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The Future of Economic Security with Dan Kim and Chris Miller
01:20:29
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- [00:00]
A
In order to understand what I think are some of the most important questions of the 2000 and twenties and perhaps beyond, we have today with us one of the premier practitioners in the field, Dan Kim. He spent a while at USITC with stints at Qualcomm and SK before returning to government as the chief economist for the CHIPS Program Office. He recently left and is now at Tech Insights along for the ride today as well. Chris Miller of Chip War Today we're going to talk about perhaps the most important and impactful case study of American industrial strategy in generations. How the CHIPS act took a broad, vague mandate from Congress and a few dozen billion dollars and tried to turn that into something that would deliver on economic development and national security. And sort of going through that case study, then try to generalize out what are some bigger principles for what government should be doing in regards to these themes. Dan, welcome to ChinaTalk. This is a long time in the making.
- [01:13]
B
Well, thanks for having me here.
- [01:15]
A
When you get the mandate to try to help conceptualize what that CHIPS Program office should be spending money towards, what was your thought process? Where did you begin?
- [01:29]
B
Well, first of all, thanks for having me. And I understand you actually don't do outro songs anymore, at least ones that are copyrighted. But if I were to choose an outro song, yeah, if I were to choose one, it would be Mad City by Kendrick Lamar. And we could get into why later in the program, Secretary Raimondo did ask me to come in and, and we had a chat about how to draft up a strategy from a blank piece of paper and executing it. And so she was asking the same questions that you're asking, which is how do you conceptualize this? Obviously there were mandates from Congress as to why they passed it and what to pass it on. There were some specifics, like you need to spend at least $2 billion and matured no technologies. But beyond that, there weren't too many prescriptions as to what a good looks like, what success looks like, and how will we have known that it worked. And remember, this is in the middle of COVID induced supply chain shortages. There were parking lots full of unfinished cars near Detroit. In fact, I heard from some executives that there were unfinished Carnival cruise ships, billion dollar ships that couldn't be finished because of $2,000 worth of accessory chips, the way they called it. And when I was meeting with the secretary while I was representing a company, the question was how soon can you get another fab online? There was not a recognition that there was not a memory shortage at the time that it was mostly shortages of other less advanced chips, things like MCUs and other things like that that couldn't finish a car. And so there was just this feeling of we need to get a little bit more of a handle on supply chains and make sure that you have a steady supply of things. And again, we remember at the time that we couldn't make masks either, ppe. So that was the tenor of it at the time. At the same time, ChatGPT was launching and I recognized immediately that as we were executing chips that if we were in an upcycle, a demand driven up cycle, that in the middle of the execution there would be a down cycle. Right. That there would actually be a glut in the supply chain, not a shortage. At the same time, we're trying to build more supply. This was going to be tricky. And so we needed to have a very nuanced view of what good looks like and how to execute that good. And I think the first assignment they gave me to do was to write what's called a vision for success paper which essentially told the world. And I think you actually had a podcast about this, Jordan. I listened to it and I was tempted to come on to explain why we wrote what we did, but I. But essentially to explain what we're going for and what good looks like. So in it, we explained that we wanted at least two competitive clusters of leading edge logic manufacturing. We wanted to go for a mature node, we wanted to go for advanced packaging. Some focused on specialized technologies like compound semiconductors and others, some interpret that as well, why don't you just ask for everything? But if you look at it carefully, we couch the language very carefully to communicate with potential applicants and, and with Congress and to the world about what we were aiming for. And we were aiming for a lot. The paper I wanted to initially write, Jordan, was not about necessarily what we're hoping to achieve, right, what good looks like, but actually a diagnosis of how we got here in the first place to try to describe the disease that we're trying to cure rather than what a healthy patient looks like. Right. And I think, Chris, you would have really enjoyed writing that because it's kind of a historical view of, well, if we're at 10% of manufacturing capacity now in semiconductors, but we started with 100% when we invented the thing and about 40% in the 1990s, how did we get here? And so the initial draft actually had some discussion about how the United States missed out on the foundry model and why, how we effectively outsourced all of memory production and why and if that was a bad thing, to what degree. Right. And a discussion as about what's critical and what's not. We scrubbed that version because we didn't want it to be a historical lesson and we wanted to have some targets out there for people to gauge. And so somewhere in the archives of the Commerce Department there is that version setting. And maybe at some point I'll resurrect it with you, Chris. But I think we needed to sort of understand how did we get here and why is it a problem that sort of underlies a strategy of what then a good then looks like. So that was the initial thinking going in. And then one of my favorite sayings that Mike Schmidt had quoting Mike Tyson, was everyone has a strategy until they get punched in the face. And we will get punched in the face like about 500 times because we have 500 potential applications coming in and we were way oversubscribed and we had no prior experience as a government to execute something like this. But looking back though, I think it turned out quite well. But we had lots of questions we needed to answer along the way, which I think is going to be the topic here in this podcast, as to how do you define economic security? How do you define national security? How do you measure it? Because we had to measure it to some degree or at least have a framework around it because we needed to make priorities because we didn't have infinite dollars. So some applications.
- [07:32]
C
Yeah, go ahead on that. Prioritization. So you mentioned the vision for Success paper said two leading edge memory logic clusters, more memory investments, some foundational semiconductors, a bit of compound like what, what was almost added but you didn't have the resources to add to that list or what kind of fell on the cutting room floor that that was a close cut, but didn't. Didn't finally make it.
