Semiconductors in the U.S.-China Tech Dispute

welcome to our program on semiconductors in the u.s china tech dispute this is the fourth of five programs in our seeking truth through facts u.s china program series we have a terrific line up today 380 people have signed up with us our three chairs ken wilcox our honorary chair jack wadsworth and our chair emeritus chung moon lee we have about 16 board members with us as well and colleagues joining us from hong kong and southern california i'm margaret conley the executive director of the northern california center our format for today i will introduce dan wong who joins us from beijing and he will give a keynote presentation after that he'll introduce four guest speakers they'll have a moderated discussion and then we're going to open it up to audience q a if you have a question type it in the q a box at the bottom of your screen you can begin doing that right now dan is going to be monitoring those throughout the program all speaker bios are on our website and they can also be found in the chat box at the bottom of your screen this program is on the record we are recording and this event will go until 6 30 pm pacific now a few words about our keynote presenter dan wong dan is a technology analyst at gav kell dragonomics an independent provider of investment research he writes on china's technology and the impact of u.s sanctions and regulations he tracks china's semiconductor capabilities u.s measures on cyphious and export controls huawei and broader chinese industrial policy before gavkel dan worked right here in silicon valley and fun fact he studied philosophy dan welcome back thank you for arranging everything for today it's all yours well thank you so much margaret i'm very excited to be speaking as part of this program seeking facts through truth and i think it's really important to get a grasp of why semiconductors are so important in u.s china relationship i can't be more excited to be joined by this panel of experts two of whom are very much technology experts and then the other two can speak through the political dynamics of semiconductors which are just so important these days now what i will do is to set the stage and give a very short 15 minute presentation to just talk through six slides to set the stage on why semiconductors are so important i'll introduce the panel i'll ask them some questions and then welcome uh the uh the questions from the audience uh now uh basically i think what um you know the the important thing here is that all of us made a pact before this panel started that this will be a lively discussion and i'm very confident that we will deliver that sort of lively discussion uh because uh this is just an exciting group now what i'll do is i will start sharing my slides to basically the group and i wonder if margaret you can quickly confirm that you're able to see the slides here okay very good i'll talk through six slides about what is important with semiconductors to make three broad points the first is that u.s firms are very much leaders in semiconductor technologies and they depend quite a bit on china as a large market china is now the second point is that china is now trying to catch up a great deal on semiconductors in my view it has quite a lot of the basics figured out but it is behind often very substantially in nearly every single area especially in equipment as well as in eda tools which are the tools that you need to design chips and then the third aspect is that uh chinese firms are now trying harder than ever before to try to close this technological gap to try to catch up on semiconductors um but you know this is a very hard progress process and so we have to think through about how successful they will be so let's get into the data the first thing the first point i should make is that semiconductors are really important first as one of the few you know remaining very much american strengths in manufacturing and semiconductors are so important because they underpin pretty much all digital technologies without them it is very difficult to make any digital technology work now in terms of semiconductor technologies us firms are leaders in most areas now uh us chip companies are not really doing a lot of the fabrication work on shore in the united states today but they are still uh leaders in so many other parts including in design including in manufacturing equipment including in eda tools and then so many of the iconic names and semiconductors are still these big american firms now um the uh interesting point about uh you know so much of the semiconductor market is that quite a bit of sales uh go to china if we take a look at the major semiconductor firms uh names like intel names like amd broadcom for each of these firms china is either their largest market or the fastest growing market now i hasten to add this is not all and use demand from china a lot of chips are exported to china and then assembled into different products like smartphones and then re-exported so this is not necessarily unused demand but around one-third to one half of all semiconductors exported to china are consumed in china now if you take a look at the equipment which is the uh which are the tooling that you need to actually manufacture chips china is a large market as well as a growing market there's a much clearer trend in terms of the semiconductor equipment industry from uh names like kla tencore applied materials and land research that china is a growing and growingly important market for each of them and that is a little bit more representative of chinese demand now what's actually going on in china's semiconductor equipment market um well there's a lot more increase of china's chip capacity china's semiconductor efforts ramped up in 2014 after uh the chinese government released the national uh integrated circuit guidelines it ramped up again in 2015 uh which was the year of the release of the made in china 2025 plan which listed semiconductors as the very top item that china really needs to figure out in terms of broader technologies and what we can see is that quite a lot more chips are being produced in china today now some of that is multinational firms firms like tsmc or intel or samsung that are that are manufacturing in china but the chinese headquartered firms are also growing in terms of their capacity to make quite a lot more semiconductors and so i'll give a very brief review of what i think are the important developments in china's semiconductor industry today just in terms of a very broad strokes where chinese industry is in terms of a lot of very different segments now china i think in my view has figured out a lot of the basics of semiconductor technologies but they are behind on pretty much every single front sometimes by many years sometimes by decades now in terms of the important segments china is now roughly competitive in a lot of different parts of assembly and packaging but that's fairly low value in terms of design china is also getting uh developing some nicer more sophisticated capabilities so huawei's a high silicon unit which designs huawei's phone chips has now become a more competent uh outfit it's becoming a quite good outfit and if you take a look at the broader segment of china's trip industry there are a lot more upstarts who are trying to produce leading trips basically on of the designs if you take a look at the actual manufacturing capabilities of china's semiconductor sector they are quite a few years behind china's technology leader in terms of manufacturing is smic smick shanghai based foundry and it is currently producing at 14 nanometers which is where the industry leader tsmc reached around five years ago so in the most generous cut i think it's fair to say that smick is around five years behind tsmc the market leader in taiwan now if you take a look uh basically at memory this is again where china has made uh some nice progress in terms of 3d and which is a type of memory chip there is a now fairly credible competitor namely ymtc based in wuhan which has made some progress in terms of 3d nand but if you take a look at the more valuable segment of dram china is quite a bit more behind on there it is a little bit more difficult to see such good evidence of progress and that is more challenging and also more valuable where china is very substantially behind is the in terms of a lot of the equipment a lot of the metrology lithography tools that actually produce semiconductors they don't really have the capacity to design the software to really go through and you know do a lot of the hard parts of semiconductors and it's going to be a little bit more difficult given u.s controls now the u.s government has uh overhauled its export control regime after the passage of the export control reform act in 2018 and it's becoming a little bit more difficult for uh chinese firms to acquire leading u.s technologies now in addition to overhauling the broad regulatory regime the u.s government has also issued specific regulatory actions against particular chinese firms so these include fujian tinhua these include huawei hike vision who are all on the entity list and now the entity list designated firms and include a very substantial uh proportion of uh chinese companies we know that there is a a restriction on smick's ability to acquire uh american technologies and executive orders from the white house has also restricted the operations of tencent swechat and fight dances tick tock so there are particular actions taken against chinese firms as well as a broader overhaul of the regulatory regime in the u.s according to data from the department of commerce in 2019 after the passage of the export control reform act a lot more u.s companies are finding a tougher time in actually acquiring the licenses to export to china and after commerce makes a determination on which technologies are emerging and which technologies are foundational i expect it's going to be a lot more difficult yet there will be a lot more technologies caught under the control of this occultatory regime and that's making uh chinese companies quite a lot more nervous now i think the um biggest victim of u.s actions has been uh huawei i think we we're familiar with the basics of what that company does um i'll just briefly mention that huawei is a major producer of mobile infrastructure equipment the equipment that we need for 4g as well as 5g last year in 2019 it was the world's largest vendor for mobile infrastructure equipment and huawei is a very large vendor of smartphones uh and uh last year was the second largest vendor smartphones for a hot minute this year uh huawei was also uh the world's largest uh was in fact the world's largest on vendor smartphones in the second quarter when its sales did not collapse as much as the other firms huawei is in my view china's most important technology company in part because its high silicon unit has figured out a lot of uh it has developed a lot of semiconductor design