Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisenthal and I'm Tracy Alloway.
Tracy, it's been too long since we've done a semiconductor episode.
I know, I actually feel really behind on what's been happening in the industry. I've seen some headlines. I mean, obviously we talked about in Video earlier in the year in that stock just exploded, and recently they released their earnings. I've seen some news about additional export restrictions and things like that. But I haven't been paying close enough attention, and I feel really bad about that.
Do you ever read, Tracy, or have you ever ever read, Yes, Joe, you read. Have you ever tried to read those like really technical semiconductor publications that talk about, oh, the new in video chip is four different cores and a thing here, And have you ever seen those sites?
I have?
Sometimes people drop.
The links at our discord and I try to catch up to speed on what the hot new chip is, and I just I always give up one third of the way through the post.
It's really difficult. I mean, even the ones where they talk about like wafer thinness and stuff like like, I can kind of understand it, but there's so much within this specific subject. There's sort of the big picture things like geopolitical tensions and trade tensions and things like that, and then you can really cut into I don't want to say the nuts and bolts of the specific technology, but you know, I don't know the wafers and pins of specific technology.
So the one thing is it seems like the lower nanometer number the better, Yes, right, But even there, and I know we've done some episodes in the past with us Stacy Rasken, etcetera. Even there, that only tells you so much about a chip's performance, and there are all different kinds of architectures and yields. We've talked about that too. Or in theory, you could have a really powerful chip, but maybe it's not economical because you lose so many
chips in the process, et cetera. So wrapping one's head around chips is tough.
Yes, agreed, But what will we be doing on this episode China wrap our heads around chips.
Yeah.
So, you know, there's been some news particularly related to China, and I think Huawei came out with a phone fairly recently in the last couple of months, and what claued people's attention was it seemed to have performance that people didn't assume it could have given what was known about the state of domestic Chinese semiconductor compress seven.
Nanometers, Yeah, seven nanometers. I shouldn't whisper on a podcast. I don't know why I did that. It's not a secret. So supposedly it had a chip made by SMI C, a Chinese chip maker, that was seven nanometers and something that people thought China wasn't able to produce just yet. And yet here we are talking about the seven and M in these phones.
And I guess the question is, is this represent a major domestic breakthrough for China's semiconductor into Does it mean that some technology which wasn't supposed to get into the country somehow got in? So there's some sort of US national security implications.
But it's a good time. You know, we've talked about this.
For years, you know, with people like Dan Wong, like what is the state of Chinese semiconductor? Are they catching up? So I think it's a good time to take stock of the situation.
I agree.
And also, you didn't mention the biggest thing that people are talking about now, which is the idea that have the restrictions basically created the exact opposite result intended and maybe accelerated China's semiconductor technology.
Which is something people have warned about that ultimately, sure, maybe you set the country back a few years in its development, but if you restrict its capacity to get international technology, then it just builds faster its own homegrown and all kinds of questions related to chips right now that we need to do, we need to catch up on.
Yes, And also, can I just say that I blame the semiconductor restriction on me having to read the Three Body Problem?
Did you ever read that?
And now these visions. I don't know how many people have read it, but it's a lot of people used it as an analogy for China's technological development. But now I have nightmares about like little shriveled up dead people. And if you've read the book, if you've read the book, this makes sense.
Okay, Well, let's talk chips.
And we really do have two perfect guests, one of whom we've had on the show before, Doug O'Laughlin. He is the chief analyst and Fabricated Knowledge, a semiconductor research service and Dylan Fitzel, chief analyst. It's Semi Analysis, a boutique semiconductor and AI research firms. So we are going to pick their brands about the state of Chinese chips. So, Doug and Dylan, thank you so much for coming on, odd Laws.
Thank you for having us, Thanks for having me again.
Let's just start. What was it?
What's the deal with this Huawei phone that caught everyone by surprise?
So Huawei has historically been a leader in technology. That wasn't a surprise anyone. And a few years ago, of course, they got banned from, you know, many aspects of the US and Western semi conductor supply chain. They got banned from utilizing TSMC, the world's largest chip maker, and all of a sudden they come out with their own phone, right, their new phone that has their own chip made in China. The expectations, of course when they first announced it were whatever.
But then once people got their hands on the phone, it was like, oh my god, this is actually very good. You know, when you compare to foreign phones right with wou'd say, Qualcom chips from like say, Samsung, it is only you know, a year and a half behind, right, And in some respects. It's actually just as good in certain specifications. It depends on how how nitty gritty you want to get into it. But at worst one point
five years behind at best on part right. And so that was a big, big shocker for everyone, just.
Real quickly on those specifications. Like when you say the phone is really good, because I don't know, all phones sort of seem pretty good and I don't really notice advances and phone. So when you say that the phone surprised people by capacity, could you just be specific about what shocked people?