- [08:01]
B
Packaging like conventional packaging. Also a topic that we felt like we couldn't really fully address, that we thought was critical but really couldn't fully address was materials. And now we had an entirely different notice of funding for smaller dollar projects, what we would call NOFO2. So effectively that was defined as projects less than $300 million in CAPEX. But we recognized that the investment tax credit, which did so much of the heavy lift in incentivizing companies to come here to invest 25%, which has now been turned into 35% through the big beautiful bill materials, is not a qualifying project. But if you look around and look at all the critical things that we're missing rare earths, minerals, things like that. Those do not qualify for CHiPs act tax credits. And because of that, if we would have said that we're going to go all in on materials, then we would have to then cover 0 to 25% that the tax credit would otherwise cover for, say, FAB or equipment manufacturing. And we would just top it off to 5 to 15% to sort of meet the cost differences. We'd have to meet like 40% of the funding. So that was sort of left unaddressed in the first Vision for Success paper with the theory that if the big fabs are here, so if there is a TSMC cluster, if there is a Samsung cluster in the Austin area, if there are intel clusters in Arizona, Oregon and Ohio, and if there's a packaging cluster in Indiana for hbm, for msk, Hynix, then that would induce their supplies to also come along. That was the theory. But it turns out that they also had some hurdles that they needed to meet before they commit to an American manufacturing base. I remember some suppliers from Taiwan coming to me and saying that's great that they're building fabs in the US Come back to us when there's a third fab, because before there's a third fab, it just makes sense for us to export this thing from Taiwan. But when there's a third fab and there's that much volume of production going on, then we will just want to build it ourselves. Right. And so each part of the supply chain had different economics. And even at the back end, sorry, even at the FAB level, the economics of building a leading edge fab, so different than building a mature node foundry in terms of returns, in terms of margins, in terms of potential for oversupply from China, all very different. And so those are some things that were left out. And that sort of leads me to thinking about if I were to design a tax credit, would I have the same amount of tax credit for every node or would I have a different one? I think that's an interesting question too. Right. But yeah, we couldn't address everything. So you're right, Chris. We had to leave some things out.
- [11:18]
A
Let's pick off where you ended earlier on this idea of like, okay, I guess we got to define economic and national security. Do we go into your famed 4Cs framework? What's the origin and evolution of that line of thinking?
- [11:39]
B
When we said that our number one priority was national and economic security, we needed to understand, even among ourselves, as a security, as a strategy team, and as a Chips team what we meant by that and how do we measure it? Right. Because we needed to be measuring applications consistently to be fair. So I laid out, at least internally this is all laid out in the notice of funding, but internally I called it with Hasan and I, the Director of economic security, four Cs then they were capacity, are we building volumes of capacity? Capability, are we having technologies coming in? And we could talk about that a little later because this is an under addressed part of it, of economic security. And then competition, are we encouraging competition or are we at least not harming good competition that is out there to the market? And then four criticality, are we addressing end use markets that we deem to be critical to economic and national security? So we looked at all four Cs in every applications that was built into how we measure things.
- [12:55]
C
And then how do you think about these four Cs in the context of trading partners that are not China? Obviously China's a unique case. But for Korea or for Japan or for Europe, where we're not concerned that the Europeans are going to cut us off from this or that chip criticality sounds different. I think capability seems different in a lot of ways. So walk us through kind of the friend shoring, if you will, aspect of this.
- [13:22]
B
Yeah, I think somewhere in the background we did a lot of work trying to understand where the supply was coming from and how much risk there was for different types. And there's actually two dimensions to this. A couple of examples here. I think it's obvious, there's obvious recognition that for leading edge foundries, for leading edge logic, for GPUs and CPUs and mobile chips and connectivity chips, that there's a huge amount of concentration in Taiwan, partly due to its historical success and its execution, but also because there's a natural economies of economies of scale that's built into manufacturing at the leading edge. It just makes sense for you to have a huge cluster to lower the cost of average production when the upfront capital costs are so high. Doesn't really make sense to break that up in different places unless the customers actually say we really value diversity of sourcing, which wasn't happening for a long time, which was part of the diagnosis that we were trying to make, but that was sort of understood. But you take memory and I'll make a prediction here. Jordan, in 2026 memory is going to be a huge focus because there's going to be not enough memory to go around. Not just high bandwidth memory, but also your average dram, your average nand, things that are going to data centers. The average selling price will skyrocket this year. And we are predicting at Tech insights that we originally thought not that long ago that the semiconductor industry would hit a trillion dollars of revenue in 2029. We think it's going to hit this year, three years earlier, partly because of that effect. Right. There will be lots of discussions about whether we need to have more American based memory production to make it more resilient. Well, there's lots to go into that and first of all, Micron is building a lot and kudos to them. They're building in Idaho, they're trying to build in New York, and it seems to be part of their plan, which is great. But memory production and how it operates in the market is quite different than customized asic chips or GPUs coming out of a leading edge foundry because it is a standardized good. And the market has achieved what an economist would call an oligopoly. There's three DRAM producers. They are roughly substitutable. Not exactly substitutable. They're roughly substitutable. And when I was at Hynix, what I found to be fascinating was that the CEO for your average server DRAM did not want to sell more than a certain percentage to any given customer, meaning they didn't want to be higher than X percent of market share for say Dell, because they wanted their customers to have some resilience of supply through other suppliers. This is very counterintuitive, but that's the way they wanted to do business because they prefer to have a long term contract. The market sets the price, the prices aren't set by these contracts. The market depending on fluctuations in the supply and demand, mostly fluctuations in demand sets the price. And if a customer like a Dell or an Apple or an AWS has three qualified DRAM suppliers, then it's just inherently more