capabilities um according to one ranking of the world's largest uh semiconductor firms by revenue uh huawei was uh the first chinese company to enter that ranking again very very briefly uh before it's run into a very substantial difficulties uh huawei's huawei's um uh problems are really intensified in may 2019 may last year when the commerce department designated it to the entity list now um huawei i thought was going to have pretty substantial problems after it joined the entity list but in 2019 actually it did fairly okay so i think that's down to two broad reasons first of all the company engaged in a crash program to really try to improve its uh capabilities and to have fewer dependencies on american products especially on semiconductors so over the course of a single phone design cycle it was actually pretty impressive at de-americanizing a lot of its products and trying to figure out a lot of its own technologies but i think far more important is that huawei was still able to acquire substantial amounts of u.s technologies now i won't explain this particular chart in great depth but i think it suffices to say that for the most part if you are able to produce offshore then in terms of semiconductors there was a good chance that you can continue selling to huawei without seeking a license from the us department of commerce if you are a semiconductor company who is able to manufacture in let's say taiwan or israel or ireland then there was a chance that you were able to continue making sales to huawei now the u.s department of commerce took a look at that situation and basically closed that avenue for uh continuing to make sales and uh you know i think the uh interesting thing here is that uh in uh this year commerce released two highly complex and novel regulations that is going to make it much more difficult for huawei to acquire any semiconductors that are produced on the basis of american technology which is pretty much all advanced technol all advanced semiconductors in the world so huawei is now in pretty substantial problem trouble its company executive has said that huawei is now uh in survival mode i understand that it has a stockpile of chips that can see its space stations through uh probably uh in through the first half of uh 2021 uh but it's already beginning to wind down the shipment of uh smartphones so it's in a fairly substantial problem right now okay so uh to move on to the final third of my presentation uh what is going to happen in china what has the chinese response been well the chinese response hasn't been to uh do onto american firms what the u.s government has done until huawei so the chinese government has not in fact really tried to strike very hard against firms like apple or boeing or cisco or qualcomm instead it's been fairly restrained now i won't get into that here i encourage questions on that uh so uh but you know uh we we can talk through more of that about that about this perspective from beijing more importantly china is now trying very very hard to uh catch up very substantially on semiconductors uh in the just concluded plan general secretary c said that you know technology is now very very important in a speech just released in teosha which is the party's main theory magazine he called for a backup industrial system and called for reliable technologies and uh you can see uh that china is going to be making a lot more investment in fab capacity than anyone else even more than taiwan and korea the interesting thing to note is that this is not just a state effort at this point what i detect is that there is a lot more private industry uh interest in doing a lot more on different types of technologies chinese industrial policy has always been a mixed bag of results it hasn't necessarily always been very successful and i think the fundamental problem there is that the chinese government was counting on chinese companies to buy obviously inferior technologies for a political purpose but now there is a lot more uh private sector um intent on cultivating uh basically more reliable supply i think mostly driven by actions from the u.s government so now we can see is that a lot more private companies are jumping into the chip company game byd an electric vehicle maker has promised to design more of its own chips gri which is a home appliance maker that makes things like air conditioners and refrigerators it's also a promise to design more of its own chips so what i notice is that there's now much more of a whole of society effort in china to really try to figure out a lot more of the very fundamental technologies namely semiconductors so that they are much more able to depend on supply now what i have noticed is that you know i'm just talking to different firms in china i'm based in beijing one uh u.s multinational in uh manufacturing told me that his companies are starting to ask questions to audit his uh products for american content so that they're not subject to american jurisdiction what i've also heard from a company in the semiconductor materials space is that you know they're getting a little bit more nervous that chinese companies that never really had an incentive to switch away to untested products is now thinking a little bit more about whether they should give some procurement to untested uh products and so you know to editorialize a little bit here i think that uh the us mostly reacted to the technological rise of the ussr and japan by investing a lot more in itself and by doing a lot more r d and it's mostly reacting so far to the technological rise of china by trying to china's leading firms so instead of realizing its own sputnik moment uh the u.s is triggering one in china now um is all of this likely to succeed especially in semiconductors i would say that uh in the longer term i am somewhat constructive that china will figure out quite a lot of the basics of semiconductors but that's a question for the panel and we will discuss that question very actively what i would point out is a few things which is that no country has monopolized a key technology in the longer run this was not the case when the united kingdom was the leading industrial power in the 18th century technology tends to diffuse that's what it does i've said this at asia society before but you know i used to work in california the saying that we have there is that knowledge travels at the speed of beer beer or coffee picker poison basically engineers tend to chat through these things and then they tend to figure out a lot of these different problems china has proven itself capable at mastering at least a few technologies it is still a growing market and it is has a lot of capabilities already if i'm thinking through uh basically the early history of semiconductors when it developed in the 1960s that was driven very significantly by the military defense complex which only uh sought performance and not necessarily cost effectiveness and that's sort of the situation that china's leading technology company huawei is in today it has plenty of cash on hand it just wants semiconductors that work and it is willing to pay and to you know provide the demand for a lot of chinese leading chips but still this is going to be a very very tough challenge i don't think that this is going to be met anytime soon this is not something that china can figure out in a matter of months in a matter of years that is more likely a matter of decades but still you know big holes of demand tend not to be unfilled for now for very long it might be the case that japanese or european firms provide a lot of these technologies to china or it might be u.s firms that manage to offshore some of their production but it could also be the case that a lot of this is driven by chinese firms a lot of the private sector now is investing very heavily in these technologies because there is obvious demand there with that let me conclude this presentation on basically to share the data on what's going on with uh with china and u.s in terms of semiconductors and let's move on to our panel so i'm very excited to be joined by this panel of experts we try to make this balanced both in terms of technology folks as well as policy folks and i'm excited to talk to first of all jimmy goodrich who is the vice president for global policy at the semiconductor industry association uh second derrick scissors who is a scholar at the american enterprise institute third willie she who is a professor of uh at a professor at harvard business school and clete willems who has partnered at aiken gump uh who uh aadc law firm so these are all uh great folks and i'm excited to uh chat with all of you um so first i think i'll ask a question to jimmy goodrich jimmy i wonder if you can tell us about you know how u.s industry is thinking through china's technology capabilities in terms of semiconductors today and why it will be very very difficult for china to catch up in terms of all these semiconductor technologies thanks dan and a pleasure to be here you covered just about everything so i could just stop here and say read dan's analysis or his presentation but happy to add some additional thoughts so china as you outlined is the world's largest market for semiconductor consumption for u.s semi-enough to companies it's about 23 to 35 percent of their sales are occur in china and it's the fastest growing market and if you look at the market structure itself roughly about half of uf chip chip sales to china are two multinationals like apple hp dell and then half of that are two chinese oems like uh xiaomi oppo lenovo et cetera so it's a fast-growing market it's super important and for u.s seminar companies who today are the world leaders in ship design and ship sales and chip equipment eda that revenue is super important because roughly a fifth of us semiconductor revenues reinvested back into research development that totals dan 40 billion annually in research development expenditures by u.s chip firms it's the lifeblood of their innovation that they use to stay ahead of their competitors and that r d intensity uh amongst u.s chip firms is uh much higher than any of their of our competitors including those in south korea taiwan japan europe especially in china who is the currently mo least most uh r d intensive uh semiconductor industry globally so i'd argue china is you know today has been will be extremely important for the future of the semiconductor industry and that's exactly why these geopolitical tensions um between the u.s and china um are are a major and significant event you know clearly china uh is investing significantly this predated you know the trump administration as you outlined in 2014 with their national ic plan china then actually set up its own 21 billion national chip fund um and so it's pretty obvious china has ambitions to be bigger uh and stronger in the semiconductor industry but i think one key important point you you made is that no one company or country really has the capability to dominate the entire