All eyes have been on Apple this hour as it unveils the iPhone fifteen.
Cheering is starting right now.
People were already in line. I got here a little before five am, and.
People are already lined up. I talked to the first eye line.
That's the familiar buzz we hear every time Apple releases a new iPhone, people waiting in line to be one of the first to get one. A few weeks earlier, though, another next generation smartphone very quietly hit the market. It's called the May sixty Pro and it's made by China's technology giant Huawei. If it's not quite iPhone level tech, it's also not too far off.
In the US When a big phone comes out, like Apple just released the iPhone fifteen, Tim Cook is literally ushering people into the store on Fifth Avenue. But in Huawei's case, they just quietly released this phone online, no fanfare, no pomping circumstance.
You know who did sit up and take notice? The US government, not so much because of the phone itself, but the sophisticated chip that powers it, which is far ahead of where China was thought to be. For years, the US has tried to slow Beijing's progress in making semiconductors, enforcing export controls that restrict the sale of the most
advanced chip making materials and equipment to China. Bloomberg's Mackenzie Hawkins and Peter Elstrom report that chips like the one inside this new phone show how rapidly China is moving ahead.
Huahwei is able to get domestic supply of these semiconductors that are so essential to its smartphone business and perhaps more importantly, could be used in other kinds of applications to including military applications.
I'm west Kosova today on the Big Take, Why Huawei's new phone is a wake up call for Washington. I asked Peter why the launch of Huawei's Mate sixty Pro smartphone was such a big deal.
Usually, of course, phone companies want to trumpet their accomplishments. They want to talk like Apple does, about how great their new phone is and talk about the new specs. Huawei did not disclose most of the key specs of the phone at the time. They just put it online and started selling it very very quietly. But it caught global attention really, and that's because of the technology that was inside of it, specifically this microprocessor that was powering
the phone. It's a seven nanimeter chip, which is a quite advanced chip, and it was a very big step forward for Huawei, which essentially had been blasted out of the smartphone market a few years ago by the US.
Niketzie. Why is the fact that this phone contains this chip such a big deal?
So this is a huge deal in what's basically became a global cold war over tech, and the US and China are the main opponents.
Now.
The interesting thing about this phone's releases that happened while the US Commerce Secretary, Gina Raimando, was in China, and I was in China with her and had gone to these kind of days of diplomatic meetings. She's meeting with her counterpart of the Ministry of Commerce. She's trying to
establish more formal diplomatic relations with China. And then at the tail end of her trip, the US's main technological adversary releases this phone that has semiconductor of technology, which is electronic component technology, a generation ahead of where the
US wants it to be. So since the Trump administration, the US government has been trying to block China's access to super advanced technology that runs everything from electric vehicles to nuclear missiles, and China has showed that despite those attempts, it's been able to get ahead.
Peter, let's talk for a second about this chip. What is it and why did it cause such a stir.
What Bloomberg did was we got one of the early versions of this phone, and we worked with a company that specializes in teardown so that we could look at the chip inside, because essentially nobody knew exactly what the chip was or what it could do. What we found when we tore apart the phone and looked inside was this, in fact, was a seven nanometer chip that was made
by a company called Smick. It's a Chinese company that specializes in producing these phones, and the US government had been trying to keep Chinese companies away from being able to make chips as advanced as this one. So it was a surprise that it came from Smick, and it
was a surprise that it was this advanced. And it means that Huawei is able to get domestic supply of these semiconductors that are so essential to its smartphone business, and perhaps more importantly, could be used in other kinds of applications, to including military applications.
So you described it as being a seven nanometer chip. Mackenzie, what does that mean, Like, how do we compare that with, say, what's in the iPhone.
