Latest / Sharp China Podcast / Sharp China: ‘Moderately Loose’ and Cautiously Stimulating; Nvidia Under Investigation; Broadening Export Bans; A TikTok Verdict and a Trump Prayer

Transcript

Sharp China: ‘Moderately Loose’ and Cautiously Stimulating; Nvidia Under Investigation; Broadening Export Bans; A TikTok Verdict and a Trump Prayer · Sharp China Podcast

• 0:04
  SPEAKER_01: Hello and welcome to Sharp China.
• 0:06
  SPEAKER_01: I'm Andrew Sharp and you are listening to a free preview of today's episode.
• 0:12
  SPEAKER_01: We should get to NVIDIA.
• 0:13
  SPEAKER_01: That was a great segue by you about a minute ago.
• 0:16
  SPEAKER_01: We should also note,
• 0:17
  SPEAKER_01: just as a follow up to last week's episode,
• 0:20
  SPEAKER_01: Defense Minister Dong Jun met with the heads of delegations of various countries
• 0:25
  SPEAKER_01: attending the second seminar on security situation in the Gulf of Guinea in
• 0:29
  SPEAKER_01: Shanghai on Thursday.
• 0:31
  SPEAKER_01: So at least there was.
• 0:33
  SPEAKER_00: But so but there have been no pictures or videos that I've seen.
• 0:38
  SPEAKER_00: Ah, okay.
• 0:39
  SPEAKER_00: Now, I think it would be risky to say he met with some foreigners and not actually have had it happen.
• 0:47
  SPEAKER_00: But,
• 0:47
  SPEAKER_00: of course,
• 0:48
  SPEAKER_00: for those who want to believe that it's all true,
• 0:51
  SPEAKER_00: that he's already under investigation,
• 0:54
  SPEAKER_00: then the fact that there aren't pictures or video will lead some to be able to say
• 0:59
  SPEAKER_00: it's all a big sort of conspiracy.
• 1:01
  SPEAKER_00: You never know.
• 1:02
  SPEAKER_00: A big cover-up.
• 1:05
  SPEAKER_00: No, I think, again, we talked about it last week.
• 1:08
  SPEAKER_00: It may be too early to tell with Dong Jun.
• 1:10
  SPEAKER_00: He may end up caught in something.
• 1:12
  SPEAKER_00: He may have been called in for discussions.
• 1:15
  SPEAKER_00: And that was somehow picked up by US intelligence.
• 1:20
  SPEAKER_00: And maybe the wires got crossed.
• 1:22
  SPEAKER_00: Wires got crossed.
• 1:23
  SPEAKER_00: It was sort of overanalyzed as this means X when it really meant they talked to him.
• 1:27
  SPEAKER_00: But that doesn't mean they won't do X later.
• 1:32
  SPEAKER_00: But so far, it seems like Dongjun is still probably pretty nervous and sweaty, but still out there.
• 1:40
  SPEAKER_00: Hard to rest easy if you're the defense minister these days.
• 1:44
  SPEAKER_00: Yes.
• 1:44
  SPEAKER_00: It's hard to rest easy in a lot of positions these days.
• 1:48
  SPEAKER_01: That's right.
• 1:48
  SPEAKER_01: Well,
• 1:48
  SPEAKER_01: we'll keep everyone updated if news emerges on the Don John front,
• 1:54
  SPEAKER_01: maybe even video photo evidence that he's not under arrest or under investigation.
• 2:00
  SPEAKER_01: Speaking of investigations,
• 2:01
  SPEAKER_01: though,
• 2:02
  SPEAKER_01: the Wall Street Journal writes Beijing fired its latest salvo in the U.S.-China
• 2:07
  SPEAKER_01: semiconductor wars by announcing an antitrust probe into U.S.
• 2:11
  SPEAKER_01: chip juggernaut NVIDIA a week after Washington ratcheted up controls on China's access to
• 2:17
  SPEAKER_01: to high-end semiconductors.
• 2:20
  SPEAKER_01: Industry watchers said the move was aimed at sending a message that China won't
• 2:24
  SPEAKER_01: stand by quietly when targeted by trade and technology sanctions,
• 2:28
  SPEAKER_01: a message with particular relevance as Donald Trump prepares to assume the
• 2:32
  SPEAKER_01: presidency next month.
• 2:34
  SPEAKER_01: Shares of NVIDIA,
• 2:35
  SPEAKER_01: which makes the bulk of the cutting edge chips that power artificial intelligence servers,
• 2:40
  SPEAKER_01: were down 2.3% in midday US trading.