supply chain so while um cg being in his most recent article you noted talked about a complete domestic backup supply chain that's going to come at a significant and extraordinary cost to china's economy if they're truly seeking to do that across every segment of the supply chain and in many cases as you as you pointed out it could take decades for example some of the more extreme areas of technology like uv lithography for china to actually try and complete their own system clearly the best way for china and any other country to work in this industry is to compete where you have a comparative advantage that's clearly not what china wants to do it's not in their plan um and the united states might have different ideas for where they want china to be in the semiconductor industry as well but clearly for u.s chip companies important market it's going to remain an important market for the you know foreseeable future very good thanks jimmy uh cleat i heard there's an election tomorrow so i wonder if you can talk a little bit about what could happen in a potential second trump term what might happen if uh vice president uh biden joins the uh white house uh and uh you know if uh there is a fight in victory what could happen in this lane duck period for the next two months dan uh thanks for the the question and thanks for having me on on the panel you know i think the key takeaway for everyone uh should be that you know the china policy that the us is adopting right now and the overall policy on technology with respect to china you know is not a president trump thing it is not based on his preferences or even the preferences of this administration it's really a trend in american policy making that is going to be with us no matter what happens in this election now there might be different ways uh that the strategy is carried out but the general themes are going to be there and they're going to persist move forward let me just i think you know by way of introduction and my first set of remarks really just kind of go through i think three important points for people um you know number one why do policymakers on both the right and the left see huawei and these other chinese companies as a threat and why are they advocating for this what have we been doing what's working what's not and then talk a little bit as you ask dan about the lame duck i mean first i think it's important to level set you know why is this a threat well i think there's really three buckets uh three aspects to that i mean one is the pure national security side of things and there's the evidence some of which is public much of which is not public um that that we had when i was in the white house with back doors and different things that these companies like huawei are involved in but putting aside the non-public information the public way that the us articulates this is pretty straightforward and it's that companies like huawei have linkages to the military or they're part of the larger chinese military civilian complex they're subject to china's national intelligence law and therefore if the chinese government asks they are going to provide access and information um that that government may use for national security reasons and that argument you hear again you hear it from people on the right whether it's the president or marco rubio people on the left like mark warner that pure national security threat then there's the economic and that's this question of competition you know who's going to be the leader in 5g who's going to dominate technologies of the future but i think that's also coupled with this issue of china's willingness to engage in unfair practices to get there the intellectual property theft the subsidization the made in china 2025 plan so that's sort of the economic component of it that i think you know is right up there with the national security component and then you get to the rule of law issues and everyone has to remember the reason huawei was put on the entity list in the first place wasn't for either the two reasons i just mentioned it's because they were violating sanctions they were violating sanctions on iran so you have all these three components that put huawei squarely in the crosshairs whether you're a republican or a democrat and a lot of the same logic would apply to other chinese technology companies now what is the strategy for dealing with this um well when i was in the white house and with this administration we really put together a three-part strategy and i think one can argue and i'll argue that some elements of that strategy have been carried out more effectively than others and some are purely lagging but what was the strategy well part one was the protection and that was the export controls and the civilians uh and and other actions like that and i think the the argument can be made that it has been effective and dan you walk through a lot of the numbers in terms of what's happening with huawei and the fact that they do feel like they're under siege right now and just trying to survive um but i would argue that it hasn't been nearly nuanced enough and an argument i try to make including on behalf of the industry is that the optimal national security outcome is not to do not to not do business with them at all but on non-national security sensitive items isn't it better for america if china's buying our stuff and therefore subsidizing our own technological dominance so let's make this nuanced get revenue from china where we can so we remain the innovation leader but only wall off where you really need to um you know the second part of this was the multilateral component which i think the administration can point to success in countries around the world starting to turn their back on not only huawei but other chinese technology companies i mean sweden i think who most say is the least protectionist country in the world recently said they're not going to have huawei or zte in their networks you know obviously australia's been a leader india has been a leader so the us has made some success there but i also think particularly on the export control side what we've seen is when we act unilaterally it hurts our companies vis-a-vis their international competitors and so i think you know even though the us is making some progress they need to do a better job where they do decide that that protection is warranted to actually coordinate it internationally multilaterally the third element to it and i think probably the area where we're doing the worst is the question of running faster and actually having our own um subsidies and different you know some people would even say industrial policy for our companies and that has been lagging way behind and it really i think is unfair for us to be shutting all these markets down for our companies and then not helping them out at the same time and the us needs to do a much better job on that i don't think there's any question about that i think there are some efforts underway through our national defense authorization act and other things but probably not enough and there needs to be more and i can see jimmy nodding his head so i think that is clear but that is what the strategy was intended to be and like i said i think the implementation has been uneven some successes we can point to other areas where it's not going as well i would however though i would take a little bit of exception with dan said about we're creating their sputnik moment this they've been trying to subsidize this industry they've been trying to create this industry for years um are they still trying to do so today yes but i saw the fifth plenum stuff is a lot of sort of doubling down on existing policies rather than the novel creation of new ones so the last point just bringing you to sort of the the biden trump dynamic um and you know again i think biden historically may not have gone down this path so if the u.s wasn't in this position maybe he doesn't run in this direction quite as quickly as trump has however i think the external policy constraints in washington right now and the bipartisan support for this stuff is so extreme that i think biden's ability to maneuver is going to be quite limited and the example i'd love to give is you know basically you know when the us took action on zte which was the strongest sanctions penalties that we'd ever imposed in any company ever uh the hill said it was too weak and on huawei they're basically passing writers saying you can never take them off the entity listing unless you jump through all these different hoops so you have the hill flanking the trump administration i think that's going to force biden's hand i think the democrats are going to be in a similar place as republicans on this stuff i think you will have a more predictable policy making environment i think you will have more of an interagency process that you have you may have more efforts to coordinate internationally but the policy trajectory is similar um last point lame doc what am i looking for um the theory that's out there and i tend to agree with it although i will acknowledge its pure speculation is that if trump loses lame duck is the last you know chance for his administration to really try to enshrine these policies do i think that's true well you know i actually called a friend pretty high up at the white house last week and i said hey everyone in industry is saying lame duck's going to be crazy what do you think are you guys planning that and he said honestly we haven't talked about it he said is it true that the hawks have a whole bunch of stuff lined up that they want to pile you know push through and do i think they're going to try to take advantage of lame duck absolutely um but the president hasn't spoken to it we don't know what his mood is going to be we don't know if he's going to be busy contesting the election for two months so i can't really tell you what's going to happen so that was the view of people actually on the inside what i would say though is i do think that the hawks are going to really want to push here because they are skeptical of the u.s establishment even though i think things are not going to go back to the 2006 uh situation people on the nsc people the state department the hawks they're skeptical and they want to make sure that this policy can't be rolled back and i think they're going to try to push through the things that they've been on the doorstep of more entity listings i think especially for companies listed on dod's section 1237 list of chinese communist military companies i think you're going to see a whole lot of those attempted to be added to the entity list i i do think the smick um you know could turn into an entity listing the view is you know we've plugged we hit huawei ourself we plugged some loopholes with the in the third countries with the foreign direct product rule and now we got to hit them domestically where they're going to get that source of supply and so smith is as high on the list i do think you're