And they picked up this device?
Sure? So stage one is sort of the network performance, right, so it can download and upload data just as fast as any foreign phone, okay, which is the sort of on par thing right. In fact, it was better than the current iPhone. It was on par with the current Qualcom based phones. And so then that's like one specification. Other specification is your CPUs and GPUs and AI aspects
of the phone. Right. And there they were not only using you know, they're again using domestic manufacturing capabilities, they were also using domestic design capabilities and were able to match again what folks had done a year and a half ago or in some cases even sooner more or more recently. Right, So this is sort of on on a performance basis, whether it's in gaming, whether it's in you know, uploading and downloading videos, whether it's in camera.
Every every aspect of this phone was on par, if you will.
I think that people just probably don't appreciate how impressive that is, given the fact that how little technology they have access to. So this they did this without EV which was the big October restrictions in twenty twenty two. And I think the thing that's most impressive about this is, like it's a really good chip with both hands tied
behind their back. And I think that like, if the restrictions weren't there, the implication is that SMC could probably ship a leading edge phone as good as TSMC and maybe even better than Intel or domestic production. And I think that that's probably the biggest takeaway that I think people need to understand, you know, and there's definitely some DV tools that snuck in, and we can talk about
the you know, all the mechanics of the cross. You know, how slippery the restrictions have been and how maybe poorly enforced it's been. But like they did an amazing phone with both hands tied behind their back. And I think that in the conversation that we've been having about semicuctors in China for a long time, it's always been like, well, they're really far behind, they'll never catch up. And I think that this is the first time where you can say, like,
if they had what we had, they've caught up. Like I think that's Dylan. Do you agree or disagree with that?
I would say, you know, if if you compare just what's shipping in the market, Yeah, of course TSMC shipping better, Samsung is shipped better. But and everyone talks about this Intel turnaround that may or may not happen. Intel's best chips that they ship today are seven animeter, the same as what China has today, right, so it's it's on par now. Of course, Intel's close to releasing their four N animeter, and you could you could caveat that in
a hundred ways. But if you look at what's in the market today, the dentist right again, as you mentioned earlier, lower nanimeter ship that you can buy today from an American manufacturer is from Intel, and the dentist is from Smick and Huawei, and it's the same, right, It's it's a similar capability.
Okay, so not since the invention of pringles have people been so excited about a single chip. But you sort of alluded to this, Doug, But can you maybe walk us through what is needed to produce a seven and M and what to your point about China basically doing this with a hand or two tied behind its back, what was actually available to them?
So this is this is a really hard question answer. I'm gonna have to ask Dylan a lot about this as well. But the thing that I think probably differentiates it from let's say TSMC's process is that they did not have access to EV. That's clearly the big delineation.
But if you remember the original the extreme yes EV Extreme Ultraviolet that's the latest and greatest from ASML, and they cost like, you know, three hundred million plus a pop their extremely advanced technology to make tiny, tiny wavelengths of light. But they managed to get around this with something called quad patterning self a line quad patterning, which is like we're not going to go into the details of that, extremely technical but an extremely hard thing that
Intel got caught up on. So they managed to ship the seven animeter Chip much quicker than Intel managed to get through all of their problems doing the same quad patterning DV process. And I think that that's a big deal, Like it shows that there's a lot of technological umph underneath the restrictions alone. And then on top of that, the restrictions have been extremely poorly enforced. That's why they had some, you know, some restatements this year about specificities.
But what happens is, like a good example is SMIC has a leading edge and a lagging edge factory, right, and they're both related entities. But my understanding is the lagging edge entity can go by extremely advanced deposition and etched tools, ones that are on the restrictions for the October twenty twenty two, and then they can just kind of shuttle those tools into the fab of the leading edge and then effectively be able to use it.
That doesn't seem like it's doing you know, the restriction is doing what it was intended to do in.
That case, Yeah, not at all so far. Pretty much what's happened, and this has happened every single time we've had restrictions on American semicap companies, is that the restrictions come out all the companies say, oh, this is going to impact us, and then they slowly find ways for
loopholes to be pushed through. An example is Applied material how to South Korean factory that probably had I think they are right now under investigation, and I think the thing is it's pretty clear that some of the leading edge tools X THEEV stuff is getting into China and they're able to use clever engine hearing to make a better chip than we thought was possible. Yeah.
I would say that while in spirit the regulations pretty much said hey, you can't have less than fourteen nanimeters, the specifics of what was actually banned were quite a bit more varied. Right. The tool that you can use for twenty eight and nanimeter, well you just use many
more of them for seven, right. I mean obviously there's a lot more complications there, and so the government sort of handed out export licenses like candy to companies like Smick, saying hey, yeah, you can expand your twenty eight nanimeter all you want. Right, that's not the spirit of the regulation.
