The Six Five team discusses China playing offense with precious metals.
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Transcript:
Daniel Newman: So a couple of weeks ago, you and I had an interesting debate conversation about what was going on in China as the U.S. continued to impose restrictions. Now some of those restrictions included the controls of machinery that including and most importantly, ASML out of the Netherlands and not allowing China to get the machinery required to basically move forward on 5320 angstrom from 18a, et cetera. These next generation nodes has put China in a really precarious position, especially with the onset of AI as the most important trend for the next decade, if not more, China is in a position where they’re playing catch up without the tools to catch up.
So this isn’t a situation where China can just buy its way out. You did see the last week Ant Group, the big, long saga in the courtroom settled around at a billion dollar fine; which given what was going on in China, it’s an interesting turn of events where China seems to be rotating back to enabling its largest tech companies to be successful, winding down some of the regulation to slow their growth, slow the development of wealthy iconoclast leaders that aren’t part of necessarily the Chinese Nationalist Party. We all know about the Jack Ma saga and what’s gone on there, and it’s related but unrelated. But China is feeling the pressure right now to be able to build out AI infrastructure and to compete in the AI space. We saw that China squeezed Micron. Why did they squeeze Micron? Well, frankly, my opinion on Micron was more that it was not the imperative product.
If they wanted to really show some weight and push, they might squeeze Nvidia, but why in the world would they do that? They desperately need Nvidia. But what does China have? Resources. China has resources, and this is a really delicate tightrope that has to be walked right now because China has resources, the U.S. needs them. In this case, they’re talking about gallium, they’re talking about germanium. These are two specific resources that are produced almost exclusively in China. You’re talking about the vast majority of germanium, over 60%, over 80% of gallium. These are important metals that can part of the manufacturing of semiconductors. A lot of people don’t realize, but these chips don’t just come out of thin air and they’re not made out of all synthetics. There’s a number just like lithium or the nickel that’s going to be used in batteries. We talk about that sometimes. These are very important natural resources that are produced in limited quantities.
Now, interestingly enough, this isn’t something that’s in limited production in China because that’s the only place that has it. So this is where it becomes a very interesting debate is already phones are ringing around the world, countries like South Korea, Russia, Japan, Ukraine. I know, why is it Russia and Ukraine? You notice themes with wars, anybody? Anyway, a lot of this can be produced in Russia and Ukraine also in another Japan and South Korea, but as well I believe Canada, Germany, Japan, Slovakia through recycling and even in the U.S. Point is, is that nobody’s manufacturing it anymore because we’ve outsourced our entire supply chain to China, and we still haven’t entirely fixed that yet. We’re going to see that get turned back on, but it’s not instantaneous. In the short run, by limiting shipping and controlling the export, it could cause another strain in the supply chain which could create a strain in terms of the availability of some of these semiconductors that we need.
We all saw what happened during the last supply chain crunch, it could be a massive problem. Having said that, some of these crackdowns could be more price impactful, where some of them could be more supply driven. But the real question, Pat, for me, and something I’d love to get you to weigh in on too is, China has to walk this tightrope. They want more 800s, but we’re not letting them have them. I’m sure they’re getting them through whatever markets they can, which is illegal, but I just can’t imagine they’re not trying to obtain them in some way, shape, or form. But the U.S., by the way, is the largest consumer of Chinese-produced goods. So there’s a lot of tit-for-tat going on here is if China cracks down too hard on the U.S., it can become a bit of a problem for China in its own economic growth if we stop buying as much stuff from China.
Having said that, we need everything from China ’cause we’ve basically created this weird co-dependence, and we don’t get stuff from other parts of the world, and other parts of the world largely aren’t manufacturing. So it feels like both sides have a hand on the rope and you can push and you can pull. But the global interdependence between these two things are so tightly wound that if either over rotates, Pat, if we actually went to war, actually went to a real on-the-ground war with China, where would everybody get our stuff? Where would our stuff come from? What would we even do? We’ve literally created this incredible dependence, it’s a co-dependence, though. You know what you and I joke about the show, if one of us quits, it’s over mutually assured destruction? We can’t actually go to war, so this is a really interesting and tedious thing there. It’s like China’s pulling these little threads and the U.S. is making these big microaggressions and in the end, the no way we can actually function without one another. So Pat, very interesting story to continue watching and develop.
Patrick Moorhead: I think that was a really good breakdown. So China, when I started working in 1990, their technological capability was to have through hole PCBs, meaning, taking a transistor or resistor that has a metal wire on the end and soldering it into a breadboard. Okay? Those were their capabilities. In 1996, the only thing I relied on China for were power supplies, what I call metal bending, like sheet metal to create an enclosure for a server or a PC and plastic injection molding, which is, you spray plastic into this huge auto sized… They didn’t have rows, they didn’t have good rows, they didn’t have good power. Then the West enabled China to go in. To China’s credit, basically, they dictated what was going to happen.
If there was a house in the way of the highway, they would just actually remove an entire neighborhood. From a policy standpoint, we believed that we could turn China capitalist, and if we turned China capitalist, they would not be communist, and we wouldn’t have a potential thermo nuclear war. Also, we wanted to increase the amount of decreased costs for particularly technology, for clothes, for pretty much anything. So we outsourced it to China, so like you said, so this goes back a long way. China invested, they invested in education, in PhDs, in college students and their population. Even if as a percentage is not as literate as the United States, they have four times more people than we do, three to four times more people than we do.
So they’re just this absolute powerhouse. Then about 10 years ago, China basically limited throttled companies like Cisco, IBM, Microsoft. They were not allowed to participate in anything that was called critical infrastructure. This is a fact, not opinion, Huawei stole Cisco IP to help create their networking technology. That is just an absolute fact. By the way, if the knockoff Chinese Boeing 737 looking product looks 99% like a Boeing 737, it’s because those designs were ripped off as well. China started stealing a lot of U.S. intellectual property. Still today, China bans Google, Facebook, Instagram, Twitter, and in some cases, makes it so hard. Dan, if you want to open up future and group China, guess what the maximum percent of ownership you can have?
Daniel Newman: 49.9.
Patrick Moorhead: That’s right. You are not the majority shareholder of that company. Do you know what the deal is if Chinese companies want to incorporate in the United States?
Daniel Newman: I don’t, not off the top of my head.
Patrick Moorhead: 100%, you can have 100% ownership. We always-
Daniel Newman: That seems fair, Pat, seems fair.
Patrick Moorhead: What’s that?
Daniel Newman: That seems fair.
Patrick Moorhead: It’s capitalism. It’s absolutely not fair. I’m just saying this just to put this in context of how far this goes back, and it’s exactly what Nvidia and Micron are caught in the middle of now. By the way, I’m working on a column about Nvidia, and are we actually safer if we restrict Nvidia products in China? So check it out.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