going to see more sanctions actions um both hong kong and xinjiang i think are possibilities i think that um you know the icts supply chain final rule that's been sort of at the doorstep for a while could be pushed through um and you know a couple other things i don't think the china phase one deals in jeopardy but i i am watching those other things very closely for lame duck so i'll stop there hopefully that was a helpful framework about why we're concerned what we tried to do some of it more effectively than others and what i think the path forward is including in the short term great willie you've heard uh clete say that this is going to be a decoupling is going to be a trend in american policymaking uh there's going to be a lot more efforts to hit chinese firms uh can you talk about you know what decoupling means for the us i know you spend a lot of time visiting different factories and logistics zones in asia you know can you speak to a little bit about you know give us some gory details about why decoupling is difficult and how does industry think about this uh well dan you know i'm a little skeptical and i would argue that recent trade numbers really verify that okay because uh you know china spent a long time moving supply chains in right i remember the times in the late 90s and early 2000s where china was mainly an assembly operation where they would uh you know you'd have logistics providers who would kit components send them into uh import processing zones and they would primarily do assembly work and then ship stuff back out okay and they embarked on a long-term strategy to relocate those supply chains and move them uh close to the assembly sites uh a is a way of capturing more value add moving up the value chain okay and you know they've dangled a lot of incentives there including you know access to the domestic market local content rules and things like that so they've done a good job on capturing the supply chain now when you want to move out uh you know what what china has clearly demonstrated in uh uh most of this year has been their ability to restart manufacturing after the pandemic the the their ability to uh get uh those supply chains moving again their ability to manage through those conditions okay what we're seeing right now on the trans-pacific is like uh record volumes right container shortages you know eric cargo limitations as everybody is rushing back to china easy easy solution right and that's more broadly not just electronics okay but uh you know in my mind it's the question of will manufacturers be able to escape the gravitational pull of china okay and you know will they reach escape velocity will they be able to move to vietnam will they be able to move to other low-cost regions mexico you know india what have you okay and i'd say the the numbers that we're seeing in the last couple weeks suggest no now when i look at semiconductors in particular you know uh here i i'd have to agree with some of the things that klitsch said okay i mean i think what we have done and i i think the turning point really came with zte a couple years ago right because that sent the clear message that i cannot if i'm a chinese manufacturer i cannot depend on american suppliers okay and it actually goes back before that because we've weaponized a lot of other things like we've weaponized swift we've weaponized a lot of other things okay and so you know if you're a chinese manufacturer and you see what's happening to huawei now and you see what happened to zte i remember being in shanghai you know when uh everybody would ask me is like is the u.s going to let the zte survive okay and there were tens of thousands of jobs at stake then so what we have done is we have given them we have put them on notice that you cannot depend on u.s suppliers now to cletes point is that good for us or jimmy's point as well is that good for us is that bad for us okay uh you know i know there's a lot of criticism about huawei but i will say they have good engineers and they're willing to invest in engineers okay so if we uh if we force huawei to go out of business where do you think those guys are going to go right i'll tell you where they're going right now they're going to other companies to try to upgrade the skills all right you know high silicon was a very capable operation i've seen you know i've seen a number of huawei's manufacturing operations these guys are good they invest in engineering okay and they're very very good okay so then the question is where are those capabilities going to go and is the u.s strategy really going to be effective in the long term or are we just going to fragment huawei into capabilities that are going to spread all over and pose a much bigger competitive threat over time so from a strategy standpoint i don't think it's a very good strategy uh but you know this is the cleats point uh i've been saying as well that the answer on these things is we have to run faster and we do have to invest more in innovation all right and so i i'm skeptical at the current rate and pace that the u.s is investing in semiconductors and i visited a couple of fabs recently and uh it really gave me a lot of focus on what kind of investment would it take to keep up in this race we don't have the will in this country to do that right i floated a number in washington [Music] in terms of what kind of investment i thought it was going to take for the u.s to regain the lead at 7 nanometer five nanometer and so on it took people's breath away i don't think we have the will to do that okay we can look beyond the semiconductor industry and see you know if you want to see something that the u.s has zero capability in that china is going to walk away with the whole thing look at lcd flat panel displays okay we've got nothing there okay do we depend on that technology all the time absolutely all right and and by the way people have been talking about that one for 15 years as that cap capability left the country so you know i'm very skeptical that uh we'll be able to decouple like that well let me let me uh move on then to um derek um derek how much decoupling have we in fact seen so far and you know do you agree with the sentiment of this panel that the us needs to run faster a lot more fast well i you know i don't think we've seen much decoupling at all uh i disagree with kleed on the effectiveness of the strategy not that he was entirely endorsing it but i would say it's considerably worse than he said um everyone focuses on tariffs i'm going to get to technology but let's talk about broader decoupling everyone focuses on tariffs you know 2019 goods and services trade volume was less than three percent lower than 2016. the 13 billion drop against that u.s portfolio investment more than doubled from the end of 2016 into china the end of 2019 120 billion dollar increase what's decoupling when you have a 13 billion dollar trade drive and 120 billion dollar increase in u.s investment in china i mean that's just silly um we're much more coupled with the chinese on net than we were now you might say well what about technology in particular um export controls as people know were passed overwhelmingly by the congress was 402 in the house the summer of 2018 they were willfully ignored by the commerce department and i would be happy to fight with anyone on here who thinks that's not true i started saying in 2019 i said we were not going to get those regulations until the election we didn't get the regulations till the election we aren't even close on the entity list i find largely to be fake it's a license requirement it is not a sanction it doesn't ban anything of course we gave huawei 5 temporary general licenses because you know we didn't want to hurt them too badly even though they're being accused in federal court of being a criminal enterprise it was designed at the beginning by some members of the administration to sidetrack the congress i was at a meeting where that happened um many licenses not really liberty to say what the proportion is have been granted the icts rules which we are going to get and we're going to get them we're going to get we haven't got those either um there is no technology decoupling there is a threat of technology decoupling there is no technology decoupling now having said that i'm going to flip myself and say we're heading that way but it's not because of the us it's not because of tariffs and it's not because of entity list designations and all the fairly silly things we've done uh in the last few years is because of china um and china as several people have mentioned i agree with um china is this is new it i i don't agree with the point that like oh we're forcing the chinese to invest in technology that's absurd uh the 12-5 year plan started this process in 2011 even before xi jinping ggp of course accelerated that made in china 2025 i don't need to go through the history the chinese are going to move as quickly as possible in technology regardless of what we do and they're going to have to do it through subsidies uh and and technology coercion because of the nature of their economy we're not going to get them to negotiate down the role of soes as we all know here so we're going to get continued anti-competitive subsidies and continued regulatory protection it follows from that that they will continue to coerce and steal technology why does it follow because they're an aging society they're pre-covered they were more indebted than the us i don't think that's true now but pre-cover they were soes remain in charge of roughly 20 major sectors they don't face any competition or any meaningful competition in this sector which means they don't innovate which means the chinese are going to be drawing technology from elsewhere either legally or illegally um so what's going what's happened is not that the us has done very much we've talked about doing things we haven't done it um what's happened for a longer period than the trump administration's talk is seven eight years of chinese action and that action is eventually going to fall because it's not going to change xi jinping isn't going to change the subsidies aren't going to change the technology coercion isn't going to change that action is eventually going to force the us into being more serious about this it not going to do it next year and next year i would say as a honeymoon period i suppose things could happen in the lame duck but i agree with whoever was saying we're not very organized we don't know the president's mindset so i don't expect anything on elaine duck i think the beginning of 2021 we'll get china reaching out to whoever is in charge in the u.s most likely vice president biden and saying oh yeah you know we just want a good relationship but 2022 is the party congress in 2023 she's going to have to justify his position and i think we're going to get an increasingly aggressive china um not just in economic terms also in foreign policy terms and that's where i think u.s action will become more