Applied Materials, go ahead and ship whatever tools you want to the twenty eight nanimeter fab in Beijing for Smick, and then Smick then gets those tools ship to Shading High right where they are making fourteen nanaimeter, where they're making seven nanimeter. And this applies not only to you know, applied Materials, but also applies to ASML and every other equipment company. Right, So when you say, like, hey, yes, they're banned from having less than fourteen ananimeter on one hand.
On the other hand, every single tool that they used for their seven nanimeter was the equivalent of what TSMC had when they made their seven animeter, or an upgraded version of it, right, So it's not like any specific tools were banned that were required for seven nanimeter. And so it's kind of like, you know, the regulation and the implementation were so far away from each other, and that's sort of what these recent regulations hopefully are going
to try and help. But there's still maybe some holes there.
So actually explain this in an abstract sense, why is it hard to align the implementation of the law with the letter of the law or the spirit of the law.
I think it has a lot to do with the fact that the US doesn't want to wholesale band chip production in China. Pyriice right, while China's automotive you know sort of chip manufacturing is exploding bids of vertically integrated monster that is like really taking over the world with amazing vehicles and chips for those vehicles. I don't think the US has really an intention to block those, but
the tools that are required there. It turns out all the advances and tools that have happened over the last decade, many of them would still also be applied to that say, twenty eight animeter chip, just the same as it would be applied to that seven animeter chip. It's just the differences, you know, throughput versus you know, accuracy, if you will, right,
in a simplified sense. And then the other problem is this is so incredibly technical, right like Doug basically told me ten times, don't say, you know, like a list of words that are too complicated for audience because it's It's like, the problem is the government is mostly talking to hey, like, who's a lithography expert? Well, they all work at ASML, and what is their incentive, right, it is to ship as many tools period as possible, and including to China, Right, Like what is ASML care that
you know, XYZ is happening. They want to be the monopoly and lithography and continue to ship, and if they don't ship, then you know, there will be a Chinese company eventually one day. Right, So their incentive is for the government to have as week of a control around lithography as possible, and they want to be like, well, hey, like this tool's used heavily here, you can't just blanket ban it. No no, no, no, just ban it for that fab and we promise we'll make sure that we
won't ship it to that fab. But if the customer decides to move it from Fab A to Fab B, then you know, oh no.
And also I think there's like an implication that China's going to play extremely fair with the regulations, and that's just clearly like I feel like we keep making these regulations and they're really cute and it's like, well the spirit of the law and stuff. And then like, meanwhile, you look at what China is doing for their domestic semicucter production and they're like they don't care, Like they
do not care. And what they're doing is probably one of the most aggressive industrial policies ever to ramp their leading edge semicuacter production.
Like I think it looks like the US in the nineteen thirties.
Yeah, it's totally different. Like, you know, the Chips Act. I'm sure everyone is like heard of and understand the Chips Act. Right, it's like fifty two billion dollars and then plus like another twenty something in tax credits. That's peanuts. Like we are talking a completely different game, and how
meaningful the incentives are there. We could go on about this forever, but like essentially every step along the way has massive cost and taxes and R and D credits and rent reductions and you know, the big fun one, two and subsequently three are about to launch and all of these things together is probably putting hundreds of billions of dollars in subsidies to encourage the semiconductor industry to
figure it out. And I think that, you know, with that much push from the top, you know who cares if a tool is not being used in the spirit of the wall, right, Like, like China's government isn't going to be like, well, darn you for using this for this using this deposition tool for not its intended purpose. It's pretty clear that they're weaponizing the split in the East and West semicopter supply chains, and they're trying to do it as fast as possible. And I think that
that's something that the West just continues to underestimate. How much gump should they have toward that?
Yeah, I remember Dan Wong, another one of our favorite Odd Lots guests. He called it China's Sputnik moment when the tech restrictions started coming into play, because like, basically it was a huge wake up call for China that it could no longer count on the US to supply its technology and that it would have to basically encourage
its own domestic alternatives. So on that note, I take the point about industrial policy and the scale of the way China is doing it here, and certainly China has a lot of experience in both industrial policy and just generally a centrally planned economy. But what sense do we have of how efficient their semiconductor manufacturing process is so far.
I've seen bits and pieces about this, you know, I've seen people talk about there is a huge profit drop in SMIC earnings for the third quarter, I think something like eighty percent. So a lot of people are going like, yeah, Okay, they're producing these new chips. The seven nanometers, but maybe they're spending an insane amount of money to do it. And also I think there was an inventory shortage of the phones, so maybe there's a sense that they're not able to produce these at scales just yet.
