How China is Changing the Microchip Industry Forever!
The US wanted to block China’s access to the world’s most advanced microchips, but guess what? It looks like this strategy has completely backfired and instead of containing China, US sanctions are now forcing China to become more creative as the Chinese government is using an incredible strategy to break through to survive US sanctions. What I’m about to share with you will come as a major shock to many Americans, but first let’s start at the beginning…
When Joe Biden came to office in 2021, many thought he would improve the US economy by ending the trade war Donald Trump started against China in 2018. Logically it makes sense, the US economy is completely reliant on importing Chinese goods. Despite everything you hear about “decoupling from China”, last year the United States actually, increased its imports from China by 6%, importing a staggering $564 billion dollar’s worth of Chinese products. But despite our economic dependence on China, US politicians have become obsessed with trying to “contain China” instead of investing in a brighter future for America.
I honestly don’t understand this way of thinking. The United States has an unbelievable pool of talent inside this country and continue to welcome immigrants from around the world. We should be leading the world in developing microchips, but the domestic microchip industry in the US is facing severe challenges that could last for decades to come. Look at this recent Bloomberg article entitled “Chip Industry See Labor Shortages Threatening US Expansion Plan” it opens with a scary statement for Americans who think the US is going to dominate this industry:
The semiconductor industry warned that there won’t be enough engineers, computer scientists and technicians in the US to support a rapid expansion this decade, threatening efforts to boost the domestic chip economy.
Here is the surprising prediction from the Semiconductor Industry Association, over the next decade US chipmakers are on course to add an additional 115,000 jobs by 2030, but the US simply isn’t producing enough chip experts.
What’s worse, a shortage of qualified workers in the US is already starting to affect current semiconductor projects. TSMC is the world’s largest producer of semiconductors, and many would argue the most important company on the planet given its role in producing the world’s most advanced microchips. It was huge news for the United States when TSMC announced plans to build a new production facility in Arizona. The Arizona plant would make older generation chips, as the world’s most advanced chips would still be manufactured in Taiwan, but as you can imagine, the news of TSMC expanding overseas to the United States was seen as a major win for US politicians in their efforts of containing the rise of China.
But even that plan is starting experience problem as the Arizona facility is now behind schedule and delayed until 2025 for a lack of skilled workers and expenses running much higher than Taiwan.
Our US politicians don’t realize the skill of building advanced semiconductors have been refined to only a few places on earth, predominately in Taiwan and Korea. It’s not as easy as just constructing a new factory in Arizona and starting a production line. The process of assembling the world’s most advanced microchips is one of the most complicated manufacturing processes in the planet, and many US politicians don’t realize the revenue generated by selling microchips to China is the key driver of the revenue needed for continued research and development for most US microchips companies.
In fact, just last month the CEOs of America’s top 3 microchip companies Intel, Nvidia, and Qualcomm met with Biden officials to discuss the future of the microchip industry in America. These 3 American microchip executives had one simple message for Joe Biden:
If the US government restricts and blocks our companies’ sales to China, this puts at risk a key Biden policy of bringing back chip production to the US.
Let me show you what I mean:
18 Months Ago, Intel announced it was building a $20 billion dollar Chip Hub outside of Columbus, Ohio, which the company hopes will become the world’s biggest semiconductor-manufacturing site. But Intel CEO’s Pat Gelsinger recently stated the harsh reality of the situation
“Right now, China represents 25% to 30% of semiconductor exports. If I have 20% or 30% less market, I need to build less factories.” - Pat Gelsinger
The irony here is quite remarkable. Joe Biden passed the Chips Act to invest $50 billion dollars into advancing the microchip industry inside America, but in order to advance the industry American companies need to sell these chips to their biggest client, China. This is why I continue to preach that it’s impossible to cut off or decouple from China economically without simultaneously also hurting the US economy.
We’ve spent 50 years build up supply chains and relationships with Chinese manufacturers and our US politicians want to do everything they can to stop the rise of China, even putting our own US economy at risk to do so. The US government is sanctioning our very own American companies from selling products to their number one customer.
One of the executives against current rules restricting the export of artificial intelligence hardware to China, said the policy hasn’t achieved the intended outcome of slowing China’s AI development.
But one of the things I’ve observed with China and Chinese people is that when you force them into a corner, you give the Chinese no other option but to innovate and “想办法” which means to think of a solution and wow have the Chinese outsmarted the US with this latest move.
The South China Morning Post just broke this story last week and highlights that both the US and Europe are growing alarmed by China’s legacy chip production.