serious um several people on the panel know the technology race and semiconductors better than i do and i'm not i'm not arguing with them about who's going to win and what's necessary to win what i would say is my point about coming decoupling is that it's not going to necessarily be about winning some people will make that argument but it will be about we don't want to do business with this country anymore that's where xi jinping's china is heading in my opinion we see that in hong kong we see it in the border dispute with india and so on on top of the economic predation so i don't think the u.s has been serious about this maybe my standard a little too high but i think chinese action both within uh technology and elsewhere in economics and outside of economics are going to force us to become serious and what i would say to the people watching and of course obviously you may all violently disagree is you know 2023 2024 barring an incident over taiwan before then you're going to see much more serious u.s policy than now um likely and so if you think this is a problem i i would urge you to to change your perspective what we've done so far is not a problem as witnessed by american money pouring across the pacific but i don't think this is sustainable in light of chinese policy trends so i think the real decoupling is three years away or so i'll stop there okay well um let me let me put a bit of a finer point this is um this is a part of a discussion i'll put a bit of a finer point about what i i said i think you know chinese industrial policy is now different uh from then in the past and you know because i think made in china 2025 is a long path of a very long series of different industrial plans what's different now is that the private sector is now much more aligned with the state basically and cultivating domestic sources of supply i think if there weren't these u.s actions against firms like uh huawei against uh you know the slight restriction on smec these chinese technology firms wouldn't need to work so hard they would uh keep buying american technology if it if it weren't the case before um now i i think a a question to uh basically please go ahead go ahead we just had she say we want to become more self-reliant he's been saying it for years so i don't think even if you know i'll keep this short because i don't want to take over the discussion you know it's not as if the chinese government can't coerce the private sector and it's not as if it's not going to coerce or induce the private sector to be more self-reliant so i mean the american actions here are incidental they speed things up a little bit uh maybe they focus attention on huawei as opposed to some other companies but we've you know you're right the private sector is more interested in chinese industrial policy now it wasn't going to be given a choice would be my counter i would just like to add to that dan i think on the on on sort of the state versus private sector investment in china certainly there's been a lot of attention like with the star market there's been a number of listings where the multiples trading of uh chinese seminar equipment ship design firms are extremely high smick listed on the shanghai star market although to say that's private capital i think it's a bit deceiving if you look at most of the initial investors that are buying shares and companies on the star market they're state-owned if you look at all the leaders in sectors like memory chip simulator manufacturing tools photography materials eda logic foundry every single one of the leaders in those segments are state-owned um if you look at the 90-plus seminar chip fabs that are being built in china i think actually just about one is is is privately financed down in guangzhou kansemi the vast majority are finance zero state state capital mostly they're local government financing vehicles i think where you do see an increase in private sector investment is in the fabulous design space and you might be able to argue that on the other hand a lot of those companies like alibaba who set up a t-head semiconductor like cte microelectronics others they're simply following the trends of you know other hyperscalers like amazon who's designing their own semiconductors i mean there's so many cases you can find where it's not it's not often easy to say what's the reason for those private companies getting into this space although more recently because of the trade war i think there was a report that thousands of private companies from seafood companies to auto tire um manufacturers are now moving to the semiconductor business and i think that's pretty clear because they see the dollar signs of government subsidies that might be there waiting for them if they announced they're not entering the chip sector that's this has kind of been a traditional challenge for chinese industrial policy the state tends to have what they believe is a finely crafted plan they have a small group of hand-picked state-owned enterprises they want to be the national champions to develop xyz technology but then every mayor every provincial governor they have their own idea and their own plan and oftentimes chinese industrial policy gets overridden by their own over investment particularly down in the provinces and we're starting to see signs of that for example over the last several months several chinese chip companies have now gone under are in delinquency um that's still only roughly 9 of china's total fab construction is now in the sort of mothballed phase um but i think it's a sign of things to come in that look it's one thing to say you want to build a semi-energy fab or leading edge company it's an it's another thing to have the money but to have the people the technology and the market bearing to actually make that happen it's very difficult to do and to say a sort of prefecture level city 100 miles outside of shanghai with no experience in semiconductors is going to whip out some cash and build a fab and make it competitive it's actually really hard to do um and and in fact you've now seen this sort of uh group of of uh roving engineers um oftentimes taiwanese or korean that are going from city to city saying we'll build you a fab we'll build you a fab they get money to do it they run away uh end up vacation in thailand or something and this has actually caught a lot of attention so much that the ndrc in china last week that said they're going to start cracking down on this practice so it's interesting to see kind of the investment trends you know some are even saying there might be an investment bubble and semiconductors in china but clearly that's going to continue with their recent 14-5 year plan talking about self-sufficiency willie you you wanted to say something about it so dan i just want to weigh in on that i mean in terms of private companies working on it i mean couldn't you argue that they see the opportunity because the government is pushing domestic sourcing independent of the us right so therefore a lot more entrance and as uh as jimmy says a lot of them will be subsidized which is we should distinguish between state-owned and private companies who receive subsidies right because i think while the effect may be the same you know there there's a distinction uh distinction in there i mean i i think subsidies are the most pernicious problem that we face not only in semiconductors but in many many other sectors as well great um i want to ask a question to cleat and derek just in terms of what is now the entity list what is that meant to be so in august i noticed that commerce designated 24 companies to the entity list for building islands in the um south china sea a commerce official immediately briefed the press and said that these 24 companies received 5 million dollars of u.s exports over the last five years which is absolutely minuscule and so i wonder if the us is now just you know what is the entity list is that just a catalog of companies that we don't like today yeah let me let me go first and then uh because i also i i've been restraining myself for so many comments i don't even know where to start um i i do want to make two quick questions then i promise dan i'll turn to your entity list question first on i want to start with what what jimmy said um and and i think what others have been talking about here which is sort of this idea of you know china's doing a lot of stuff um they've been trying to subsidize this industry they've been trying to catch up but it's not necessarily all that clear to me how effective they have been or they will be and i do think that in our policy making you know we tend to paint china as like the big bad boogeyman all the time and this existential threat to the united states and are they the biggest economic and national security threat that we face today absolutely they are but you know we shouldn't just throw our hands up and say you know we need to you know totally forget about the american model and what has made us so great in an effort to try to combat china and i do fear that in a lot of our policy making we are we are doing that and so that was just a point i thought was important to make here is i just i think we overstate the threat of china as dan was saying they're far behind us in a lot of ways they've got subsidies from these ad hoc companies that may not work anyway so yes let's be responsive but let's be careful and let's remember um that you know they aren't better than us today i don't think they're going to be in the next two weeks and so let's make sure our policy is responsive to what it is jimmy did you want to jump in there and just agree i was just saying just to add one point there i think um you know with like with any chinese industrial policy you throw a lot of money at the wall something's going to stick and so if you look at the accumulative investment numbers it's easily over 100 billion since 2015 that the chinese state has invested into the sectors you're going to see a tremendous amount of waste and failure one point i'd like to make is that that in itself can have you know damaging effects on the global supply chain you can create a lot of zombie-like artificial capacity that's non-market-based it's not justified and you can create wreckage like for example you saw in other industries like flat panel steel aluminum where you just have a lot of capacity somebody needs to sell and it hurts the industry dynamics second i think in terms of what could stick on the wall as dan mentioned progress in areas like flash memory ymtc have actually been pretty remarkable um if you look at for example smix business the majority of it 90 of the revenue is not from leading edge it's from mature technologies that are still very profitable if you look at your amazon echo your garage door opener those chips are not made at leading edge processes at tsmc yet there's still a huge market for them so i think you know the two you know where china is going to be highly competitive is in areas where the process