So the thing about the manufacturing here is that, you know, yeah, their volumes are limited, right, only about seven million phones will ship this year, looking like they're going to ship maybe forty million next year. Versus the you know one point four billion or now one point two billion phones that ship a year. This is, you know, kind of like an initial drop in the bucket, but the scale
of the ramp is huge. And what's more important, I think that's hard to recognize for most people is that semi conductor manufacturing is literally the most complex manufacturing supply chain in the world, bar none. There's more processed steps, there's more complex there's more R and D in this
field than any other field. It is the most complex supply chain, period and so when you're talking about thousands and thousands of processed steps, each step has one hundred different knobs that you could turn on each tool getting good yield, right, getting the number of chips you try to make for how many actually work in the end
is very very difficult. But the way you learn is by ramping right by by producing and then hey, if I'm running a thousand experiments in flight, and each one has one knob slightly turned differently, and then I see, oh, which one work?
Awesome?
Now I know that I leave that knob turned, and now I move on to another piece. Right, sort of, there's this like complex like you know, constant tweaking of the process, right, this is what's made TSMC, you know,
so amazing, versus say a company like Intel. Is that TSMC, their engineers are constantly doing this even on fifteen year old process technology, still getting they old better, still getting the performance better on say ninety to animeter, whereas Intel would move on to work on the newest technology every
single generation. And so Smick by you know, yes, they are not profitable, especially if you strip away the subsidies, right, the Smick Shanghai joint venture, the subsidies are getting from Beijing. These are massive. If you were stripped those out, they'd be losing billions a year, right, But you know that's that's the thing is like, hey, let's skip forward now, is there twenty eight animeter profitable probably, Yeah, it's their
seven animeter that's not okay. But we skip forward a couple of years and it's like seven animeter will be
very profitable. And guess what, over eighty five percent of the world's chip value is not under seven animeter today, right, And so like there is a long tail of like, hey, my car has zero seven animeter chips, right, But there are a ton of chips that are made by Texas Instruments and analog devices and microchip and you go down the list and it's like, well, China's going to compete with these companies and they're going to compete with them very strongly.
Yeah.
And I think that also just looking at as in a pure profitability perspective maybe loses some of the context of history. Taiwan Korea did this exact same thing, where you can look at the early days of TSMC, and they lost a lot of money along the way. But the important thing is that by pushing their self sufficiency, what they're going to be able to do is they're going to be able to ride up the experience curves on every single technology as they're pushing for full self sufficiency.
And I think that this story continues to evolve, and I think that, like that's one of the reasons why we're here to be excited to talk about it. Is like CXMT today actually I think is literally today or yesterday. Which company c x MT. It's their d RAM company. So they have a nand company which is YMTC, which for context, is shipping the most dense memory in the world. I think that's correct, Dylan, like.
Most dense memory. Maybe the yields aren't great, but they've they've been effectively banned from tooling like properly, like no loopholes, and so they've been they've been stumbling. But six MT company found it in twenty sixteen, Yeah, and they are. They're looking to spend about seven to eight billion dollars on equipment next year. Yeah, which is more than Micron by the way.
Yeah. And so so like they're shipping these memories that are like maybe two to four years old. But like this conversation, if we had this five years ago, it would seem insane, Like truly, I think the rate of change is something that people continue to miss and I think that as this continues, it's going to be you know, after they have their own domestic phone or domestic five G modem, the domestic CPU for the phone or like whatever, the NPU. Then they have their own domestic nand then
they have their own domestic DRAM. Then all of a sudden, you just like look at it, and that's the entire semicapter tool chain, Like you know, so this is this is and so yeah, is it capital efficient? Hell no, Like Big fun two, for example, has allegations of massive amounts of and that definitely is happening. And there's hundreds and hundreds of companies that have started probably this year
to take advantage of the subsidies for semicopters. And yes, there are lots of misses, but in terms of being able to get the talent there and then also bring them all up the learning experience, I think that that's
a huge thing. And I think that's also a conversation that is completely missed about this as well, is that like Dylan and I we go to you know, trade shows in Japan or Taiwan or Korea, and like the amount of young people there versus the amount of young people in the West that are making chips is just drastically different. And I think that you fast forward that same equation, and yes, maybe they don't have ev tools, but there are a lot of ways to make better
phones using packaging or other clever engineering tricks. And so what's going to happen is that not only do they have the technological know how, they also have the talent too. And we could be talking about in you know, ten twenty years that America's chip dominance is very you know, backwards looking, and I think people need to watch this closer. The rate of change has just constantly shocked me at least, and I'm sure Dylan, but like the progress is staggering.
This kind of gets me to I don't know if it's a strange question or theoretical question, but when it comes to semiconductors, you hear a lot about the importance of the overall supply chain. So, you know, people will say that in Video is really good at managing its own supply chain and that's been part of its success story.
If China is now manufacturing more and more of its own chips on a domestic basis, I guess like maybe it'll take them longer to develop some things, But does that in the end kind of lead to a more resilient or reliable supply chain for that technology. How do you see those two things interacting?