And whether you like China or not, I think we all need to give China some credit into how they have outsmarted and creatively thought of a solution in their difficult situation. Joe Biden thought cutting off China’s access to the world’s most advanced chips would cripple the Chinese economy, but the Chinese didn’t panic, they simply pivoted strategies and poured billions of dollars into factories for the older “legacy chips” that haven’t been banned.
Legacy chips refer to older microchips that don’t require the most advanced technologies but make no mistake, these chips are still incredibly valuable to our world today, powering everything from your coffeemaker to your car and even smartphones and military hardware.
So the big question is why would China do this? Why would they invest billions of dollars into manufacturing older generation chips?
The answer is simple but actually quite genius because there is one thing that China does better than almost any other nation on the planet and that’s produce high quality goods for a fraction of the cost. American and European officials are now worried that if China ramps up production of legacy chips, China could flood the chip market with a plethora of Chinese made chips and eventually outprice and make Western legacy chip manufacturers obsolete.
The quality of Chinese legacy chips would be of the highest standard and the price point would be a fraction of what any US or European chip company could produce, so once again this would shift the power directly back into the hands of the Chinese. The legacy chip market could become exactly like solar energy.
90% of the silicon wafers produced in solar cells are manufactured in China. China has completely taken over and now dominates that industry and if you want to use solar energy, no matter where you are in the world, you are going to have to go through China to get it.
If there is any doubt to how important these legacy chips are and how big a worry this is for American politicians lets consult the opinion of a true expert Peter Wennink, who serves as the CEO of Dutch company ASML, which is the most important chip-making equipment supplier in the world. He states:
“When you think about electrification of mobility, think about the energy transition…the roll-out of the telecommunication infrastructure, battery technology, that’s the sweet spot of mid-critical and mature semiconductors, and that’s where China without any exception is leading.”
The United States chip war against China is simply not working and to be honest it’s very similar to how US sanctions against Russia have completely failed in their strategic purpose. Despite two years of making Russia the most sanctioned major economy in the world, the International Monetary Fund now forecasts that Russia’s economy will grow by 1.5% this year. You might be thinking how is this possible? But what if I told you that right now in 2023, American companies are paying around $1 billion dollars a year to Russia’s state-owned nuclear agency to buy Uranium.
You see the United States didn’t fully sanction Russia, because the US is the largest consumer of civilian uranium in world. Despite everything you’ve heard of regarding the US standing strong against Putin and Russia, the United States is still actively sending over $100 million dollars a month to Russian to purchase Uranium!
The reason for this is simple, around 20% of US households get their electricity and heating from uranium, so this is a major issue for the United States. You might have seen headlines last week of the military coup in Niger. Angry citizens flocked the streets of the capital city waving Russian flags and chanting Putin’s name as Niger’s pro-Western government was overthrown.
Niger is the world’s 7th biggest producer of Uranium and possesses the highest-grade uranium ores in all of Africa, but Niger’s new military leader has now suspended uranium exports to Western countries.
Everyone as I analyze the world’s current geopolitical events each week, I’m constantly looking for gaps in the market and areas of chaos that could lead to investment opportunities and if you are an investor you’ll want to pay attention to what I’m about to tell you as Traction Uranium is the sponsor for today’s newsletter and a company I believe has a tremendous potential in the future. The ticker for Traction Uranium is TRCTF and let me break down 5 reasons why I think this company has enormous potential in the middle of this intense geopolitical conflict between China, Russia, and the United States:
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Once again, I can’t stress how important Uranium is to the future of our world. Nearly 20% of the United States power comes directly from uranium powered nuclear reactors, look at a country like France which produces over 70% of its energy from uranium powered nuclear reactors.
Finally if we look at which nation is leading the world in the construction of new nuclear power plants, once again it’s China that has a commanding lead and this even stresses the need for the US to tighten up its supply chains and ensure they have access to Uranium.
I think Traction Uranium has a great opportunity to serve this exact interest but once please do your own due diligence before investing in any stock. To help you with that, I’m going to include the website, stock ticker, and investor presentation down in the description below so you can do more research. Everyone as always thank you for your continued support and I look forward to seeing you in our next newsletter soon!
Many thanks to Traction Uranium for sponsoring today's newsletter. You can read more about their latest projects right here: https://tractionuranium.com/
Download their corporate presentation here: https://tractionuranium.com/wp-content/uploads/2023/02/TractionUranium_Feb_2023_Feb_10_2023.pdf
Stock Ticker: TRCTF
China is a legacy manufacturing legacy chips.