The ongoing US-China AI war

Do you know about the US-China AI war that is going on in parallel with the Iran-Israel proxy war?

During March 2024, Biden released license suspension rules to several US suppliers that sell chip-making materials and parts worth millions of dollars to China.

These restrictions are not new; the AI war has been going on between US and China for a while now. This article aims to cover the following parts of the story:

1.       Why is it important for the investment community to know about these developments?

2.       A background of the US-China AI war and

3.       Steps taken by the US in this war

Happy reading! 😊

Why is it important for the investment community to know about these developments?

US and China are the largest economies of the world attributing to ~44% of global GDP. The two largest global economies fighting over AI boom is definitely a topic of concern for investors all over the world.

As investors, we can look at it with a 3-step top down approach:

1.       Economy level: US seems to be winning the war as of now. Lack of A100 and H100 chips (leading edge tech) from Nvidia is hurting China’s ability to outperform US in the AI field. The semi-conductor supply chain is so specialized that only a handful of firms in the world can do it, and if any economy is totally locked out from one of the steps in the supply chain, it is nearly impossible to replicate it locally. It takes enormous amount of technology, talent and energy to replicate it without the US providing access for it. So as an investor, if you are looking to invest in AI, you will have to look into the US markets and not China.

2.       Company level: Players like Nvidia, Intel and Advanced Micro Devices are set to gain over Chinese players like Baidu, Tencent and Alibaba- again a point to note for investors looking to hold positions in the names (directly and indirectly).

3.       Consumer level: The customer base for the above mentioned companies and how an ‘AI contagion’ is going to impact certain industries (positive and negative) are also a few things an investor should consider while looking to invest in AI.

I started the article by introducing the latest development in the ongoing war but like I already mentioned, this news is not entirely new. US has been banning its advanced AI technology to China since 2022.

Let’s take a quick look at the flashback.

US has a ‘Commerce Control List’ under which there is a section called ‘Export Administration Rules (EAR)’ which takes care of the commodities that enter and exit the country. Advanced high-performing computing chips were added to the restricted list in October 2022 for the first time. These policies restrict China from accessing, developing and using advanced semiconductor technology. The initial restrictions were as follows:

1.       Added certain high tech chips to the Commerce Control List (CCL)

2.       Added new license requirements for advance chip usage in China

3.       Scope of EAR was increased towards super computer technology from overseas

4.       Restricted the ability of US citizens to produce semi-conductor manufacturing equipment and related items in China

and more, you get the picture.

Why is US banning China from accessing its advanced chips?

The objective is to ‘protect US national security and foreign policy interests’, in the words of US. China’s probable use of semiconductors in their military systems to produce advanced weapons for mass destruction is seen as the main reason for this ban. Use of advanced semiconductor technology will also mean that there will be a significant improvement in the speed and accuracy of the military decisions. This may increase the potential of geopolitical tensions between the two nations.

Why does US see China as a threat?

The troubled relationship between US and China goes way back to 1950s. Multiple issues were ongoing like the political status of Taiwan, territorial disputes in the South China sea and more recently the treatment of Uyghurs in Xinjiang, to name a few (this would take up a whole article in itself, so I suggest you to dig into these events on your own😊). This makes US worried about what China can become capable of doing in case they get hold of advanced AI technology ahead of the US.

Apart from these restrictions, US is also helping its own AI players. How?

‘US CHIPS and Science Act’ is an important development to understand in this regard.

What is this ‘US CHIPS and Science Act’?

‘US CHIPS and Science Act’ was enacted by Biden on Aug 9th, 2022. Here CHIPS stands for ‘Creating Helpful Incentives to Produce Semiconductors’. Some key points regarding this act are as follows:

The act authorizes ~$280 Bn in new funding towards semiconductor manufacturing in the US. Out of this,

·         $39 Bn in subsidies and 25% investment tax credits for costs of manufacturing equipment

·         $13 Bn allocated for semiconductor research and workforce training

·         $174 Bn invested in the semiconductor ecosystem

·         $54 Bn invested in manufacturing

Additional investments and non-financial support have also been ongoing apart from the Act’s initial provisions in the last two years.

US is strong in its game of both weakening its opponent and strengthening itself in this AI war. Looks like US will continue to dominate the world AI market?

Where are your AI bets at?

Feel free to share any feedback 😊