You know, it depends. In capital intensive industries, what you tend to see is a very big sort of winner takes all vibe, which is why in prior you know sort of technologies, if you will, right solar for example, Hey, Germany in the US invented all of it, and they were great until China dumped way more capital in a very capital inefficient way, put way more people at work at it, right, smart engineers working on it, and all of a sudden, you know, hey, ninety plus percent of
solar cells come from China. Right. And likewise, you know, US companies were the first to do electric vehicles, right, like GM initially than Tesla. But hey, China makes like three times as many electric vehicles as the West does now, and so you know, sort of you see these technology curves and there's a significant amount of winner takes all, right. You know, if you look at Latin American markets, I mean even even Europe had to put up tariffs recently,
Chinese evs are killing it, right. The US has had to put up massive tariffs and then has had the sort of the flat reduction act with the huge subsidies for battery production and cathodes and anodes and all these sorts of things. There is a big winner takes all sort of element of capital intensive industries, and the semi conductor industry is not different. In fact, it is even more salted that way. Every single vertical you look in, and there's hundreds of verticals, people think, oh, it's such
a complex supply chain. Well, every single spot where you zone in, there's two, maybe three competitors right in any specific technology and any specific chip, and many times one and everyone makes a good profit. And it's very like, you know, strong industry. But what happens when someone comes with breakthrough innovation and now all of a sudden, you know, it's capital intensive, and those players start to fall off or they exit markets. That's something that happens, right, and
the winner does take all. And so it's not just necessarily a hey, it's a it's a domestic supply chain. It's hey, well what about all of the vehicles that are being shipped out of China into Latin Southeast Asia and you know, maybe even Europe if they don't have tariffs or you know, the US already blocks Chinese vehicles mostly, or or how about you know solar right, like battery, you know, solar inverters to convert the power from sort of the solar panels to what's acceptable for your home
or for the grid. That's going to become a Chinese supply chain. Why wouldn't it, Right, they already have the solar panels, So it's not just like hey, domestic versus not. It's actually there's a very strong element of hey, this is going to be a Chinese supply chain, or this is going to be a Japanese supply chain, or this is going to be a Korean supply chain, which is already the case in sort of semiconductors, right, or a US supply chain.
Yeah, and I think there's also like an important thing to note there. At least I don't think this will happen in the United States, but Europe is where this is happening. The hardest is so we've been talking about the leading edge which they put out this new Huawei phone, really amazing technology, but there's problems with ramping, there's problems with yield. We have some cutoffs. But like you know, China at the same time is also pressing their foots
of the gas in the lagging edge. And we've been talking about automotive, and I think that that's probably where it's scariest. Frankly. So, if you are a European automotive OEM and you are trying to sell more ebs as everyone is, and you're buying your semicopters from other semicapter companies, and then you're buying the battery and then you're you're putting it all together and you're trying to have this margin. You know, it's like a it's a single digit or
you know, maybe double digit margin. It's it's a very low dollar value added industry, and then you're trying to compete against bid who and BYD in this conversation is making their own batteries. They're buying their own ships to ship the cars from China to Wow. Yeah they are.
They have their own fab.
Yeah, they have their own fab They make all the semicopters, and like the semiconductors are because they're becoming larger and larger parts of cars, and they are the most profitable. They are the largest gross dollar profit pool within cars. And so if you just do it, talk.
Called about batteries all the time. But the real profits are in the chips.
Well well batteries as well, batteries and batteries and semicopters, and they're doing both completely vertically integrated. So what they're gonna do is they're going to collapse all that margin that the suppliers make and then they're going to take it out of the price of the car and they'll make the full stack margin. But if you're a European or American company competing against this, you will never compete on price. And I think that this is and you see.
It with Tesla, right, Tesla has the highest gross margins in the industry. You can say what you want about their cars, right, but they have the highest gross margins, and especially after the like the seventh price cuts this year, they're cheap, yeah, right. And Bidea is the same, except even better in many regards it even more vertically and integrated.
Yep.
And it's happening a lot quicker than people realize, and I think that that's something that it's another example of where the industrial policy is just going as fast as possible with this hundreds of billions of dollars to subsidies, and people are not really paying attention to the story that's happening right in front of us.
I'm glad you brought up the car chips because it does seem as though the disruptions to car chips that we saw in twenty twenty is sort of what brought the semiconductor supply chain to the forefront. It's what sort of got everyone's consciousness. So we can't make cars because
we can't get the chips. But those are, you know, the lagging edge chips, So we sort of it feels like there is this sort of incoherence that we maybe tell about the story here where it says, okay, we need to invest in chips, but then we talk about we need to invest in the leading age, whereas actually the real disruption was at.
The lagging edge.
Can you talk a little bit more what you said about how the US companies gave up on the lagging edge, Whereas you say TSMC and others continue to improve their yields on the lagging edge.
