The Case FOR Letting China Buy NVIDIA Chips

But the big news out of Nvidia yesterday was that Nvidia says it's restarting production of AI chips for sale in China specifically. So Jensen Huang says the company's supply chain is fired up after months of mixed signals from the Chinese market. We've been tracking this for a long time. Of course, chips were banned first from sale to China in 2022 by Joe Biden under the Chips Act. That also unlocked billions of dollars in incentives for American chip manufacturing. We began following the Intel story. We began following the Huawei story. There were a number of different initiatives. And then the narrative flipped back and forth, back and forth on what are the risks and what are the costs and benefits of actually selling chips to China.

Back in 2022 after the Chips Act, which if you want to read up more on it, we've interviewed Chris Miller, the author of Chip War. It's a great book. Highly recommend it. We should have him back on. That'd be amazing.

That time. Yeah.

Ben Thompson's also covered the story throughout. There's a whole bunch of good stuff in Stratechery on chips and China. And the calculus has always been pretty clear. Like on the first pass, the first order effects, AI is an important technology. America wants an advantage in the AI race, the AI buildout. So less chips for China means more chips for America, stronger economic engine.

Massive chip shortage right now. You see old chips being valued basically more than they were when they launched, which implies there's plenty of demand in America. So you'd want to keep those here.

And plenty of demand at TSMC from American chip makers specifically. I mean even Apple is sort of getting crowded down there on the 2 nanometer, which I think is better for phones than for GPUs, but they're, you know, they're grappling with what the compute boom, what the AI buildout boom will be for their business.

But the second order effects are what are more complicated. So in November of 2022, about this, and I said on a YouTube video, in the past China's dependence on foreign technology companies has been seen as a key bargaining chip. Why would China invade Taiwan when they need to keep TSMC's manufacturing facilities online? Chip manufacturing is extremely precise. One of these factories isn't going to withstand a rocket hitting it. So if there is any sort of broad military action in Taiwan, TSMC probably gets a little bit damaged. I mean even the tiniest earthquake.

Right. They have to track the weather outside of the facility. If the weather outside of the facilities is fluctuating at all.

Earthquakes. Taiwan is famous, TSMC is famous where they don't even need apparently a detection system or a push notification to their employees if there's an earthquake. If the employees sense that there's an earthquake, they just get up and go to the factory and start working on things. It's not like they need to, like, we need to email all the employees. The employees just know because that's the level of sensitivity over at the TSMC fab. So if you want to keep TSMC producing chips, you can't invade Taiwan. And so by banning the export of chips to China, the cost to China of a Taiwan invasion decreases. And so if China can't access TSMC chips anyway, it's a lot less risky to go to war. And that was always the risk with hardcore chip bans, that you'd create an increased risk of geopolitical conflict. And in 2022, the Russia-Ukraine war was about 6 months old. Global conflicts have grown significantly since then. Obviously we've been tracking the Iran war. And America's military is potentially stretched thin. So the risks of a Taiwan conflict are higher than ever. And so you add to the fact that everyone agrees that we will be in chip constrained, the chip shortage through at least 2030. And the need to keep TSMC supplying chips to American companies is extremely important. It's always been difficult to parse the various arguments around selling chips to China because there's an insane amount of money at stake and many, many people whose basically their full-time job is to advocate for a particular position. I was talking to a friend who is interfaced with a lot of the different groups in Washington. And there are like huge think tanks, huge lobbying organizations on both sides because there's so many different interests going on.

Yeah, not to mention how much of everyone's retirement accounts Nvidia actually makes up.

Holding up the world economy, right? That's the meme. And that's certainly true. So there are good arguments on both sides. One that keeps getting trotted out is, you know, it's important to keep China dependent on the American AI stack. And it's reasonable. The better argument might just be dependent on a functional TSMC fab. But there are benefits to the CUDA ecosystem and to the idea that whatever models get built there will be applicable here. We'll be able to transfer that research and development that happens over there very quickly. But the much more important thing is just that the more the economies are interlinked, the less likely there is a conflict. So all of this underscores the importance of TSMC Arizona, Samsung, Intel broadly, as well as startup fab projects like the Terafab.

Terafab. And there's a whole bunch of other companies that are at least talking about tool making, talking about getting a fab up and running. Nothing that's really taken off. I mean even Samsung is not fabbing any of the leading edge Nvidia chips at this point. But you know, there's incredible economic incentive and people have known that this is an important kind of sort of cash cow business for a few years now at the very least. And so there's certainly been a lot of incentive to put plans in motion that might play out before 2030 because there's such a shortage.

And so in general we're traveling this like long and narrow road. But I'm coming around to the idea that selling some chips to China is the best possible move at this particular moment in time. It was easy to stick with like the first order logic of just we want the chips because we can use them to power our economy. So we should have them. But going forward, it'll be really interesting to track how China's indigenization project of their domestic supply chain evolves. They of course have.