(Preview) Myriad Holes in US Chip Controls; New Reports on TSMC and Huawei; The Latest "Stimulus" News; Mixed Signals on Private Tutoring
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Hello and welcome to Sharp China. I'm Andrew Sharp and you are listening to a free preview of today's episode.

Hello and welcome back to another episode of Sharp China. I'm Andrew Sharp. And on the other line, Bill Bishop. Bill, how you doing? I'm doing well, Andrew. Hi, everybody. Hope you're all well. It's good to see you. We're not going to talk about the election a week out here, but I will say the city, Washington, D.C., is alive with commander's fever. We hit a new crescendo in the wake of the Jaden Daniels Hail Mary this weekend. Are you feeling it?

I grew up with Ed Redskins sheets on my bed. So it's been about 25 years since you could care about the commanders. Who knows? They'll probably break our hearts again, but it was certainly an exciting game. Well, it was pretty hilarious because I grew up a Cowboys fan. I've never told you this before. I got to stop right there. Stop right there. I did not know that. Are you backing out of the podcast two years down the drain?

Coming up at our second anniversary, I'm just not sure I can do this anymore. I'm so sorry. I'm so sorry to confess it live on the podcast. The Cowboys suck. The Cowboys suck. It doesn't matter. They do suck. Well, and I renounced the Cowboys like eight years ago. And then over the last couple of weeks, I've been joking with Ben Thompson that, A, I'm not going to let my son make the same mistake that I did. He's going to have to root for the commanders. And B,

I'm starting to like the Commanders because I like everyone else in the city being in a good mood. And so last week, last Friday, Ben sent me a Commanders jersey for myself and for my son, Charles. And so I was watching the Hail Mary wearing a brand new Commanders jersey. Well, so I'm hopeful on one of your Stratechery videos, like that Sharp Tech videos, I hope you guys are both in your Jaden Daniels jerseys.

Yes. Well, I believe later this week you'll be able to see me in a Jaden Daniels jersey because I wore it for the podcast recording. So talking Salesforce. You know what they say, right? Is mama, don't let your boys grow up to be Cowboys fans. Yeah. Well, my mom lapsed. I did it because I really enjoyed how infuriated it

made my dad to root for the Cowboys that entertained me at six years old, but rebel, rebel, exactly. Disagreeable from the very beginning. But in any event, yes, it's good to be here. It's great to see you. And as for the show today,

I want to start with where we ended last week, the chip controls. I'm going to read an article from Semi Analysis that was published on Monday. Semi Analysis, for those who don't know, is probably the best resource we have for chip news and analysis. And the headline of their Monday article was,

Fab whack-a-mole, Chinese companies are evading U.S. sanctions. And related to last week's discussion, they wrote, of all sanctions evading schemes, Huawei's fab network is the most alarming. It is a clear national security concern as Huawei is CCP affiliated and a leader in Chinese AI.

In response to U.S. restrictions, Huawei embarked on a massive government-sponsored development project to build out a domestic semiconductor supply chain. And then elsewhere, they note that, quote, the scale and speed are staggering.

We estimate the Huawei Fab Network will spend $7.3 billion on foreign waiver fabrication equipment in 2024, making it the fourth largest purchaser in the world. If SMIC and CXMT are included, both of which work closely with Huawei, they would be the second largest purchaser in the world, only behind TSMC and far ahead of any U.S. firm.

More than half of this equipment currently comes from U.S. companies. So again, that puts a finer point on our discussion last week. And in general, I thought this was a remarkable article. It was super comprehensive, full of useful specifics and examples. So we'll put it in the show notes for people and especially recommend it for any policymakers who may be listening. But and I want to get into more of the specifics, but to frame it with big picture thoughts and

You wrote on Monday that industry capture of the U.S. Department of Commerce should be a much bigger story. So if you were talking to someone in D.C. who's not familiar with the specifics of what's been happening here, what would you say to explain what this story has has been so far and why it should be a bigger story?

Well, you know, inside commerce, you have BIS and, you know, BIS has long had a revolving door between regulators and then the industry.

And it continues to be the case. You know, you have multiple sort of government affairs executives at the chip companies who were senior officials in BIS. There's a lot of overlap. And so the industry, I mean, it's a massive industry, billions and billions of dollars of revenue, hundreds of billions, trillions now when you count NVIDIA, of market cap involved. And so it makes sense that industry would do whatever they could to

you know, legally, not saying anything's illegal here, but they would do whatever they can to affect regulatory policy. And I think what we're, you know, for example, we are now October, we're recording on October 29th. Yep. No update, no annual update on the October 7th chip controls. And we've talked about this multiple times on the podcast. Certainly don't think they're happening before the election. I'm skeptical they'll happen in the waning days of the Biden administration. The,

Investment controls that were released yesterday are not part of the chip controls update. They're separate. Right. And I don't have the specific language here, but I believe in past updates that Commerce has implemented, they have signaled the intent to annually update the export controls on chips. They have. And so this article from Dylan and his team at Semi Analysis, I think, goes...

Again, some of this has been reported. We've talked about there was the Nikkei Asia a couple of years ago, two years ago this September. Then there was the Bloomberg story last year. This Huawei network...

and the way that they are still being able to get chips fabbed using U.S. equipment that they're not supposed to be able to get access to has been known, and it's been known inside the U.S. government, and yet the Biden administration has not really done anything about that. And this article maybe will force, again, maybe not because the election's a week away and there are bigger issues at stake, but this is just a really good crystallization of, I think, how...

When it comes to Huawei, at least, you know, the Biden administration really has fallen down in terms of actually enforcing all the various controls and sanctions that are already on the books. And, you know, it ties back to this, I think, is also important in the context of what's happening at TSMC, where I think on the last podcast, we talked about how TSMC,

Went to this government and said, hey, we might have a problem. It looks like we were fabbing something whose end user was actually Huawei. And they said, oh, we learned about it. So we self-declared. And from various media reporting, it's because there was a report by Tech Insights that tore down a chip that

that wasn't from Huawei, but was from Huawei and then found something that had been found by TSMC, which wasn't supposed to happen. And Tech Insight, they shared the report with TSMC before it went public. Yes, I wondered about that, whether any of this would be public if not for that Tech Insights piece. Well, I'm skeptical. Since then, we've learned that that company was basically a cutout company

Journalists were able to discover that the company was set up. This company, Softgo, I think is what it's called, was set up. The initial legal representative was a former Huawei employee. Then he stepped aside. But it was very clear, quickly, to the journalists who dug into it that this company had some pretty interesting connections to the Huawei universe. Today we learn from Nikkei Asia, TSMC now has suspended shipments to two more chip developers.

Because they think they have ties to Huawei and they were being used to circumvent chip controls on Huawei. And so this is a big problem for TSMC because, you know,

Sort of like when you turn the light on in your kitchen and there's one roach, you know there's never just one roach. I think there's something similar here at TSMC where they had a compliance issue. And now all of a sudden, maybe the legal team at TSMC is saying, wait a minute, maybe we should dig a little deeper. And they're going to start finding other problems. So that's two more. Is that really it?

All right. And that is the end of the free preview. If you'd like to hear the rest of today's conversation and get access to full episodes of Sharp China each week, you can go to your show notes and subscribe to either Bill's newsletter, Cynicism, or the Stratechery bundle, which includes several other podcasts from me and daily writing from my friend Ben Thompson. I'm an incredibly biased news consumer, so I think both are indispensable resources.

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