We don't have that here with say Intel.
So in some cases, right with companies like Analog Devices, who used to vertically manufacture all their chips, they're moving more and more to having TSMC make for them, but in other cases, Texas Instruments, right, both of these companies are over one hundred million dollar companies, but Texas Instruments, they are actually investing hugely in making more fabs and having more than eighty percent of their chips manufactured by themselves.
And you know, I think, you know, just a little bit of a chime in on the whole term lagging edge is that it take a bit of a misnomer because it's not like they're selling the same chip that the designed in the nineteen eight in nineties, right, well, they are, but they're also selling many, many specialized chips that just aren't low nanimeters, but they have some material innovations or you know, they have some different properties with
them that aren't necessarily the smallest post but definitely specialized. And there's a humongous variety of these chips, right, So it's not like, oh, there's one chip, right, it's it's you know, phone chips are quite easy to understand, and it's a it's a single chip that it has a tens of billions of dollars market, right. AI chips same thing, tens of billions of dollars of market, right, so we can point to that one in video chip and be like, wow,
look at it. But when you look at Texas Instruments catalogs, the catalog is like so thick. It's like it's incredible of how many different chips they sell.
It's thousands of products. It's thousands and thousands of products. And I think Texas Instruments will say this that like half of their products have been from nineteen ninety in earlier. So there there's a lot of lagging edge chips. But the difference here is that Texas Instruments is making like a sixty five seventy percent gross margin. The business is
managed extremely like a mature semicopter company, it is. But then you have the new entrants in China that are just saying, let's like completely screw up the industry structure, and that's that's something that's very new MCUs micro controller units and China on that is like the hottest topic of disruption and what people are trying to do. And MCUs, Yeah, it might be a twenty eight animeter chip or maybe it's like a you know, fourteen animeter chip or something
like that. It's not the sexiest thing, but that is a you know, that's a tens of billions of dollar market there. And I think for the reason why it's maybe not as viewed as strategically important is, let's put this in the context of AI. Right, it is not a leading edge AI chip that you know, and the original restrictions that we put on China was to stop AI progress, right, So that's not exactly you know, strategically quote unquote important, but in terms of for the businesses,
for economics, it's it's a big deal. So what they've done is they've kind of refocused on the lagging edge where they can, and they're throwing as much money into there, and it's going to probably create crazy price.
Going back to this this sort of idea of that, hey, this catalog is thousands of chips. This is why no one competes with each other, right, Like Texas instruments, they're the only player in many markets, right, or analog devices, And maybe the chip is only eight cents to sell, but it maybe it only cost them two cents to me manufacturer. The thing about China is they've they've literally sighoped their entire generation into wanting to work in semiconductors.
It's literally the coolest job. There are two different dramas that I know of.
I was about to ask, like, are there any TV characters that are working in semiconductors, because that's when you know.
Yeah, there's there's one of like this kid who's in college and he's laying but then he like goes and works in the semiconductor industry and now he's super cool. And then there's another one where it's like a love story and they both work in a fab and they like fall in love and that's it's like a drama, right, It's it's.
They're like gazing at each other through the glass and stuff like that. That'd be pretty funny.
Yeah, both wearing bunny suits.
But I don't know if anyone heard, but I think the sound earlier was both Joe and I scrambling to pull up the Texas Instruments.
A literally we both how did you know what? I was typing?
That?
We both googled Texas Instruments catalog.
But I can tell you I'm looking at the page just for MCUs and it looks like it's more than a thousand, two hundred that was just one category product.
Yeah, yeah, twelve hundred and thirty eight micro controllers and processors.
Can we just order them online?
I guess you can. I mean, click the box, see what happens.
Each of those has a hundred couple hundred pages of PDFs associated with how to design them into a product. And it's like, there's a reason no one redesigns this stuff. But well, now when you have thousands, hundreds of thousands of people coming into the supply chain and like, hey,
we can't order this from TXN anymore. We need to order this, we need to get do this domestically, it's like and then and then you also have subsidies that say, hey, if every time you design a chip of you know, certain ages, you get pure tax credits.
You get you get you get just straight up a payout local governments. Essentially, each tape out will give you like a million.
Bucks tape out as a design of it.
Yeah, yeah, a tape out all the way to design. So if you make one of these, it doesn't matter
what it is, you just get money. And you know, if you're engaged in doing anything related to a semicopter, you have five years for every company, ten years for leading edge companies tax free like two hundred percent R and D credits, meaning that like for every ten dollars you spend or let's saye hundred dollars you spend in R and D, you get two hundred and twenty dollars back for certain leading edge categories, like the subsidies here,
you know, they want you to work in it. They want to give you as much money as possible to you know, be moderately successful. You don't have to be that great at it. Honestly, if you if you're just taping out bad chips, you can probably make a living doing this. Now that that probably creates some pretty messed up IT incentives there, but the focus and the desire to you know, to get to Chinese domestic by twenty thirty or whatever, and that number, they're meaningfully below that.