resilient. Right? And they could do that because it's a standardized good. There's standard side at jedic, but that is not how it functions at a customized leading edge foundry. Right. Samsung and TSMC and Intel are not out there saying here's a standard, right? Apple come to us with a standard and then we'll all go away and figure out how to make this best thing. And then you could just substitute among all three of us. That's not how it happens. And so we knew that practically. What does it mean to have dual supply on AMD or an Nvidia? What would make the most sense is to have one chip fabricated at one foundry. Another model of that chip fabricated at another foundry. Either the same foundry or different foundry by different companies or different locations. So maybe it's TSMC Taiwan and then TSMC Arizona. You effectively have different models produced. That's how resiliency would get built in. Memory doesn't work like that. It is more substitutable. So I'm going back to the question you're asking, Chris, which is how should we think about fence shoring? Well, there's not a one size fits all description of that because it depends on how the market works for that product. Are we more okay friendshoring memory because it is a standardized good and it turns out that the most amount of memory comes out of an allied country? I say yes. Some people disagree with me on that, but I say yes. But is it okay to have most of your logic chips coming out of a geopolitically sensitive area? Yeah, probably not that great. And there needs to be some substitution. Then the question becomes, well, what kind of competition do you want as a result of it? Then you step back and say, okay, we've got $39 billion. The industry spends about $150 billion per year in capex, and we got 39 billion in incentives for the next five years, which will come at conditions that industry might not like. So we have to be a little humble about what we're able to achieve. But at the very least, we had to at least signpost to what it could look like. Right. So we did put out very clear statements that we value friend shoring and we established a international engagement team within the CHIPS team whose sole purpose was to engage with partners and allies. So they would go talk to the government officials in Germany, in Singapore, in Korea and Japan, and talk about very openly what we were seeing in the market, what we were going after. Some governments would come to us and say, you know, we don't really have a strategy. We want to build more. And so quite frankly, if there are projects you don't want. Right. That are not quite making it to the, you know, they've made it on the cutting floor to the. To, you know, to go back to our original question, can you point them to us? Because we have some money to spend and we would love to have some more. That's so sweet. Yeah. And some others would come to us and say, no, this is what we want. This is our national champion.
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C
What you're describing of letting there are certain projects which might be good, we don't have the money for them, and so let somebody else subsidize them. And there's an interpretation of that which is sort of friendshowing at its best that we're going to let our friends put the bill for supply that we consider secure. There's another interpretation of that which is is that not what we did in the 1990s and 2000s and 2000s that led us to the current position of let our friends subsidize a bit. And they would object to the word subsidize but debate that they got us into the position we're in now where we're highly dependent on critical goods from a small number of regions. So how do we think about that lay our friends subsidize and winning manufacturing capacity over time. And is, and how do you know when it's good versus problematic?
- [21:12]
B
Well, it's not about subsidizing necessarily. I think it's more the way I think about it is are there natural competitive advantages that our partners and allies have that we should just leverage and is it worth spending the marginal dollar on to substitute away from that? Because at the heart of economics is about trade offs. You could, it's not a bad thing to want to onshore everything. We could have 100% of printed circuit board manufacturing in the United States. But with that money could you do something else? And so that's I think is the way that we've thought about it. I take your point, Chris. It is the story of the semiconductor industry that in the late 90s up to today, the biggest force, market force, is this fabulous foundry model. And before we criticize it, let's recognize that it's been a huge force for good for the American industry because it allowed companies like Apple and Qualcomm and Nvidia and AMD and Broadcom and Marvell to de risk the risks of manufacturing capacity. AMD learned the hard way why it's beneficial to be fabless and makes them more nimble. And it allowed companies like Apple to create and sustain the most successful compute product in the history of mankind. The iPhone. Right. It allowed Nvidia to create an entirely new architecture of compute in AI through GPUs and allowed AMD to compete with intel and you know, and challenge that, that monopoly. It actually allowed intel as a, as a founder customer of its own for TSMC to sustain its customers even while their manufacturing capacity and capability was flagging. And it allowed Qualcomm to invent the future of wireless technologies from 2G onwards. Right. And now they're doing 6G. If you were to ask them to then have their own fabs along the way. The level of invention would just be slower. And so I take a point that there is systematic risks that are built into offshoring, but I think we also have to look at the good things that have happened as a result of that and make sure that we don't throw that baby out with the bathwater while trying to address systematically the risks and think about what roles the government has in that and what roles the industry has in that as well. Because I think it has to be a joint solution. We couldn't have done chips act without a huge amount of engagements with fabless customers. They had to be bought in. That would not have worked otherwise.
- [24:23]
C
Yeah, I totally agree with that. Jordan, do you want to ask the Apple vs Xiaomi question?
- [24:27]
A
I think that's like a one for both of you guys. So Dan, this kind of brings us to the central question in who's going to win the 21st century, the US or China? Which perhaps we can just boil down to who would you rather have, Apple or Xiaomi plus byd? Maybe we'll give can't just do Xiaomi because that's kind of not fair. On the one hand we have Apple, right? Like worth a few trillion dollars. Defined a paradigm makes more money than God. On the other hand, we have these two companies who I think together are worth like $300 billion, something like shockingly small. But at least on the BYD side are global leaders in an industry that have been able to sort of underprice by at least 2x the American competition. Xiaomi, while still dependent on TSMC to make its flagship phones, was able to kind of pivot into the electric car, which Apple didn't feel like, didn't think was going to be profitable enough was just too much of a headache to make. So when kind of doing the, I think using these case studies as an exercise for like, I don't know, national power, national competitiveness and economic security, whatever have you is is worth a few minutes of this podcast. Curious for both of your takes on, you know, how you look at.