There's a handful of companies in the world that produce chips, and they use these many, many million dollar machines to etch tiny patterns onto silicon wafers, and the goal is to get the patterns as minute as possible so that the chips can be as powerful as possible. You can pack more onto a single wafer. And the most advanced ships are what we have in like the latest iPhone that Apple produce, and those are down to three nanometers, which is basically the equivalent of like a strand and
a half of human DNA. Now, the US was trying to keep China's abilities at fourteen nanometers, which are considered more mature and legacy. Ships still really important for consumer tech things like electric vehicles, but not powerful enough for like the super advanced military equipment that the US government really doesn't want China to have.
Peter, this new phone, the Mate sixty pro, is made by Huawei, which itself is an important thing.
That's right. Huawei has really been at the heart of US China tensions for many, many years. You recall, Hawei really made its name by developing telecom equipment that was very good, very inexpensive. It was known to have very good customer service behind it too. Huawei took on companies like Ericson and Cisco in particular, and expanded around the world.
But it became a boneu of contention because the US began to try to convince its allies that Huawei's equipment was dangerous, that perhaps they could be using it for spying, for monitoring exactly what was going on, not just in the US but in other countries too, So the US took it upon itself to go out and try to
get other countries to ban Huawei's equipment. These tensions simmered for many years, and European companies were not so crazy about going along with this because Huawei's equipment was inexpensive, it was very good, particularly in five G wireless technology, so there are many companies that wanted to continue buying want weight gear even as Washington was trying to get it banned. So it was effectively out of the smartphone
business for years. It had been the largest smartphone company in the world at one point, and it was essentially out.
Its business was really decimated by these US controls. And what we saw this year in August was essentially while we getting back into the smartphone business, showing that they were going to be able to get some of this equipment, at least domestically, so that they could come back, they could be a player in the smartphone business, and they could take on companies like Apple and Samsung and McKenzie.
China found a way to very publicly respond to some of the US export controls.
Yeah, so the Chinese government recently placed restrictions on using iPhones at state backed companies and agencies. So if the US takes aim at one of its most important taech companies, they're going to do the same right back.
Which is kind of ironic because, of course, very famously, the iPhone has been made in China for many years.
Yeah, the Chinese government has not said anything publicly about this. In fact, they said there isn't aficial ban on iPhones within the government, But what our reporting has shown is that they are expanding controls on the iPhone within certain government agencies and within some state owned enterprises. So it's a big deal. For Apple, the most valuable company in the world. They get about twenty percent of their revenue from China and now it looks like some of that could be in jeopardy.
And of course, the fact that Huawei, a Chinese company, has produced such an advanced phone is a huge source of patriotism for people in China. We talked to several customers shortly after the launch day for this phone who said, I don't want to buy an iPhone, I want to support China's tech.
Peter like Mackenzie said, the US has been trying to prevent China from getting this kind of technology. Exactly how is the US responded to the fact that they're able now to produce chips at a higher level than they wanted them to be.
Able to do.
This all really accelerated last year when the Biden administry introduced a whole new round of export controls on China, and that stopped them from getting access to certain kinds of chips, including the most advanced AI chips and the kinds that you could use and other kinds of advanced applications. Also, the Biden administration wanted to cut off Chinese customers from being able to buy the machines that actually make chips, and those come from American companies, and particularly this Dutch
company ASML. That's so important to this story. What happened, though, is that as the Biden administration imposed these controls itself on American companies, it left the door open for the Dutch companies and the Japanese companies. It had not gotten the allies on board in terms of agreen to those controls.
And so basically what that allowed the Chinese to do is import a ton of pretty advanced chip making equipment from the Netherlands and from Japan, and now there's this massive stockpile that it seems like they've basically used to produce this seven nanometer chip. And so the reaction that you're seeing now in the US is a WHOA, our export controls did not work as planned? How do we
ramp these up? Do we ramp these up? At the same time that the Bide administration is trying to pursue better, more normal diplomatic relations with China, And so earlier this month, the Commerce Secretary testified on Capitol Hill and talked about
the Huawei phon. She said she was upset that it came out while she was in China, but she doubted the Chinese ability to produce seven nanometer chips at scale because they're using less advanced machines than you know, a US company or a Taiwanese company might have access to, and so it requires massive, massive infusions of capital from the Chinese government to keep it going, and she basically said, we have doubts about whether they can do it.
