Thursday, August 11, 2022

Damage from Pelosi’s Asia tour awaits final tally - Besides worsening US and Taiwanese relations with China, her trip made the semiconductor conundrum even more complicated

This was first posted on Asia Times. Nancy Pelosi came and left. Some in Taiwan called her visit a part of her graduation trip. A tad condescending, perhaps, but they meant it was her last hurrah. After the forthcoming midterm election in the US, her Democratic Party is expected to lose control of the House of Representatives and she will no longer be the Speaker. She had to make her grand tour, fully paid for by taxpayers, while she could. The immediate consequences are clear. Step over Beijing’s red line and you can expect China to react as it promised. Some hotheads were disappointed that People’s Liberation Army (PLA) fighter jets did not shoot down Pelosi’s plane. However, by exercising live-fire exercises in seven regions surrounding the island of Taiwan, China was saying not only that the “median line” in the Taiwan Strait does not exist, but that it can enter Taiwan’s waters any time it wants, anywhere it wants, and fire at any target it wants. Pelosi’s provocation had given China the necessary cause. The PLA fired missiles from the mainland over the width of Taiwan that landed on the opposite side of the island facing the Pacific, the potential area where US naval vessels would lurk if they were there to defend Taiwan. They weren’t. The aircraft carrier USS Ronald Reagan had already hightailed out of danger and sailed for Japan. No wish to waste Patriot missiles The Taipei government explained that the air-raid alarms remained silent because it did not want to panic the populace unduly. It did not fire at missiles incoming from the mainland because it did not want to waste expensive Patriots on missiles that were going to land harmlessly in the sea. A poll taken shortly after Pelosi’s visit found that 9% of Taiwanese people remain convinced that the US military will be around to defend them. The world will be waiting to see if US carriers will resume patrolling the South China Sea and if the PLA will challenge the American version of “freedom of navigation” in the body of water that China considers its own. Pelosi’s meeting in Taipei also revealed why South Korean President Yoon Suk-yeol declined to meet her. Over lunch in Taipei, Pelosi urged Morris Chang, founder and former chairman of Taiwan Semiconductor Manufacturing Company (TSMC), to locate some of its fabrication plants outside of Taiwan, specifically to complete its new site in Arizona and perhaps establish a presence in Japan. Chang’s polite reply to Pelosi was that building semiconductor fabs in different locations is not economically or technically practical. An American citizen, Chang did not say that he did not think the US has the needed skilled personnel, which he had said on other occasions. Strong-arming South Korea Pelosi’s mission in Seoul was to pressure Samsung and other chip makers in Korea to join TSMC and move their fabs to the US. Her selling point was to take advantage of the US$52 billion in the CHIPS (Creating Helpful Incentives to Produce Semiconductors for America) Act as a financial incentive for such a move to the US. The conundrum for the Korean chip makers is that the US would expect them to take sides, that is, the American subsidy would require them to stop supplying chips to China. While China represents only 10% of TSMC’s market, the Korean fabs sell 60% of their output to China. Giving up 60% of their business to comply with the American embargo would be a real dilemma for South Korea. While the Korean government is stalling on making a commitment to Washington, Yoon’s avoiding seeing Pelosi was a diplomatic way to avoid being put on the spot, at least for the short term. A less diplomatic view was that meeting with Pelosi was not in South Korea’s national interest. Washington’s method of denying China access to semiconductor technology has been excruciating for the entire spectrum of players in the chip industry. TSMC was the first to feel the pain when former US president Donald Trump’s administration ordered it to stop providing advanced chips to Huawei, ZTE and others. China used to be a major customer, accounting for more than 20% of TSMC’s sales. Now. according to the current chairman and chief executive officer, Mark Liu, the figure is around 10%. The Dutch company ASML is the world’s leading maker of lithography machines essential in making semiconductors. Its most advanced extreme ultraviolet (EUV) system sells for more than $150 million per unit, and the company is forbidden to sell to China. Now Washington is asking the Netherlands to forbid export of an older generation of deep ultraviolet (DUV) machines to China. Last year, ASML sold $2.78 billion worth of this product line to China, accounting for 14.7% of the company’s total sales. Embargo painful for US company too Lam Research based in Silicon Valley is one of world’s major supplier of equipment for semiconductor fabrication, with annual revenue just under $20 billion. Based on its latest quarterly report, China accounts for 31% of its sales while the US accounts for 8%. Undoubtedly, Lam management is agonizing on how to plead for an exemption from President Joe Biden’s administration so the company will not have to commit corporate seppuku. Washington’s determination to decouple from China is shortsighted and reflects what lawyers know about technology, which is not much. For many years, the US has underinvested in semiconductor manufacturing while China has done just the opposite. The $52 billion in the CHIPS Act is too little and too late. Asking companies to withstand self-inflicted pain and act against their own self-interest is unfortunately a case of Washington being an implacable bully. To survive, the victims will have to find ways around American exceptionalism. Already there are reports appearing to indicate that China is coping, American sanctions and embargoes notwithstanding. See for example two recent discussions, here and here. Could China embargo EV battery? Another development associated with Pelosi’s trip to Taiwan that seems to have escaped mainstream media’s attention is the Chinese company Contemporary Amperex Technology Co Ltd (CATL) putting on hold its plan to build a plant in the US until the dust settles from her tour. CATL is the world’s largest maker of batteries for electric vehicles (EVs) and the owner of world-leading battery technology. Vehicles using its battery pack can go more than 965 kilometers per charge. Its current battery offers four main advantages: safety, long lifespan, high energy, and fast charging ability. The founder and chairman of CATL, Robin Zeng, has a PhD in condensed-matter physics. In an interview, he indicated that his company has two groundbreaking batteries under development ready for imminent market introduction. As of May this year, CATL had the largest market share in China’s EV battery market of 45.85%, and as of 2021, it had a global market share of 32.6%. CATL had been looking at potential sites in the US states of South Carolina and Kentucky to build an EV battery plant to supply Ford and BMW. It’s probably unlikely, but Beijing could decide to reply in kind and deny America’s access to China’s advanced technology and order CATL to abort plans to invest in the US. Or, on the other hand, US Senate Majority Leader Chuck Schumer could express concerns that a Chinese battery under the hood could be used as a listening device to spy for China, the same logic he expressed on subway cars from China.

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