technology is not as demanding but there's still a huge commercial market where is the majority of that market it's in china yeah no i think that's a great point and like i so like i said major threat but let's keep it in perspective second point is i wanted to respond to what what derek said about decoupling and you know my view is i don't know whether it's actually going to happen i mean that's my honest view i think it's hard to say at this point what i do think and i think is important for people who are listening to this all over the world is that it is the primary palace primary policy objective of a whole lot of people right now especially when it comes to i think three areas um technology including semiconductors medical you know and pharmaceutical and everything else that comes along with that and then the third area where i disagree with derek is on financial and he is correct that decoupling has not happened at this stage of the game with respect to u.s financial flows into china but it has started to happen quite a bit onto inflows in the united states and the the guns are out with respect to the outflow and i would point to you what has already happened with our thrift savings plan in terms of not investing in china what is likely to happen pretty soon which is u.s company or chinese companies being delisted from u.s stock exchanges and then what we're on the precipice of which is legislation rubio introduced this week and that others have been talking about which is saying pension funds shouldn't be investing in a whole range of chinese companies so i don't know where that financial flow is going but i think that is a lot more on people's minds than derek would give them credit for but again with respect to coupling more broadly look the phase one deal was the anti-decoupling agenda item right that was supposed to open up china you know so i do think for commodities and things like that you're not going to see decoupling i think it's going to be more targeted whether or not it succeeds or not i think is an open question but i think we need to talk about it in a slightly more nuanced way now going back to dan to your to your question the entity list um if i can speak bluntly right now it's just a favorite toy it's the easiest toy to use in this administration when it comes to going after the bad guys and i think a lot of people would argue it's not the best toy um you know it really was supposed to be um you know for pure national security threats not for something broader um i think it's being used broader in a way that that sanctions typically would be used and i think in a lot of cases people will argue that sanctions would be much more effective you really want to cut off huawei you know why don't you put them on the sdn list instead of on the entity list i mean one of the big problems with the entity list is it only deals with exports and so it also isn't responsive to other companies that are not reliant on u.s exports and you see you know another thing we're debating right now in the us is you know should we do something or not with ad financial with alibaba you know an entity listing is on the table but does that really work i don't think it does i think if you wanted to get serious about that you would go down a different path so look i think it's you know to put it bluntly you have commerce department officials who are on the hawkish side of the spectrum who are willing to do these kinds of things what toys do they have well they've got entity listings is it the best toy or the most effective toy probably not in quite a few cases uh yeah the i i know that cleet is thinking about a couple people the commerce department is hardly a hawkish organization a broken organization maybe it's not hawkish um and if you looked at the the if you went when this information as i hope comes out because there is no legal reason for it not to about the the licenses that have been granted as opposed to licenses have been rejected in addition to the export controls in addition to icts you will see that commerce can't possibly be effectively hawkish but i take the point i agree completely the entity list is not a real sanction it's it's a it's a toy um that was trotted out originally when congress was on the war path against huawei and the administration said no no no don't do anything serious let's do this instead um and we would continue to do that there are other sanctions tools we could take that are superior including the sd enlisted treasury and one of the reasons we don't do that is treasury is actually a pro-china organization and it has been because it represents u.s financial sector traditionally it's not just this this uh trump administration goes back quite a ways um now you know that's one of the reasons i'm i'm very suspicious about controlling u.s portfolio flows in addition to the fact that we've completely failed to do so so now if you talk about uh delisting uh it's a much smaller amount of money than the money going directly into chinese entities same thing with the thrift uh the thrift board those are those are small amounts of money and we're spending a lot of time talking about them and we're not doing anything and we have an administration that's supposedly decoupling from china that like the previous administration doesn't even want to enforce u.s regulation until 2022 because magically it's you know we don't need to have the rule of law enforce till then so i don't think you know we're going to get the natural progression we have a lot of talk senator rubio has been trying to pass legislation for several years never goes through senate banking we will not if the republicans hold the senate it might if the democrats take the senate we've got a lot of talk about this stuff but i think we're going to need a galvanizing action um hong kong was a step in that direction the chinese mainland intervention in hong kong partly because it makes taiwan a much more sensitive issue so i think we're going to get that galvanizing action but i don't think we've seen much uh in the way of real action so far and the entity list is a is a perfect example it's a good question to ask dan i mean all it does is say you have to apply for a license and if you ask commerce well you don't have to identify any company but how many licenses you rejected they'll claim they they can't answer that it's not true but that's what they claim so we would need um for for quicker movement for the end of the list become a real tool we need a different department of commerce and i agree with cleat there are other tools that are better and for those we need a different department of the treasury and maybe we'll get that in the next administration i doubt it i think it will be forced upon us rather than the us going there voluntarily well dan just wanted to add one point if i can okay cool quick i just think on you know on the enemy list and export controls it's really important to point out that the vast majority of these actions have been unilateral in nature meaning that the united states is the only country in the world that continues to place these companies on their entity list many other countries don't even have an entity list particularly those that are important in the semiconductor industry and so what you have with the exception of huawei because of the foreign direct protocol it's much more complete in its restriction as you pointed out when it was expanded in august 17 of this year but what you have for the vast majority of every other entity listing is u.s exporters are put in a major disadvantage because their competitors in europe japan and south korea can continue to ship to them unabated no restriction whatsoever so what does that do that just means less money in the pocket of u.s companies but more importantly the national security objective is not even achieved because the technology the us government does not want to go to those entities flows from one of our you know allied or or non-allied partners so what's really important is multilateral is working with allies i think there's a real opportunity for the united states to work with its allies to reform uh things like the washington arrangement um to you know have a you know honest and and real discussion about um you know sensitive technologies about export control because at the end of the day they need to work together to be effective and that also helps limit the negative blowback on the u.s industrial base one of the key aspects of the ecra legislation that reformed export controls in 2018 was that bis has to consider what the economic impact of those controls will be on the domestic industry and yes you might be able to achieve that natural security objective but at what cost have you displaced in a u.s industry entirely have you significantly eroded their ability to invest in research development and all those are really important factors that have to take into account um just one final point i think you know we need to talk more about running faster what should the united states be doing to not think about as uh one chinese expert commented to me uh the tanya harding strategy of kneecapping it's always a better strategy to run faster in the race to be a better athlete able to outrun your competition and as and as willie has pointed out we're just simply not doing enough um and we could easily be investing more both in domestic manufacturing um that's not the only solution the second half of course is investing in basic research development in our workforce because at the end of the day it's nice to have more fabs but you need to have the technology to power them so you know i think this is an area which is a no-brainer for um you know whomever the next administration is doubling down on basic research um r d doubling down on supply chain investments in a way that are still american uh in terms of letting the market still determine the outcomes and not the government picking winners i think we can do that balancing sort of a light touch industrial policy uh with our free market principles so i just have to ask jamie a question there i i want to support this industry and i want to run faster and all those things you're talking about there is no way that i can go to a member of congress and say take taxpayer money give it to a chip firm when the chip firm is free to at the same time be investing more in china right or if an american financial is investing in the chip industry in china so when when all of when everybody here talks about running faster it's a great point and i won't belabor this we can't be running faster and using taxpayer money and mobilizing resources and the challenge that willie points out that maybe we don't have the nerve to spend the money if we're simultaneously still willing to provide the chinese with technology and capital which is what we're doing now because we don't have well in the chip sector though i think you know just one final point um that's actually not true you know if you