But this is a long journey, and it's pretty clear how they feel about it, right like this is this is like splitting the interest.
One of the most interesting like observations of this sort of like warped incentive structure is that the company that makes railcars in China has made it their like national goal to like because they make profit from that.
Right which company a cr RC Yeah, yeah.
Cr r C Yeah, So one interesting thing about this warped incentive structure is that stayed on enterprises or very successful companies that are doing really well and some some market are expanding to places that make no sense like you know, logically, right, because they have profits and they're like, as Doug mentioned, right, you don't have taxes for a certain amount of time. So hey, let me take all the profits from this business and throw them into another sector.
And so CRRC is a national railway car company, and they're plowing all of their money into making their national goal to basically disrupt Infinian, which is Germany's largest chip maker, right, who makes chips for power? Nothing sexy, right, but hey, converting from one form of power to another is is very important job for chips, and that's what that's what Infinian's chips do, right, And this is what crr c's sort of goal is to do, is to do that,
which is nothing at all related to railway cars. But hey, I might as well do it because now if I make any money on the semiconductor business, I don't get taxed. And what I was getting taxed on my profitable, stable business is now being funneled into this new business.
This is the irony of Shesh and Ping's crackdown on disorderly capital in like e commerce and consumer tech, and now there's just like money kind of flowing indiscriminately in other sectors.
You know.
Joe mentioned in the intro that it's been a while since we've done a semiconductor episode, and I think the last one that we did was actually on in video. Is that right?
Yeah?
I think I think that's right. And since then the stock has absolutely exploded and there's been this frenzy over AI.
In video is just the absolute leader here. Obviously, China wants to develop its own AI models. It has its own AM models, its own large language models, its own open AI competitor, et cetera. Where is it in terms of its own access to the quality of chips that it needs to make cutting edge AM models?
So that's probably the most effectively enforced part of the China restrictions so far, right in twenty twenty two now twenty twenty three, is is cutting back on Hey, you can't get the chips that in video makes has been the most successful part basically, and in Videos tried to circumvent this by you know, releasing new China specific versions
and China's able to get some. But really this is this is where China's ecosystem looks the most interesting for breakthrough innovation, right, which is, hey, you know, you guys are going in this route, which was awesome. You know, we can't really go that route, but we have more people working on this, so why don't we try and do different things that will actually generate outcomes that are in the same vein but not on the same path. Right.
So Huawei of course is making chips. They're making this mobile chip on seven nanimeter, but they also have this AI chip on seven nanimeter domestically made in videos. AI chips are on seven nanimeters, only one generation behind non processed technology. But more importantly, what Huawei and Smicker are doing is that they're investing heavily in technologies that are sort of a few generations out for everyone else because they're sort of not necessary.
Right.
So things like bringing optical fibers directly to the AI chip, right, so it's called copackage optics is the technology. Other things are called like hybrid bonding, just like stacking chips on top of each other. They're doing really interesting things there to enable breakthrough innovation to enable performance that is on par with the US chips like from in Video or AMD right, and they aren't there yet, but they're going
to be there. And one interesting like sort of phenomenon is that, like you know, because they can't order all these Invidia chips, there's really only two places in the world that will let you build data centers and have cheap power. Right. East Asia can't do it because they have to import all their power europates, you know, natural gas, and natural gas is basically how you have to power data centers. And so the US and China are really the only place that can build data centers, and China
has been blocked off. So now China has like these companies flooding into Malaysia and Indonesia trying to build data centers that they can install foreign chips in. And meanwhile they're also building these chips trying to do this breakthrough innovation domestically.
Yeah, and I believe there is also a loophole that might have been priorily closed talking about how you can essentially rent a chip. So for example, a Chinese company could rent something you know, in AWS, you can rent a GPU that's in a cloud and say Signapore or
something like that. But I think that the conversation about hybrid bonding and co package optics is really interesting and kind of where we you know, at the beginning, we were talking about how by cutting them off we would effectively force them on their own roadmap, and that's kind
of what's already happened. The Smick roadmap is completely different than what is sort of the industry standard roadmap for leading edge, and as we continue to cut them off, they're going to have to kind of create a new roadmap for semicupters going forward, and the especially co package optics, which is always five years ahead. And the reason why it's never adopted in the United States or in the
western semicopter world is because it's just too expensive. But if you don't have an option and this is your only option for scaling out chips, they'll pursue the expensive option. So there's going to be no how created because of the necessity.
Of this Tracy.
I think when we released this episode, we should publish a glossary too in all these terms, with like little like definitions. I think that'd be very helpful.