• 2:43
  SPEAKER_01: The company's China revenue totaled $13.5 billion in the past four quarters,
• 2:48
  SPEAKER_01: accounting for 12% of its global total.
• 2:52
  SPEAKER_01: And just for reference,
• 2:53
  SPEAKER_01: what's specifically being investigated by the state administration for market
• 2:58
  SPEAKER_01: regulation is NVIDIA's takeover of Mellanox,
• 3:02
  SPEAKER_01: which was lauded by NVIDIA as a way to sell a more comprehensive product by also
• 3:09
  SPEAKER_01: providing the networking gear to connect GPUs.
• 3:13
  SPEAKER_01: And the State Administration for Market Regulation thinks that they may be in
• 3:17
  SPEAKER_01: breach of anti-monopoly regulations because of the bundling of products,
• 3:23
  SPEAKER_01: at least according to the Chinese agency and Bloomberg.
• 3:26
  SPEAKER_01: So...
• 3:27
  SPEAKER_01: How much precedent is there for an investigation like this?
• 3:31
  SPEAKER_01: Is this a new kind of choke point that China could be utilizing more frequently going forward?
• 3:38
  SPEAKER_00: No, I mean, the SAMR, the State Administration for Market Regulation, I mean, they've...
• 3:45
  SPEAKER_00: They are a significantly strengthened body.
• 3:47
  SPEAKER_00: The anti-monopoly law has been amended two years ago, and it's significantly more powerful.
• 3:53
  SPEAKER_00: It's been used.
• 3:54
  SPEAKER_00: I'm looking at a Tyson article right now.
• 3:57
  SPEAKER_00: Even before the amendment in 2015,
• 3:59
  SPEAKER_00: Qualcomm was fined 8% of its 2013 Chinese revenue for violations,
• 4:04
  SPEAKER_00: which at the time was almost a billion dollars.
• 4:06
  SPEAKER_00: And they held up a Qualcomm acquisition too.
• 4:12
  SPEAKER_00: And they blocked Intel from buying tower semiconductor.
• 4:14
  SPEAKER_00: Yeah.
• 4:15
  SPEAKER_00: And according to the law,
• 4:17
  SPEAKER_00: the amended anti-monopoly law allows fines of up to 10% of a company's previous
• 4:23
  SPEAKER_00: year's revenue for anti-competitive behavior.
• 4:25
  SPEAKER_00: But it is not clear if that's global or domestic revenue.
• 4:29
  SPEAKER_00: But even if it's just domestic revenue,
• 4:30
  SPEAKER_00: that's a pretty significant amount of money that they could theoretically fine NVIDIA.
• 4:34
  SPEAKER_00: And actually, so the announcement yesterday was very, very thin.
• 4:38
  SPEAKER_00: There's a good Taixin article today.
• 4:41
  SPEAKER_00: If I can just read off it, because the regulators signed off on the 2020 deal.
• 4:46
  SPEAKER_00: And apparently, there were seven conditions that the company agreed to.
• 4:53
  SPEAKER_00: But they say only five of which were disclosed publicly.
• 4:55
  SPEAKER_00: The five conditions that were disclosed publicly were...
• 4:58
  SPEAKER_00: The companies must not enforce any form of bundling when selling NVIDIA GPU
• 5:02
  SPEAKER_00: accelerators and Mellanox high-speed network devices in the Chinese market nor
• 5:07
  SPEAKER_00: impose any unreasonable terms on buyers.
• 5:09
  SPEAKER_00: They must not restrict customers from purchasing or using either type of product,
• 5:14
  SPEAKER_00: must not discriminate against customers who purchase only one type of product.
• 5:19
  SPEAKER_00: Continue to supply relevant products to the Chinese market under fair,
• 5:22
  SPEAKER_00: reasonable,
• 5:23
  SPEAKER_00: and non-discriminatory principles.
• 5:25
  SPEAKER_00: Ensure interoperability between NVIDIA and Mellanox products and third-party devices.
• 5:30
  SPEAKER_00: Maintain Mellanox's open source commitments for certain software.
• 5:34
  SPEAKER_00: The regulator has not said specifically what of those seven in total conditions
• 5:40
  SPEAKER_00: NVIDIA might be violating.
• 5:41
  SPEAKER_00: So we don't actually know for sure.
• 5:43
  SPEAKER_01: Right.
• 5:44
  SPEAKER_01: Well, and I mean, Nvidia is also under investigation or might be under investigation.
• 5:49
  SPEAKER_01: There was some dispute, but I mean, there's scrutiny on Nvidia in the United States from the DOJ.
• 5:56
  SPEAKER_01: And so certainly it's not unique to China and their regulators.