- [26:08]
B
What do you think?
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C
Chris, you're the guest. You go first.
- [26:13]
B
Well, first thought comes to me is why can't we have both? Why do you have to choose one or the other? It seems to me that Apple's path is harder in that they're inventing something new and they're taking risks in inventing something new. I know Apple doesn't always have that reputation, but no question that they're the leaders in smartphone technologies have been for a long time and Xiaomi has been a follower. I think same thing with byd. There are these fast following companies out of East Asia, not just out of China, but other countries too. It's just inherently harder to invent the future and take risks in that. And I think American companies willing to do that. There's so many spillover benefits to that that I would not want to abandon the Apple model and what Apple means to the American economy and the technology sector. But at the same time I think the question is why can't we have a Xiaomi like company too? Can the American system award at the same time, the inventors and new creators at the same time award fast followers? Can the capital system do that? I don't know the answer to how that would work. I think looking at Korea is really instructive. Right? And the way that they have used fast following to catch up to the world and now unquestioningly the best memory technology in the world in which the world depends on maybe that's where China is going next and maybe that's implicit in your question is if that's where China is headed next and we don't have anyone that could compete with that, then maybe we should just have Xiaomi. But I think maybe what you're asking is maybe we should just prefer the Shami pathway. But I come back to, well, someone has to go first, someone has to invent this and so someone has to be the Nvidia, someone has to be the Apple, someone has to be the Qualcomm. I'd rather have them in the US than anywhere else. As an American.
- [28:31]
C
Yeah, I guess I'm on the one hand very sympathetic to the question, Jordan. But then here's the counterargument and I don't know where I stand, but I'll give you the countermeasure. The counter argument is something like this is that Xiaomi has made, I don't know, ballpark as many phones as Apple, but never made any money. Apple every year makes 80% of profits of the tire smartphone industry. So as a business you'd much rather be Apple than Xiaomi. And you'd say, well true, but Xiaomi is also diversified into cars, which they did, but only after Tesla. So that seems like less obviously compelling. I think BYD is a bit more compelling if you were to say, well yeah, they were behind Tesla in EVs, but then they've managed to revolutionize the manufacturing and drive down costs in a way that no one apparently can. And that's A pretty good argument. But then it happened at a time where A, Elon was distracted with other things maybe, but also B, it seems like his bet is very much on autonomy and robotics and things other than just selling cars. And so is it possible that in 10 years a company that bet on selling cars looks like a company that made a really bad bet? It seems possible. And so I'd want to be. I wouldn't want to bet entirely on the business of selling X or Y if in fact it's going to be transformed. And I worry that the Xiaomi's and byds being fast followers are condemned to doing that. Although BYD does seem pretty impressive.
- [30:01]
B
Yeah. If you were to. We do a lot of teardowns at Tech Insights so we actually get to see all the components within these phones. And so it's been fascinating to observe the iPhone 17 Pro for example, and look at all the components inside and see what innovation there is. We always look for innovation. And then Xiaomi, I think they introduced a 17 as well. Right. I think they skipped the number. So they can say they're 17 to indicate that they've caught up to the Apple. Right. And they look eerily similar in terms of design and look and feel. But there are components that they are more ahead. They have more battery capacity. Fast charging. Yeah, fast charging. And they're using not Xiaomi design application processor.
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C
Right.
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B
And it's really interesting if you crack open China made smartphones as we do for every phone that we find with the exception of Huawei, which is entity listed, so they have to rely on Chinese supply chains and their own design stuff. How much American, European and Korean technology is in there. In fact, there's not that much Chinese technology in those smartphones. So if you were to tell me what is Xiaomi effectively fast follower by using globally available technologies, I think that's a different business model than what Apple is doing. Both have huge influences in different ways. But I think I would be with Chris on this one.
- [31:35]
C
But then I think the counterargument to you and me, Dan, is the following. Jordan, tell me if you agree with this, is that that's fine if you're maximizing profit, but what if you're maximizing geopolitical influence? Do you look for a different set of variables? Is manufacturing output more or less correlated with geopolitical power than stock market capitalization? I think that's a really interesting question. I don't know the answer.
- [32:02]
B
Yeah, that's a good question. And I feel like we're venturing into theories that I'm not totally comfortable with in terms of which one's better. Right. I think we have to think about like, I think the smartphone market in China is a really fascinating example. Clearly the policy isn't substitute away from American technology as fast as possible. So far it has been make globally competitive phones that we could sell into the market. Right. I remember, do you remember, Chris and Jordan, when China tried to make its own 3G standard? And the American response to that among the industry was you can't do that. That essentially says we can't sell into the Chinese market. You have to go to a global standard. And China looked at that and said, you know what, actually you're right. We actually need to compete globally. That is the path forward. I think the government wanted it and.
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A
The Chinese firms pushed back. That ended up in the dynamic.
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C
Right.
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B
And I think it's actually served China quite well. Right. If you look at the smartphone market now, unless you're supplying to the Chinese smartphone market, you are not really a competitive supplier into the smartphone supply market, or at least you're very limited. Right. And so I think in terms of, if you're looking at it from a Chinese perspective, I think it has helped your. It has had numerous benefits. Are you more self sufficient than you were to some degree? Would you be more self sufficient if you were to say we need to have our own standard, we need to have our own goods? That's a different world. But they didn't choose that. So I think it's really instructive and I think instructive for the AI world as well. How far do they want self sufficiency? Because if you look at the semiconductor industry and the markets they serve, it is really about international technology partnerships. What is an Nvidia gpu? It is an American technology coupled with Korean and American HBM technology made in Taiwan, packaged somewhere else and sold to globally. That is incredibly powerful. And if China's response to that is we're going to do everything ourselves, I think that's inherently not a winning hand for them. So I don't know how far they want to take this as much as they're saying they want to be self sufficient.