Okay, I have fun doing that. Jo. We actually speaking of new terms that will no doubt need to be added to the glossary. Who makes the best chips for q Star that's been in the news. We don't know what it is yet, but I'm going to go ahead and ask.
Trying to kind of explain it to me last night.
Actually, I don't even know what. My favorite take on this, and this is Dylan's take, is that q Star is a sieop. It's oh, yeah, So I'm in the bay a lot.
A lot of my friends are researchers, and we sort of have this idea that anytime Opening Eye tweets about something that's related to research, they're actually just trying to siop everyone into wasting their time on a path of mL research that is actually not like, yeah, not going to result in a better model because there's limited amounts of GPU, limited amounts of time. So if you're wasting your time doing that instead of actually working on, you know,
what's the correct path at least what they think. Because they've done all the experiments as sort of ahead of everyone else, it's easier to innovate what's already been innovated than it is to innovate something completely new, and so sort of the thought is, hey, they're doing these syops and Q Star is one of those.
We'll see.
There's a million more questions we could probably ask me. We gotta wrap up, so we'll have to have you back.
Doga Laughlin and Dylan Patel, thank you so much for coming on odd Law.
It's amazing conversation.
Thanks for having us. Always love to chat with you guys, and always loves the chat chips for sure.
Yeah, yeah, this was a blast. I didn't realize you two were even more funny when you're sitting in the same.
Room when we're pointing at each other and making faces. Yeah, all right, thank you.
That was so much fun. That was amazing.
Thank you so much, Tracy. I thought that was an amazing conversation. I guess it freaked me out a little bit.
Yeah, you know.
You know what's bothering me enormously now is I've realized if you step away from semiconductors for like a month, there's some new breakthrough. Yeah, and there's like five new technologies and probably like but there are more companies with like four letter acronyms. Yeah involved somehow is that like a rule?
I remember having the same thought about stepping away, Like every time I would ignore crypto for six months, there would be some new scheme, except in the end, none of that mattered because it was all it didn't matter any This stuff actually matters.
And so you do.
It does feel like you really have to pay attention constantly to know what's going on.
There was so much in there, you know what.
One thing just that struck me when I was thinking about US first China industrial policy and here we freak out politically do it to a waste. So we're still talking about say Cylindra, so one company that was doing tech and it ended up being scandal that for years cast dispersions on the idea of the government investing. And it sounds like listening to Dylan and Doug that yeah, they probably have their equivalent of plenty of Cylindras in China.
There's probably plenty of fraud, plenty of ways, plenty of disasters, plenty of endeavors that don't have the chance. It just seems that they have the appetite to continue you investing in those areas, even with some level of fraud.
But also like they are so explicit about what they're doing, and I can't remember I'm gonna have to go back and look who said this, but someone was basically like the equivalent of follow the money, like China is telling you where they're going to put the money in semiconductors. This would have been around twenty twenty one, when they first started cracking down on like for profit education and
the e commerce platforms and things like that. And this person I remember them saying, like, China's telling you what it wants you to do. As a domestic investor or someone who's working in tech. They don't want you building, you know, video games or something like that. They want you to make chips that might power those video games or something much more important. And here it's like, yes, we have messaging, but it's never it's never quite that
way for obvious reasons. I think there's like still a lot of discomfort here about industrial policy in general. But of course since COVID that seems to be changing a little bit.
So many other details I want to we need to find one of those shows the love story of the two people who meet in this semiconductor fab. I also think it's just really interesting this idea of a railcar company, yeah building, say hey, here's an opportunity to build a chip that we have to buy from a German company, and because of the tax structure, it makes sense for us to invest and see if we can build it domestically.
This idea that you know we talked about bid before on the show a couple months ago with Corey Kanter, but that it's also a chip powerhouse, and that there's a lot of a lot of mergin. There so many, there's too many interesting things to go over.
Yeah, I gotta say. I went on one of crrcs, the high speed trains. I think it must have been done them between Beijing and Hong Kong. That's a nice train. I really enjoyed that those so I look forward to seeing the semiconductors too. I'm sure they'll also be nice. Maybe shall we leave it there, Let's leave it there.
Okay.
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
I'm Joe Wisenthal. You can follow me at The Stalwart. Follow Dylan Patel He's at Dylan five to two to two p. Follow Doug o Laughlin at Underscore fab Knowledge Underscore. Follow our producers Carmen Rodriguez at Carman Arman, dash Ol Bennett at Dashbot and kel Brooks at kel Brooks. And
thank you to our producer Moses Ondam. For more odd Lots content, go to Bloomberg dot com slash odd lots, where we have transcripts, a blog, and a newsletter and you can chat twenty four to seven with fellow listeners in the discord discord dot gg slash odd lots. There's even a room there just for semiconductors where people are posting links to highly technical things that I don't understand but seem very fascinating.
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