• 6:01
  SPEAKER_01: But it does seem like it's a pretty clear response to the chip controls and part of
• 6:08
  SPEAKER_01: that ongoing story in terms of the leverage that both sides of the U.S.-China
• 6:12
  SPEAKER_01: relationship have as we move forward here.
• 6:15
  SPEAKER_00: Right.
• 6:15
  SPEAKER_00: And then the question really for NVIDIA is how,
• 6:18
  SPEAKER_00: I mean,
• 6:18
  SPEAKER_00: they have,
• 6:19
  SPEAKER_00: and I think Ben Thompson over Sir Zachary,
• 6:21
  SPEAKER_00: he may have written about Mellanox and NVIDIA.
• 6:23
  SPEAKER_00: I mean, I think it's become a very, very strategic part of what they sell now.
• 6:29
  SPEAKER_00: And so forcing NVIDIA,
• 6:33
  SPEAKER_00: depending on what the Chinese want as the mitigation,
• 6:37
  SPEAKER_00: the remediation,
• 6:38
  SPEAKER_00: they might wonder,
• 6:40
  SPEAKER_00: is it really worth it to keep the Chinese market if it's only 12% of their global
• 6:44
  SPEAKER_00: revenue declining?
• 6:45
  SPEAKER_01: Right.
• 6:45
  SPEAKER_01: Well,
• 6:46
  SPEAKER_01: in that respect,
• 6:47
  SPEAKER_01: the chip controls sort of insulate NVIDIA a little bit here because they're less
• 6:51
  SPEAKER_01: reliant on that market already.
• 6:54
  SPEAKER_01: And going forward, who knows how much they're going to be able to rely on the PRC market.
• 6:59
  SPEAKER_01: I was surprised it was only 12 percent of the global revenue.
• 7:04
  SPEAKER_01: I will say I read this story and found myself thinking back to our conversation about the chip controls.
• 7:10
  SPEAKER_01: There were two thoughts I had that were nagging at me after we finished talking last week.
• 7:15
  SPEAKER_01: The first one has nothing to do with NVIDIA, but just for my own sanity, I need to get this off my chest.
• 7:21
  SPEAKER_01: We've mentioned on this show a number of times that the 2022 chip controls were
• 7:26
  SPEAKER_01: implemented in part as a reaction to PLA exercises in the Taiwan Strait after the
• 7:31
  SPEAKER_00: Pelosi visit.
• 7:32
  SPEAKER_00: Well, they were...
• 7:33
  SPEAKER_00: They were allowed they were able to get through with fewer water with less watering down.
• 7:39
  SPEAKER_01: Correct.
• 7:39
  SPEAKER_01: That created an opening for various people on the national security side to put
• 7:44
  SPEAKER_01: together aggressive,
• 7:46
  SPEAKER_01: comprehensive and sort of forward thinking restrictions.
• 7:50
  SPEAKER_01: What makes me feel like I'm going crazy is that the holes in that policy have
• 7:55
  SPEAKER_01: become clearer,
• 7:56
  SPEAKER_01: and the Biden administration hasn't been nearly as aggressive about patching any of
• 8:01
  SPEAKER_01: those holes.
• 8:02
  SPEAKER_01: But it's not like the PLA exercises in the Taiwan Strait have stopped over the last two years.
• 8:07
  SPEAKER_01: From what I can tell,
• 8:09
  SPEAKER_01: the reaction to the Pelosi visit just established a new baseline,
• 8:13
  SPEAKER_01: and those sorts of exercises now happen on a regular basis,
• 8:17
  SPEAKER_01: including this week.
• 8:18
  SPEAKER_01: And so-
• 8:20
  SPEAKER_01: It's just a little bit maddening.
• 8:23
  SPEAKER_01: The other thought I had,
• 8:25
  SPEAKER_01: which is exemplified by this story,
• 8:27
  SPEAKER_01: is that as much as the chip companies and someone like Jensen Huang might be
• 8:32
  SPEAKER_01: worried about protecting certain categories of products that are being sold into China,
• 8:38
  SPEAKER_01: I also think this is a reminder.
• 8:40
  SPEAKER_01: There are bigger risks than just those sales,
• 8:43
  SPEAKER_01: the sales of advanced chips,
• 8:45
  SPEAKER_01: advanced chip making equipment,
• 8:47
  SPEAKER_01: because like as an example,
• 8:50
  SPEAKER_01: next on the rundown,
• 8:51
  SPEAKER_01: we have rare earths.
• 8:53
  SPEAKER_01: All these companies are reliant to varying degrees on critical components that come from China.