- [34:52]
A
All right, let's do the sharp version of the Chris question. Cute. $4 trillion valuation you have there. Apple, Google, wonder if a World War 3 would get in the way of that. And if a sort of dramatic conflict or even a sharper version of some, you know, economic warfare escalation, like if the rarest thing wasn't just like solved, is what the domestic manufacturing capacity, which the sort of fast fashion manufacturing version of like the BYD seomi, even DJI version of kind of economic productivity, which is something that the Chinese model seems to emphasize, would maybe give you a bit of an edge or have some benefits above the kind of like America, giant richer companies that are more globally dependent.
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B
Yeah.
- [35:56]
A
And don't make as much stuff at home.
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B
Right. I think you have a couple of good points here. The first point is has America forgotten or has it not exercised its manufacturing muscle to scale up quickly across the board? And I think the answer is probably yes. And we've encountered a lot of that during chips and I'll come back to that and what that means. But secondly, I think it is important to recognize that if you are planning an economy around wartime scenarios versus peacetime scenarios, they do look very different. Planning around the peacetime scenario is inherently more prosperous because you're aiming for efficiency and efficiency just means more production and more productivity. If you are aiming for resilience solely, then there's going to be added costs and that just means less overall prosperity. Now there's all sorts of questions about, okay, if you aim for more resiliency then inherently more manufacturing capacity and that means more distribution of different types of jobs and goods across the economy. That's a lot of things we could get into there about the regional impacts and sectoral impacts. But the larger point I want to make is if you are just thinking about which economy is best in a wartime scenario, power competition, then quite frankly, CHIPS ACT is not the answer. Yeah, right. The scope of which and the funds with which we had to do with. It's not the answer. And the reason why I say that is because it is a question I was asked quite a bit when I first came in. We had folks from the national security world, the intelligence world and others who asked the question can we use this to de risk from China and Taiwan? And I said with $39 billion, no. Right. And secondly, if you gave me $3 trillion, maybe, but even if I could, why would you now saying that we might look foolish say five years from now when there is a huge disruption and we wish that we could have done that, but executing a wartime scenario in peacetime is really difficult and the market is going to fight back on it. So for example, we could have said at CHIPS act we have a production target across different technologies. We could have said we want to be self sufficient in leading it. Logic semiconductors, maybe they don't have to make everything in the United States, but if we say consume 50% of leading edge logic, which now we consume more because of how much we produce AI now then we need our production targets to be 50%. We've discussed that. And the reason why we didn't go there were a lot, but I'll mention a couple. One, if you mention a production target, the thought immediately goes to we need to be self sufficient. And that is an autarky question at that point. And I'm not sure if I wanted, I did not want us to do that. I wanted us to have more resiliency. I didn't want us to be self sufficient necessarily because self sufficiency doesn't like. I don't think that was the goal of chips. And also it would take a lot more. And if you wanted to do that, we would need to build so much capacity all at once in the US that quite frankly it would crash the market if the applicants themselves who had to build the thing were willing to do it, which they were not. There were a lot of questions with that. Right. And so you could think theoretically about which one's better, Xiaomi or Apple. And the benefit of Xiaomi and BYD is that we could scale up quickly and produce things more quickly. I get that. But I think it is different now. We live in a different world than we did say even five years ago, where I think the question now is automatically asked where do our stuff come from? And can we diversify right away at the beginning of things taking off rather than like trying to fix it at the end. And so I suspect there's a middle ground here in which we could optimize for some level of resiliency rather than going all the way to the wartime scenario planning.
- [40:29]
A
Yeah, And I think it is a bit of a, I don't want to say a red herring, but like the world that the base case is maybe not World War 3, but kind of economic, Cold war, trade, war wrestling. And I guess with that as a sort of backdrop, which wasn't something that like had entirely hit even in 2022. I mean we started to have the export controls but, but Chinese export controls and sort of to the Chinese like rare earths, snapback was still like a thing that was just discussed in the think tank papers, but not necessarily a reality. But I guess for both of you guys, when thinking about the sort of like efficiency versus resiliency trade off, if we are sort of assuming five or ten more years of the US and China trying to get one up on the other by cutting off certain supplies or using that as leverage to get other things. How does that dynamic end up feeding into where you want to spend time and effort and bacon in efficiency?
- [41:42]
C
Could I pick up on the base case isn't World War III point? Because I'm sure. Well, A, appreciate your optimism. B, but there's a really complicated kind of timing, expectations dynamic around here. So if you take it as the fact that base case is not World War 3, which I indeed hope it is not, and then you prepare with that expectation in mind, you make yourself unable to. To stand up to the other side if they are in fact preparing for World War iii. And then in a crisis, you can't actually stand up to them. And the crisis doesn't get all the way up there because you have to fold earlier down the escalation ladder. And so you get back to the kind of Cold War era. Why do you need 10,000 nuclear missiles? And it's because being able to go all the way up the ladder actually has an ability to. Has an impact on your ability to stand on the other side during a crisis. And so on the one hand, I'm totally with Anne. You wouldn't want to pay a $3 trillion price tag today to insure yourself against something that is probabilistic and might not happen. On the other hand, if you follow that logic all the way to its conclusion, you end up unable to stand up for your interests at all. And that's actually a really tricky balance. I don't know where I would fall on that kind of spectrum of answers.
