story is twofold:
Obviously, it will be very difficult for Nvidia to deliver the profits expected if they cannot sell their most advanced and expensive products to the second biggest global market.
As usual, these restrictions may underwhelm but the incentives for China and the Chinese tech industry are clear.
Nvidia 's shares have been priced as if it is going to be able to sell as many of its products to as many willing buyers as there are around the globe. Unfortunately for the company and its shareholders, the prevailing trend is in exactly in the opposite trend.
More importantly still is the fact that China is now even more incentivized to develop and build their own replacements for these chips and the manufacturing process that surrounds them.
They already proved their bonafides when, just last month, Huawei released a phone with 5G-like capabilities that they were not supposed to be able to attain. It is likely not a coincidence that they announced the Mate 60 at the exact same time as when Gina Raimondo, the US Commerce Secretary and the official in charge of trade restrictions, was visiting China.
Let no one say that the Chinese Communist Party struggles with symbolism.
Necessity is still the mother of all invention and the Chinese will now turn their not inconsiderable energy and creativity to the strategic task at hand. We have, if anything, only underlined why this is a critical goal for the entire country.
Further, in classic authoritarian regime fashion, they will also no doubt deploy significant state resources and coercion towards equaling and then surpassing the likes of Nvidia and Taiwan Semiconductor.
We have no idea whether and when they will succeed but it seems likely that investors will begin to hedge their bets immediately.
Once again, the time has probably come to get out of the Super 7 and invest elsewhere.
*******
Have questions? Care to find out more? Feel free to Download our App (!!) or reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
