(Preview) Chips and the Geneva Consensus; US Policy and the Chinese Century; Controversy Over Solar Power Inverters
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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. Hi, everybody. Hope you're all doing well. I closed the last episode saying that the Wizards had a shot at the number one pick. In fact, they landed with the number six pick in the NBA lottery. So it's taken me a week, but I'm ready to podcast with you again. It had to have been rigged.

mired in media. First of all, it really did feel rigged. We try not to traffic in conspiracy theories on the Sharp China podcast, but it is what it is. We're here. We're back. And since there's a pause in the trade war, an apparent pause,

We can talk chips for what feels like the first time in the last couple months here. Last week we got news the Commerce Department and BIS, which oversees export controls, said on Tuesday that it was taking a more stringent approach to foreign AI chips, including issuing guidance that using Huawei Ascend chips anywhere in the world...

violates U.S. export controls. So again, that was Tuesday. What has happened since then? Catch everybody up. So that guidance was, it was pitched as not actually new, but just reminding people. And the logic being that the Huawei Ascend chips were made in violation of the U.S. export controls at TSMC, where Huawei used to cut out a company called SoftGo to get these chips made, even though TSMC wasn't supposed to fab them.

And so the argument is, well, technically these chips were, they're in violation of export controls.

Therefore, if anyone uses them anywhere in the world, you're breaking US law. And that's obviously pretty chilling, not only for anyone who might want to use one of these or any firm that want to use one of these Huawei to send chips outside of China, even though they're very, very few outside of China because they can't make enough inside China for domestic use. But also it raises the question, what does that mean if, say, Tencent or ByteDance or Alibaba is using these Huawei chips? Does that mean that those companies can then be subject to more US sanctions or some of their executives?

And then the press release part of the guidance was changed a bit, took out the anywhere in the world language, which, but actually the substance of the guidance itself doesn't seem to be that different. So it's not really clear if that actually marks a change. The Chinese side was pretty unhappy about it on Monday. Then the Ministry of Commerce came out and did say that they recognized this change, which they believe was that the U.S. had

adjusted that language, but it still was seriously undermining the consensus reached in Geneva. Although, again, it is not at all clear that there was any consensus around chip controls reached in Geneva. And so we are now, you know, these Huawei chips are under this guidance and the U.S. government believes that using them violates export controls and then whether or not there's any enforcement of

But it is certainly a threat hanging over anyone who or any company that uses them. Yeah. Well, and it's interesting because there is that looming question, like, what does it mean if companies are using Huawei chips and violating export controls? What does the enforcement regime look like? Well, these are specific. The Ascend series, I think they note in the guidance, they talk about three different Ascend chips, which are Huawei's. Right.

And so what does that mean for a company that's using Huawei Ascend chips? That's an open question, still ambiguous for now. And it is interesting because Huawei's ambitions, the PRC's ambitions is to get people on these Ascend chips and work up a competing ecosystem to the NVIDIA ecosystem. And certainly looks like the US wants to counter those ambitions here. But again, the question is,

How aggressively does the US want to counter the adoption of chips like this? I mean, I think part of this is also reaction. I mean, this conference I was at last week, one of the people, you know, won't be named, but somebody, you know, said Huawei had been able to get 3 million of these chips from TSMC using this SoftGo cutout. And who knows, there may be other cutouts. I mean, TSMC, due diligence,

They weren't really motivated due diligence. I think if they get a big fine from the U.S., they might beef up their know your customer process. This goes back to the scandal that we talked about and then was quickly buried like in November or December of last year. Is that right?

I think so. I think Biden was still president. But so yeah, it goes back to, okay, this... And it's certainly something that... Ben over at Techery had a great interview with Jensen Huang of NVIDIA on Monday, right? And there's a section where, of course, he talks about competing with China. And basically, he doesn't want to lose the China market. And Xi Jinping wants NVIDIA to lose the China market. If listeners remember back the April Politburo study session...

was the study was on AI and in the readout, it's site sheeting is calling on everyone to quote, "Concentrate resources to overcome challenges in core technologies such as high-end chips and foundational software and build an independent, controllable and collaboratively functioning AI foundational hardware and software

So that is not CUDA and that is not NVIDIA. That is Huawei and CAN and maybe some other Chinese chips, but really I think it will be built ultimately around Huawei. Right, and sell into China and then eventually compete with NVIDIA around the world. It's pretty easy to see that roadmap over the next 10 years or so. Right, and so I think the...

This guidance just reminds, again, it's a little bit moot right now because Huawei can't get enough of these chips to fulfill domestic demand. So they're not going to suddenly dump several hundred thousand or millions into the Mideast or Southeast Asia. They can't yet.

But there's no reason to think over time that's not what they would want to do, too. And so this guidance just reminds everyone that they are at the risk of U.S. enforcement if they start using these Huawei, these three listed Huawei chips. Right. Some kind of reprisal from the American side. It has a chilling effect. Yeah. It is, I think, something that would help NVIDIA because they're really the only other real game in town at this point. Mm-hmm.

Yeah, well, and it's interesting, too. I mean, the response from the Ministry of Commerce, the U.S. actions have seriously undermined the consensus reached at the Geneva high level talks between China and the U.S. And the Ministry of Commerce demanded that the U.S. correct its deviations and mistakes.

I read that last week and I guess this was on Monday. And it was a reminder to me that this is why the PRC side loves to talk, because they can allude to discussions that may or may not have taken place. And then they can threaten to derail progress anytime the U.S. side does something that they don't like.

And the other thing that's interesting too, and is part of that, is I think it was on Friday, the Financial Times reported that the U.S.,

specifically the Bureau of Industry and Security at Commerce, which oversees the export controls, was considering, had actually drafted a list to put several Chinese chip makers under more export controls. There being Changxin Memory, which is CXMT, SMIC, Yangtze Memory Technologies, YMTC. You know, SMIC and YMTC are on the list, but this would add more to it. And the article goes on to note that the move, the timing changes

has been complicated by the trade deal agreed by China and the US and Geneva, some Trump administrations have argued that putting export controls on critical Chinese groups could jeopardize the negotiations. And so I actually believe, I think, you know, I'm pretty confident that some of the folks at the Ministry of Commerce in Beijing actually probably read the Financial Times. And so this broadside on Monday talking about how this guidance around Huawei chips seriously undermines the consensus reached

I think is actually trying to

Remind those in the Trump administration, the FD says, are worried about more controlled, chaperoned deal that, yes, this is undermined. This may undermine the deal. Yeah. Or give them something to point to. Give them something to point to. They can point to this Ministry of Commerce statement in a conference room. Hey, look, guys, they're serious here. They're going to blow up this great deal if we do this. Exactly. Yeah. So again, it's interesting. The timing, it's one of those things where don't believe in coincidences.

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