- [43:01]
B
Yeah, and these are good points, and these are hard questions, and I'm glad that smart people are smarter people than I am. So certainly are engaging with these questions. Certainly folks that you've been on the podcast before. Yeah, this is Jordan. Yeah, so now I'm going to come back to the four Cs and why I wanted to divide it into those, and I'm going to focus on the second one because I think we all understand capacity. Right. That's what you're getting at, right? Which is can we scale up quickly and build capacity quickly? I think we all get that it's a challenge. Right. If you look at the experience that TSMC had in Arizona, at first, it was a rough go at first. Now they're executing really well. The fact that they are yielding the 4nm at really competitive rates, I think gave them a lot of confidence they could execute more. So there is a timeline to this. And so the first ones through the wall were always going to be heroes and champions. To me, because they, they're taking a chance in an American ecosystem that has atrophied for a long time and they're taking the risk to do that. And there's so much money the government can give and they have to cover the rest. So customers that are willing to say let's try it, and manufacturers that willing to say let's risk our future of the company on this, like to me they are underappreciated and we should all thank them for that. But let me come back to the capability question. One of the things that you lose when you don't have fabs and capacity is you don't have the capability which I would define as know how, right? Do you know how to manufacture that thing at whatever, whatever volume? In practical terms, if you're a, if you are a, say a fabulous manufacturer. The question that I would phrase it in that case is does Fab X in the United States is our good quality qualified at that fab? That's the way I would ask it. Because if it is not, the time that it takes to qualify for that power management chip, the GPU, whatever it is, at whatever node is a two to three year proposition. normal times. That's the first question. And the question that you ask sort of at the same time or later after that is well, what is then the capacity? You could ask the same question twice. So I remember there was a time when I was at Qualcomm, one of the supply chain managers were asking, because I was one of the economists there, is there slack capacity in the market? The answer was no. But you can't wait for there to be slack capacity at first. You have to understand if that fab could actually make the stuff, could you qualify it there? And you would be surprised. Even the best fabs can't make every product. And so a yield rate for a matured no Chinese FAB might be even better than say a TSMC for some products, right? They have different specialties. So if we define economic security, one parameter you can use is minimizing the time to recovery after a disruption, whether It's World War 3, whether it's a hurricane or earthquake, or a huge surge in demand because of a pandemic, whatever the disruption is, how do you minimize the time to recovery to normal settings. If you have to do capability building, bring in the know how, which is like within the fab, training the right people, getting the recipes right, that's a two year process somewhere on to your process and you have to build a fab Two in sequentially, that's a long time to recovery if you don't already have that in the United States. But if you have one, if you have the capability, if you have some level of qualification at say 7nm, 14nm, 28nm, then you have built in some level of resiliency in terms of shortening the time to recovery to your supply chain as a company or as a country. And so we looked at that too. And so to me, like, that kind of thinking didn't require us to think about a war, it just required us to thinking about, well, what's more resilient? And the challenge there was the market, when it's aiming for efficiency, would have corner solutions where you qualify everything in one location. So how do you then solve for qualifying at multiple locations for that same node? And then we thought about, well then can we pay companies as part of the CHIPS act, money, design, porting costs, those are sort of like practical questions to answer. So I would love for there to be a discussion about how do you measure economic security? Can we define something like time to recovery as a metric and then really dive deep into, well, what does it take to recover and what can the market bear? And then what does the government need to do in terms of sending out the supply and demand signals to solve for the optimal level of that? And to me, like, that discussion just doesn't really happen even in forums like this. But we had to think about all of that at CHIPS because when we were doing trade offs, we thought about, okay, is it more worth having some viable volume of, say, I don't know, TSMC's 28 nanometers in the United States than an additional 3 nanometer fab. Which one is better? Which one is more economically resilient for us? Some would argue it's the mature one, some would argue that it's the 3 nanometer one. It's a healthy debate, but at least you have a parameter in which you could debate it, right? And if you want to be really cold and calculated about it, you could put metrics on it and say which one is the highest number on that? That's what you build first. And then if you have additional dollars, you build the other one. Industrial policy doesn't really work that way, at least in the debating forum. But I found that in practice you almost had to do that whether people saw it or not.
- [49:16]
A
I mean, there's a bit of it. Which comes back to the Chris thing of if that's our framework, like you're only as strong as your weakest link when you go into a economic war or you know, escalation. So it's nice to fix one of them but like if it's not just fixing the thing, it's that thing multiplied by like the GDP impact or the employment impact of what that gap would deliver.
- [49:47]
B
Yeah. And I think that is your strongest argument Jordan for let's have more Xiaomis and BYDs which is Xiaomis and BYDs are not the result of a I think in your view like a super innovative founder. That said, you know what we need to do is do a fast catch up company on mobile phones and smartphones. It is a economic system that rewards fast following and scaling up quickly. Right. And if you were to compare two different systems and who would win in a war scenario, I could see where that argument is going. Right. Coming back to that, I would still think that there is more thinking that needs to be done about how do you optimize for both peacetime prosperity while living in a world of two power competition.
- [50:37]
C
But I think Dan is not only the kind of wartime scenario and I agree with you there, but there's also then the kind of economic warfare scenario that we're living in right now. And there the calculus is complicated to me because a got the question if you don't have this component, what's the downstream disruption? And so you're back to your kind of 10 cent microcontroller and your $10,000 car or whatever. But then there's the whose system can take more pain.
- [51:06]
B
Or willing to.