• 8:59
  SPEAKER_01: I read a story in the New York Times a couple of weeks ago that mentioned NVIDIA is
• 9:03
  SPEAKER_01: reliant on dysprosium from China for some of its capacitors.
• 9:08
  SPEAKER_01: And if the relationship really devolves into a tit for tat,
• 9:13
  SPEAKER_01: there are a bunch of different ways that a company like NVIDIA could suffer.
• 9:16
  SPEAKER_01: So it's not just about protecting the market share.
• 9:20
  SPEAKER_00: A bunch of companies and a bunch of industries could suffer.
• 9:23
  SPEAKER_01: Yeah.
• 9:23
  SPEAKER_01: And you see this response from China.
• 9:25
  SPEAKER_01: I think that's what makes the watered down version of the chip controls so
• 9:29
  SPEAKER_01: frustrating is like China's responding with countermeasures to even the Swiss
• 9:34
  SPEAKER_01: cheese version of the chip controls.
• 9:36
  SPEAKER_01: So if that's how it's going to go,
• 9:39
  SPEAKER_01: why not implement chip controls that are actually going to achieve their intended purpose?
• 9:44
  SPEAKER_01: But I guess we have to give up on that for the time being.
• 9:48
  SPEAKER_00: Get Secretary Robondo on the podcast before she steps down.
• 9:52
  SPEAKER_00: That's true.
• 9:53
  SPEAKER_00: She's downtown.
• 9:54
  SPEAKER_00: She is downtown.
• 9:55
  SPEAKER_00: For now.
• 9:56
  SPEAKER_00: And again, everyone is assuming that this NVIDIA announcement, the investigation announcement is...
• 10:03
  SPEAKER_00: linked to the latest round of chip controls.
• 10:06
  SPEAKER_00: No one has said, yes, it's tit for tat.
• 10:09
  SPEAKER_00: Certainly looks that way.
• 10:10
  SPEAKER_00: But that is an assumption that we are making.
• 10:13
  SPEAKER_00: And it could be separately.
• 10:15
  SPEAKER_00: It could be like legitimate bad business practices by NVIDIA.
• 10:18
  SPEAKER_00: It certainly is coincidental if that's the case.
• 10:21
  SPEAKER_01: Indeed.
• 10:22
  SPEAKER_01: All right.
• 10:23
  SPEAKER_01: Well,
• 10:23
  SPEAKER_01: to keep it moving here,
• 10:24
  SPEAKER_01: a headline from The New York Times,
• 10:27
  SPEAKER_01: China's critical minerals embargo is even tougher than expected.
• 10:31
  SPEAKER_01: And they write,
• 10:32
  SPEAKER_01: alarm is rising among multinational companies doing business with China about
• 10:37
  SPEAKER_01: Beijing's decision last week to order a trade embargo on the export of four
• 10:42
  SPEAKER_01: critical minerals to the United States.
• 10:45
  SPEAKER_01: The central subject of concern is a provision extending the ban to companies in
• 10:49
  SPEAKER_01: other countries that transfer minerals to American firms after acquiring them from China.
• 10:55
  SPEAKER_01: China's critical minerals embargo is,
• 10:57
  SPEAKER_01: quote,
• 10:58
  SPEAKER_01: a direct threat to Japanese and European interests to push them away from the U.S.
• 11:03
  SPEAKER_01: with the hope and expectation the Trump team will further that objective,
• 11:07
  SPEAKER_01: said Susan C.
• 11:08
  SPEAKER_01: Schwab,
• 11:09
  SPEAKER_01: who was the United States trade representative during President George W.
• 11:13
  SPEAKER_01: Bush's second term.
• 11:15
  SPEAKER_01: Bill, do you have any thoughts on that development?
• 11:18
  SPEAKER_00: No, I mean, I agree.
• 11:19
  SPEAKER_00: I wrote that in the newsletter when the controls,
• 11:20
  SPEAKER_00: the announcement came out last week that basically I thought it was most likely
• 11:24
  SPEAKER_00: targeted at Japan and South Korea and the Netherlands.
• 11:30
  SPEAKER_01: All right.
• 11:30
  SPEAKER_01: And that is the end of the free preview.
• 11:32
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• 11:36
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• 11:39
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• 11:42
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• 11:45
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• 11:50
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• 11:55
  SPEAKER_01: But either way,
• 11:56
  SPEAKER_01: Bill and I are going to be here every week talking all things China,
• 11:59
  SPEAKER_01: and we would love to have you on board.
• 12:01
  SPEAKER_01: So check out your show notes, subscribe, and we will talk to you soon.