After the break, some chip makers push back against US restrictions. Peter, can you explain how this isn't just a story about the US versus China, but really the US versus its own friends.
Yes, So there are a very small number of companies that produce the machines that are able to make chips, really just five key ones. Three of those are American companies, and then there's one in the Netherlands ASML, which is very important, in one in Japan Tokyo Electron that's also very very important. So when the US announced it's export controls last year, that immediately cut off the American companies
from selling into Chinese customers. However, it did not have the Dutch on board, and it did not have the Japanese on board. As discussed, they began negotiating these things. The CEO of ASML has been very outspoken in his opposition to these controls. ASML is not just another company in the Netherlands, it's the most important company there. It's the most valuable tech company in Europe. So when the CEO speaks out against these things, they certainly get the
politician's attention. So ASML has not been able to sell its most advanced machines. This gets a little technical, but these are extreme ultraviolet lithography equipment or EUV machines. It has been able to continue selling its next most advanced machines, which are called DUV or deep ultraviolet lithography machines. So this year it has been selling a bunch of those DUV machines into China to Chinese customers, and you can
see this in China's import data. The sales from the Netherlands and from Japan in particular have spiked this year. They reached a record four billion dollars in July alone, so you can see that Chinese chip companies are stocking up on all this equipment that's going to help them make as advanced chips as they can possibly make.
McKenzie what if the government, say of the Netherlands, decided no, we're just going to allow our manufacturers to sell to China. Can the US bring any pressure to bear if they simply don't go along.
So there is one potential option for the Biden administration, and that's invoking what's called a foreign direct Product rule, which basically allows the Commerce Department to regulate products of companies based in other countries because they use a share of US technology. But that could be seen basically as extra territorial bullying. The US Netherlands relationship is important to
both governments. It took a lot of time and legwork to get them on board the first time around, and that would be a pretty diplomatically risky move for the Biden administration to take. They would much much rather get the Dutch government on board. But as Peter said, this is their most valuable company, and this is really a US China fight, not a Netherlands China fight.
And there are similar tensions in Japan too. Of course, Japan and the Netherlands are considered allies of the United States. They tend to be on the same side of most political issues, including when it comes to China. However, In Japan, the Prime Minister Kashida has a similar kind of dilemma where there are about a dozen Japanese companies that are
very dominant in key parts of the semiconductor's supply chain. Kashita, in theory, could go to these companies and say, hey, you should cut off your Chinese customers, you should pull back from them, and that way they won't be able to run the chip making equipment as efficiently as well as they could in the past. They may not be able to run at all. But there's a political dilemma there.
He's going to essentially the pillars of the economy asking them to pull back loose sales when you know that the Chinese government is investing in competitors and would accelerate any kind of investments and competitors to create competition for these Japanese companies if they went ahead and did this, and that's a political tension for Kashita that he has to sort out with the White House.
McKenzie, one thing you write is that even though China isn't able to import the most advanced machines, they've gotten very, very creative with trying to squeeze as much as they can out of the machines they're able to buy.
That's right. So, you know, as Peter explained, these kind of holes in the overall export control regime between the US, Japan, and the Netherlands allowed China to massively massively stock up on equipment that could be even if it's not the best, good enough. And so when the US is casting doubt on China's ability to produce these chips at scale, We've talked to some analysts who say they might just be able to do that. And you have to bear in
mind the Chinese government is massively backing these companies. They plan to invest more than one hundred and fifty billion US dollars into their domestic semiconductor industry by twenty thirty. Now, take it all with a grain of salt. The Chinese economy is not doing well. A real estate meltdown might
squeeze government funding at all levels. But they've shown so far, and they've shown over decades, not just in ships but also in products like electric vehicles, that they're willing to put a lot of state money behind their tech companies.
The concerns are not just that the export controls are failing, but that the export controls are backfiring on the US. What Beijing has decided is that they're at a point of no return. They need to invest in their own chip industry because they need to become self sufficient.