- [51:08]
C
Yeah. Who's willing to take more pain? And that's another facet where it seems like at least the experience in 2025 was that for a variety of reasons, some good, some perhaps less good, China is willing to take more economic pain than we are. Which is why rare earth controls of an experia situation that were not costless at all for China either in the short run or long run proved effective nevertheless.
- [51:34]
B
That's right. I think what's been fascinating listening to your podcast with your previous guest Jordan, is this dual thought of export control related Biden administration officials saying on one hand they were saying some would say I think the last podcast I think Ben would say if he had his way he would have done more semicab equipment controls right away. Right. And then I think I've heard either Jake Sullivan or some others say but we were judicious as to how far we pushed because we didn't want there to be an instantaneous and overreaction we were thinking about that too. So which, which is it? Right. And, and was there, these are smart people. So was there a thinking behind. You know, if we do this here is the, we could escalate this way. We're going to leave room for that, but we're going to exercise to say 20%. Right. Because that's the optimal outcome. I don't know what discussions they were behind that. I hope they had all these thinking. But then you also run up against like can we actually administer this and all the bureaucracy and you know, maybe that's the dominant thinking. But if national security resilience is then defined as who has the largest escalation power, then I guess you wouldn't look for a complete supply chain. You just look for the most vulnerable one and just dominate that. Maybe that's the corner solution. And I don't think that's where you want to be as an economy either. And so I would want there to be a diversity of supply chain resiliency and a system that could reward that. I think it's fascinating that financial institutions now are looking into how to fund resiliency into the economy, like the JPMorgan Chase Resiliency Initiative. I would love to see how that pans out. How would they define that and how do they define where to put their own money into and what will be their willingness to not optimized for profitability for the sake of resiliency as a bank? I mean, these are fascinating questions to me that is being played out in real time. And I hope that we will find that our resiliency system, however that ends up, is more dynamic, more prosperous and more secure than the alternative.
- [54:11]
A
And Jamie Dimon gives Tran talk a call. I, you know, the, the, let's stay on the like how to get on. Yeah, Chris, can you talk through your like, your like, like the offensive versus defensive mix in this sort of thing? Because you know, we were talking earlier just about how Dom, you know, how dependent the Siamese of the world still are. You just mentioned the financial system. That's a whole nother giant can of worms. If you are a Chinese economic policymaker stressed out about getting into some economic escalatory ladder with an American president.
- [54:59]
B
How.
- [55:00]
A
To tie the chips manufacturing industrial strategy piece of this with America developing and maintaining leverage over China in an economic context.
- [55:12]
C
Well, I don't have my thoughts completely straight on this issue yet, but the best explanation I've heard this is not mine, this is somebody else's. But is that intermediate goods are uniquely powerful as economic weapons relative to finished goods because the disruption they cause is so much larger. So if you cut off the sale of a smartphone chip, you disrupt the smartphone industry, but the sale of a microcontroller, you impact dishwashers and autos and a much broader. And if you cut off the sale of photoresists, if you've got a monopoly on photoresist, maybe you could shut down an entire country's production base if your monopoly is in fact, that strong. And so I think there are different offensive versus defensive dynamics around different types of products, But I'm not sure we've got a clear sense of how that generally falls beyond a general view that the earlier you are in a supply chain, the more disruptive potential you probably have.
- [56:17]
B
Yeah, I think also there is inherently a higher cost if a supply chain is already set and not emerging for substitution. So I remember when the Japanese government placed an export control on photolithography materials on Korea because of some unrelated political issue. And it was an odd moment for the industry because there's nothing they can do, the industry, there's nothing they can do to make historical grievances between Korea and Japan go away. I mean, try as you might, that's hard. Right. So what do you do? And I think it was really interesting that after Japan did that, they almost like, almost immediately moved to, like, almost soften it. If just to say, we can exercise this, but we're not going to. Right. So how does the industry react? It gives them a terrible choice. Live with the risk or encourage a domestic supplier that's going to be inferior for the next few years. And if and when that does come online, do you then redo your supply chain and your qualifications based on that inferior chemical? That's also a terrible choice to make. It's just anytime you introduce. Anytime you introduce a disruption in an established ecosystem, it's just hard. Which I think is fascinating about the expert controls and AI debates now. And Jordan, I think maybe this is a time when I could make a comment that I hope will not be mistaken for lobbying for Nvidia. Okay. You have had many guests on. And you've said on your podcast that you would like someone from Nvidia or someone that is, you know, advocating for Nvidia to come on and make the case that they should sell H2 hundreds into China. And you had many guests on that argue very powerfully about the national security arguments on the other side, which is you should not sell any there. And that it's all about, you know, the amount of compute if you're taking a long view and I'm not saying I'm advocating this necessarily, but I am concerned that the national security establishment in the United States and our national security champion, like it or not, in Nvidia, are talking such different languages towards each other that I think that's inherently risky. One thing that is not being mentioned is what is the optimal amount of American made AI chips in China? Is it zero or is it not zero? And I think you can make the argument that it is not necessarily zero for the very reasons we're talking about here. If you let that supply chain set into the AI ecosystem, it does give you leverage down the line to exercise that and take it away and have it be costly. Now, I don't think it translates necessarily directly from the photoresist example to an AI chip, but I think it is a debate worth having as to. Well, if you're playing the long game, as the amazing title that Jake has on his, on his podcast, is the optimal level of chip usage, American chip Usage in China 0 or is it something else? And I think that, I think that's an interesting thought experiment to have because I think what we're learning is escalation, dominance includes some level of usage of that good by the other side already or some dependence on it if you take that dependence away at the beginning of a supply chain being set. I think that's an interesting argument. The other thing I would say if I were on the other side of this, which I'm not, let's just be clear, I don't get paid by Nvidia in any way, shape or form is if you consider your customers to not necessarily be your chip purchasers, but AI developers who are using your code base. Is the optimal level of users from China 0 or is it something else? If it's not 0, then what is then? The appropriate export control policy to get that optimal level? Now you could still conclude it's zero because maybe it's all about AI compute power and you want to have the biggest lead, whatever it is. But I haven't heard that discussion and that debate in that kind of framework and I hope at some point there will be.