look at u.s semiconductor capital expenditures of the last 20 years we actually went through and looked through both commerce data and public reporting data there's a blog post on our website that explains this less than five percent of u.s capital expenditures um for semi-energy companies has been in china the vast majority um 40 roughly 47 percent has been in the united states that's why the us is still roughly 12 percent of seminar to production our fourth largest export uh and you know when there has been investment overseas it's been in allied nations like singapore um israel other areas that are you know strong protection of ip and good partners us so you know would disagree with that but anyhow i think um at this point i think i should just mention that um it's about a time that we uh have to move on to audience questions i think it's uh it's fair to take on a couple of these um audience questions um but yeah yeah maybe i'll make one comment quickly because all right one more comment yeah one comment is look i agree with jimmy on the multilateral point but i think we need to be realistic about how difficult that is getting europe to step up getting japan to step up getting korea and everyone else to actually do this stuff is really hard and i was talking earlier about some of the progress we made but the amount of blood sweat and tears that took for the u.s administration to get it done was quite a bit so they you know the other countries need to be more ambitious my second point is we need to stop seeding the national security arguments and assuming that decoupling is the best answer for national security as i was saying before the best answer for u.s national security is to be the strongest and most innovative economy in the world that's how we remain dominant over china and if we can get china to subsidize our sales that's great we should do that that helps us beat them and last thing i'm going to say is derek's right that just handouts for people to build plants in china is not a good idea but how about handouts to build plants in america that's what i'm talking about i think that's what jimmy's talking about too so if we do it in the right way i think it can be effective and so um again i just wanted to jump in thank you dan dan quick point willie okay uh most of what i hear about restoring american competitors in this sector is all about working on the supply side okay my argument has been focus on the demand side back in the 60s you know when u.s semiconductors were preeminent is because nasa and dod bought 60 of them for the space program right and stuff like that okay i think as long as we're going to spend so much on infrastructure coming up right there's real opportunity to create the demand which will then attract the investment and really you know drive the a virtuous cycle in that regard okay so we're going to move on to audience q and a and then we'll try to tackle as many of them as i can as i can and um encouragement to the audience to please type in your question in the q a box um the first question i'll ask the panel uh i guess this is for everyone um how would you characterize the threat of corp uh corporate espionage and uh thievery of know-how in the ic market what have you guys observed and you know how likely is corporate espionage able to help china's ability to make chips depends what you call espionage okay is it going to taiwan and offering to triple people's salary if they come work in china you know i mean uh i mean california has such a good example in that regard in terms of uh you know non-compete agreements okay but you know the problem is people are pursuing opportunity i i see that as the biggest leakage path for know-how right well um i can uh you know just to share some you know anecdotal evidence on that in terms of hiring people i understand that smick built a church for one of its uh executives a taiwanese executive a communist country building a church on premise uh to to lure one of its executives over smick has had churches for a decade more than a decade right i always built a little taipei uh in shanghai basically with really good beef noodles to attract uh taiwanese engineers so go ahead please you know i was just gonna say i mean i think there are some very public examples you know of theft some of which you know i think the president even mentioned what happened with micron um and you know the fact that other chinese companies have popped up with the same technology that they stole i think if you look at usgr's 301 report you see the pervasiveness of the forced technology transfer policies you know and then i think you look at things like i think it's the thousand talents program that basically recruits you know all of the us individuals and then tries to bring them back to china i mean so you know there's there's a combination of policies that i think manifest themselves in a lot of different ways and it's pretty clear that that is part of china's playbook um precisely the stuff we need to be worried about i would argue without the huge number of subsidies none of that would be practical yeah i i agree with willie on the on the econ side the straight econ side that that subsidies are are the biggest problem um and they enable you know if you steal the technology you don't have the subsidies you can't scale up right and the subsidies give you the incentive to steal or coerce i i don't know i mean jimmy would know more maybe others would too about about ip theft within ships but someone would have to make an argument that ships are somehow really different which they might be because we know there's you know reams of evidence of chinese ip theft and coercion in various sectors and we know that this is now a target sector for china and i would again argue that the state involvement tends to blunt innovation i don't think it's a net help um so that technology coercion and theft is going to be is likely at least maybe it won't work or attempt a technology coercion and theft are likely at least um uh you know in in semiconductors as well and since i'm i'm a little bit putting jimmy on the spot because he knows more about this than i do i would add that the argument that he made at the beginning which i accept that u.s firms really need the chinese market um for revenue while it does fund american innovation it also is an obvious point of leverage for for beijing to say look the other way when we coerce or steal your technology um because otherwise you know we got other chip firms we can deal with so i i you know i don't have specific examples here as i do in some other sectors of the economy but i don't see why this if it isn't the problem now i don't see why it's not going to become a big problem even though i agree that subsidies are on the econ side an even bigger problem jimmy you're on the spot do you want to say anything yeah i mean i think obviously intellectual property and the protection of it has been a you know fundamental issue between the us and china for a long time it is not new um china has made strides in improving things like its patent law it's its enforcement of ip but we all know at the end of the day it tends to be selective and and when state-owned enterprises are involved oftentimes the outcomes are just not that great um so improvements definitely need to be made um and there are you know unfortunate incidents i think cleat mentioned the micron case and others where you know there has been intellectual property that's been misappropriated um but you know i think one thing that's really key is this technology is more complex than others um you you know simply cannot hire two or three engineers and say we're going to be able to replicate a dram plan you need to hire several hundred at once and now the thing is china's doing that um they have so much uh government investment at hand that for example i was visiting about a year ago one chip plant in eastern china that had 450 taiwanese engineers who flew from taipei to that city every weekend back and forth and they'd all formally been engineers and another foreign company developing the same technology so i think you know it's the question of scale again and the investment sometimes that enables this and that's really that's you know but the interesting thing is this is hurting chinese companies too there's been a number of reports domestically where one fab popped up in one city that stole a bunch of your engineers from another domestic fab and so you're starting to see this issue not just affect multinationals but also domestic companies as well will china take steps to improve it we hope so it's super important that was going to be one of the issues that was discussed in the 301 um and but so far while china has made some changes to the laws on the books we need to see more progress in terms of enforcement okay there's a number of questions here about what third countries are doing uh in terms of uh you know uh semiconductors um i guess um question first of all to jimmy and willie do you see japanese um korean european firms eagerly trying to take advantage of the american company's inability to sell then i'll ask clean and derek you know how much do you expect that any uh future administration would have success in actually getting these countries to you know really follow the american lead here well well i think korea has benefited uh from you know korea and japan have benefited from uh being non-american sources you see that in the export numbers already i think it's very clear i mean if you're if you're a chinese chip maker um you know if you're buying equipment if you're buying software if you're buying chips if you're electronics company if you now have the choice to choose between a non-american solution an american solution oftentimes chinese companies for example in the past where they'd give 100 or 90 percent of the procurement to the leading american company because it was better it was cheaper it's more available supply chain was managed better now they're saying you're going to get 50 of that contract we're going to give 20 to those in china 30 to those in asia we're going to diversify our supply chain um we're seeing that for example you mentioned in greek air commissioner byd a number of companies who are now making the decision that they need a second and third source that oftentimes includes a chinese supplier where they're investing in them to help them grow their capability that includes uh non-us but foreign companies that can help fill the void so clearly you know it's an opportunity i think even huawei has been toting um very publicly its investment and component procurement in south korea and japan cleed and derek can europe and uh japan work with the us uh you know i mentioned this before and i mean i i i think exactly what what jimmy and what uh willie are saying is the problem here is they're making money in china right now and so you know the incentives for them to stop that you know are pretty tough and so i think you know