When we come back, Can the US actually curb China's chip trade? Peter If China can't get the most advanced machines, but they're working to make them, that's going to take some time. What happens in this intermediate period where they do appear to be somewhat throttled in what they're able to produce.
We are entering into uncertain territory for China. As much as Huaweiho's demonstrated the ability to make some progress here, Smick is helping them with these seven nanometer chips. We don't know exactly how far they can get on their own, but come the end of this year, they won't be able to get new machines, and they won't be able to get the of services and support that you would typically get from the companies that supply those machines too.
So Chinese companies are going to be in a risky position as they try to function on their own produce these chips under trying circumstances. It is, as we've talked about a bit, it is less efficient to do it with the kind of DUV machines that they have right now, and there's a limited period of time where they can use these foreign machines to be able to make these chips.
At some point, if the US keeps up the pressure and its allies keep up the pressure, they're going to run out of the stuff that they've bought from overseas. They're going to run out of their stockpiles, and then they need to have established the domestic industry that can help them pick it up from there support them as they go forward in making these chips in the future.
And the question for the US is what kind of pressure. There's this debate happening in Washington right now over is it just that we didn't enforce export controls well enough or are ATO controls not actually the right tool to deal with this, And there's this kind of push and pull with industry and the Biden administration over how tight
can we go? How much are you willing to hurt the revenue of American companies, And then there's this pressure mostly from Republicans on Capitol Hill who say the Bide administration is soft on China. This is a huge political liability for the president, it's a liability for the Commerce Secretary,
Gina Raimondo. And it's all happening at the same time as the Bide administration has been sending cabinet official after cabinet official to Beijing trying to restore diplomatic relations, and then this feels a little bit like a slap in the face. In the backdrop of US China relations, there's always the looming question of Taiwan, and relations between Washington and Beijing have been souring for months. There was a spy balloon in February, the Secretary of State canceled his
trip over there. But Taiwan is really the central question, and there's a fear that if China ever invaded Taiwan, the US and the world could lose access to the most advanced chips, which are produced by a Taiwanese company called TSMC. That's part of why the US is looking likely to issue subsidies to TSMC, which is building a plant in Arizona.
Was it ever realistic to think that export controls could keep China from advancing this technology?
If you talk to people who have been watching the industry for a while, none of them are surprised, and they say that the US government shouldn't be either. China's been trying to produce advanced indigenous semiconductor technology for years, and the fact that they did it so soon after the US imposed its controls, some people would say, means that the controls came too late.
So, Peter, where do you see all this headed? Obviously, the stakes couldn't be higher, the tensions couldn't be higher between the US and China, even between the US and its allies. What happens next?
It seems right now that Beijing is growing in confidence. Huawei is showing that it is possible to make breakthroughs in some of these key areas that are important to the technology industry in China. They were able to come out with this seven nanimeter chip, So there is a bit of a rallying cry around Huawei right now. They seem to be not just a national champion, but a national champion that's been able to take on some of
the constraints of the US and break through. After the Mate phone came out, there were all sorts of memes circulating. Some of them mocked Gina Ramundo, who was in China at the time, as we discussed as a new brand ambassador for Huawei, you also saw caricatures of Uncle Sam being left behind as Huawei busted through the barriers that were being set up. So from Beijing's standpoint, they are certainly planning on accelerating their investments in some of these
key areas. They want to be able to get a stable domestic semiconductor industry that can supply all sorts of things, certainly the tech industry and smartphone companies like Huawei, but beyond that very important areas like artificial intelligence like super and especially the military activities that they are going to develop in the future.
Peter mackenzie, thanks so much. I learned a ton from this conversation.
Great, thank you, weis, thank you so much.
Thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen, and we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. The supervising producer of the Big Take is Vicky Virgolina. Our senior producer is Katherine Fink. Frederica Romanello is our producer. Our associate producer is Zenobsidiki. Raphael mcili
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