we need to figure out a way that for a from a political standpoint it's in their interests domestically to stop doing this business with china um because i think they think it's in their economic interest right now and so you know we talk a lot about working with allies i think we've had some successes you know at the end of the day when they're making a lot of money in china it's hard for them to stop um unless we can convince them or at least or they're convinced by their own people that that china is such a threat that that it's in their political interest to stop and i think to do that we just need to continue to be more and more public about what are the problems with china what are the challenges our companies are facing so that where we do take targeted actions we have others with our with our side to make it more effective but it's tough um let me ask you a question on that okay so let's say you're a german company okay and uh you're making payroll by selling to china and you tell them to stop for political reasons well you've seen that happen in the united states right i mean we our companies and you know i think jimmy can attest to this i can as well i mean our companies are making money in china and our government has basically told them that they need to stop you know that there's going to be a cost to them um because this is the policy that we need to do for national security and i think there is enough political support in that for that position that the administration more or less has gotten away with it so far now i think you need to sort of backfill that as we mentioned before with the subsidies and other things to help the industry um but but i think you know other countries haven't yet made the same calculus as we have uh this is multilateral it's really hard to do it well i'm just saying when you get down to the economics okay and jobs and staying in business by selling to china right it's it's a very tough choice that's why i think it's so hard i mean one thing we could do uh we've talked about running faster here um you have to get your own house in order before you work effectively multilaterally we need to be saying these are our regulations let's let's take pharma as an example we didn't get a lot of cooperation on investment screening pre-firma the world has changed but one of the things in the world has changed is we not only passed firma we implemented it you can see the investment regulations it gives somebody to cooperate a basis of cooperation the basis of emulating the us model to some extent and they know our policies are going to be stable and of course firma does not um inhibit investment into the us it might even create a little space for investment in the us by most of our friends and allies um so we need to do something like that on export controls for example where we don't have regulations so no one can see what we're going to do i would argue we don't have a political commitment to regulations but we have to take care of that first and then talk to our friends and allies we're not going to be able to do this as a giant coordinated effort without a clear and consistent american position which we do not have uh and you know beyond that it is still going to be hard but with that we have a chance to say to people look um you know we're not cutting you out of these supply chains we're cutting unreliable or predatory partners out of this supply chain you're still in it that's an opportunity to some extent and you can rely on u.s policy going forward to be consistent if we can do that we can bring some countries over i don't think we can bring everyone over because we have a different view of the chinese security threat than perhaps some of the european countries for example but we're not going to convince anyone unless they're convinced that u.s policy is both clear and stable which it i think it is on firm it's not perfect but it's clear and stable and we've seen some emulation and some multilateral cooperation it is not there on technology controls all right we think we have a about five minutes left and maybe we can just do one or two more uh questions um but you know i one interesting question here is that um you know it's uh you chinese firms are trying to now avoid a little bit more of u.s technologies and so i guess a question to um derek and kleet is it still you know the goal of the u.s government to try to really promote a lot more sales of american products in china and how do you recover that trust if some chinese companies are not so eager to buy american again so i i think the answer is yes and no and i mentioned this before you know the the um you know the phase one deal is on its face you know an anti-decoupling measure intended to increase sales however um you know one of the things that china wanted to secure in the phase one deal uh was a supply of very sensitive technologies and and different products from the united states and the administration rejected that so i think you have this situation where i was talking about before where i don't think you can look at it and make generalizations i think the generally speaking us policy is still for agriculture and things like that to increase sales but in some of these other areas you know maybe we can increase sales in the non-sensitive stuff but on the most sensitive semiconductor type technology i think right now that is not the position of the administration that we should increase those sales and so again it's a nuanced type answer uh before kovid took over everything and made you know most of our lives work uh irrelevant for an extended period of time uh president trump infuriated me in january and i'm sure you guys remember the statement because we're following this where he said i you know the us is open for business and i'm not going to let this so-called national security excuse interfere with selling i believe it was ge engines to china i don't think this administration as we see in the phase one deal wants to inhibit exports at all it pretends what it does and i'm sure people within the administration do but the administration as a whole led by the president they want to cut the trade deficit primarily increase exports create jobs in the united states um so i think to now we haven't been trying to to really trying to to limit our exports i think it's possible in a biden administration that we would i'm not sure i don't know who the secretary of commerce is going to be the white house chief of staff all those fun things um but i don't know that we will get a second a biden presidency that is as focused on cutting bilateral trade deficit with china and therefore in exports and therefore on sales even if sensitive items as the trump administration has been so i think and you know there's an example of a split between the two i think if the president wins re-election we're still going to get the trade deficit as being the worst thing in the relationship and you know it'll be solved by more exports or fewer imports uh if vice president biden wins election i think we're going to get a more diverse view of the relationship and it could involve sharper restrictions on the nature of u.s exports even though that will cost the united states something economically so let me ask a follow-up on that could i ask a quick follow-up on that okay so then with regard to leap engines from cfm right going to comac and other other players okay and so would you rather have uh the western supplier of the u.s supplier ge aviation lose the scale and now especially in this covid era where that is looking to be the only market that's going to recover in the near term so you know my answer is i you know i trust on the national security side if someone tells me that we're selling equipment to china that could upgrade their military capabilities the answer is yes then you restrict the deal uh i don't have an independent judgment of whether that's true or not um if it's just says an aircraft engine and and you know we don't like selling aircraft engines i think the argument is much weaker although then you would have to look at domestic competition but you know it's the the point is the president my attack on the president was not um that he made a reason judgment he referred to national security as an excuse to block sales it's not an excuse if there's a good job national security justification you block the sale and in fact you go to possible foreign competitors of the united states you might make the sale and say you can't do this this could put american service men and women in danger if there isn't a national security reason different story then it's a straight economic calculation about whether the child this will enable a chinese competitor or not okay so your answer is really uh strategic rationale rather than transactional which is what you were being critical of okay yes fair enough and i would jump into that i'm not sure i can do it in ten my point this is just the point i've been making before not every single sale to a chinese company is a national security threat and i think that's what the president was getting at is that he gets that justification from some of his hawks quite a bit and i do think you need to make a sophisticated nuanced decision on the basis of the facts before you and i think you know just blocking every sale is not to me the right answer for us national security okay with that i have to uh hand it over uh back to margaret conley our host you all delivered and then some thank you so much thank you to dan wong for pulling this group together and all of your work with your keynote presentation thank you to jimmy goodrich willie she clete willems and derek scissors this is the best program we've had on semiconductors and we hope to have you back this was the fourth of our seeking truth through facts us china program series our final program is on january 14th it's a virtual conference on the future of us and china we are going to be honoring george schultz our honorary chair who turns 100 next month if you haven't registered please do join us if you're interested in sponsoring us or developing one of the panels uh reach out to us too asian society is hope hosting virtual programs around the world you can find all of our programs at asia society.org forward slash online we're a non-profit with a mission of building bridges and if you aren't a member please consider joining us for those of us joining the vip reception please click over to the second link that was emailed to you right before this program and thank you very much to our team pilar rexel jamie and michael and again to all of our speakers and to dan wong and from all of us at the northern california center stay safe

Channel: Asia Society

Views: 47,344

Keywords: willy shih, derek scissors, clete willems, jimmy goodrich, dan wang, technology, u.s.-china, semiconductors, current affairs, program, asia society northern california

Id: qs1PGD6AXPk

Length: 90min 18sec (5418 seconds)

Published: Mon Nov 09 2020