- [61:22]
A
I think the, the generic retort would be it's not zero because all these companies are using Nvidia chips in Malaysia and that's kind of the base case right now. So you, there is like a bit of splitting the difference here where like yeah, they're still training their models and developing them and deploying them on these chips. They're still buying these chips and they're still, you know, they're like Ali Cloud and Nvidia are like announcing partnerships in Brazil and stuff. So it's not like these ecosystems are entirely separate. But the, the question of like bringing, like having a legal pathway to like get the chips physically in China seems to be where would, would. I'm positing the Ben Buchanan retort here.
- [62:08]
B
But yeah, no, and that's very fair and I have, I have enormous respect for your previous guests like Chris McGuire and Dimitri and others who have argued for pretty much zero and as much lead as possible. But I think it's always worth considering the other side and thinking about what is the optimal outcome, especially if you believe that this is going to be a competition for the next couple of generations and if you believe that there's going to be shifts in technology that we're going to be inherently better at making and that you do want escalation, dominance. All those things I think has to be considered. And certainly I'm not an expert on export controls or anything like that. But when you think about economic security, I also don't want, don't think it's the optimal thing to be producing 100% of leading edge chips in the United States. Right. I think Taiwan has served us really well. I think Korea has served us really well. And I think the international relationships that have been formed as part of that I think serves the world well as well. And I would hate for us to lose that or at least have the impetus for us to lose that too.
- [63:26]
A
So speaking of thinking, big thoughts and earlier, Dan, you were like, I hope more people are, I hope there are lots of people going to take up this mantle of some of the mix of questions that we've been exploring today. So we're going to be launching an essay contest trying to broaden the field of folks considering what economic security means, how industrial strategy should be deployed to pursue that. And I would just love to spend the next few minutes talking about what you think the first few questions we should pose to the world that can be fruitfully tackled in 3,000 words or less.
- [64:09]
C
I think this question on escalation management, how do you know which side is more capable or willing to sustain? The cost of escalation is key. I think there's been miscalculations around that in a big way the last 12 months on our side, and that's wide open. I think also learning lessons from the Cold War, perhaps, or maybe there are other places to learn lessons from about deterrence and how do you produce it is a wide open space. We clearly don't have deterrence right now. Neither we nor the Chinese have deterrence, which makes it particularly unstable, at least stable deterrence over the long run. But I also don't know what conditions would actually enable deterrence in the kind of economic security space that also seems ripe for interesting thinking.
- [64:56]
B
I do think that it would be great if we could introduce some economics thinking thinkers into these questions about what resiliency means and how it should be defined and what metrics would go around that. I don't think there's enough discussions between economists and international relations thinkers and national security professionals. One of the magic of chips was that all of those kinds of professionals were all mixed into one pot to come up with a strategy. And it was just so fun to talk to people from the national security agencies, intelligence agencies, investment bankers, people that worked in childcare, and for us to all think about what this all means together and for us to present our thanks to leadership. So yeah, so more rigorous definitions around economic security and metrics and optimization, which I think is economists really good at. But frameworks, I think we just need better frameworks and thinking around that, that policymakers who come in and say, okay, this is a framework we're following and it doesn't have to be one framework, but I think some rigorous debates around that would be helpful. What are some other things? I think institutional design around economic security and execution is worth some thinking about. So CHIPS act had two components to execution in institutional design. One was at the Treasury Department in terms of a non competitive tax credit, meaning if you build it, you don't have to compete with other companies. There weren't finite number of tax credits that you had to fight for. It was unlimited. You could get it if you built it. That was one component very helpful. And then there was another component in which Congress delegated this authority to the Commerce Department and the Commerce Secretary to execute the grant program as well as establishing R and D. We noticed, you know, in the economic security statements and work from cfr. One of that was for there to be an economic security office in the Commerce Department for them to take it on. I would love to think about how that actually would look like in practice. But I would also I think at this stage have an essay that would compare the strengths and weaknesses of different types of institutional execution of this. So for example, what would a independent agency like say a Federal Reserve for industrial policy look like? What kind of mandate would they have delegated from Congress? What would their metrics be and what tools, would you give them? And I think this is a relevant question that I think will be really interesting for industry at least because they are having to contend with very different approaches to industrial policy execution depending on who is in the White House. I am not saying one is better than the other. Congress did delegate this authority to the Commerce Secretary who is inherently answering to the President, and so they took that risk. So for Congress, is that a risk that you want to continue to take for the sake of keeping it within that process, or do you want there to be less fluctuation with political changes and keep it more predictable? I think one of the strengths of East Asian industrial policy, if you will, isn't necessarily how much subsidies they give. This is always a misconception that I found puzzling. There's always this belief that Taiwan and Korean governments are subsidizing fabs quite a bit. They don't actually. But what they do do is create a very stable business environment for these critical sectors to manufacture. So there's less permits, more predictable things that you have to jump through. And I think one thing we learned in CHIPS was that we just don't have that here yet. And there needs to be more work to establish that. One practical thing that I think we ran into at chips, and I don't know exactly how we solve for this, is once you make a deal and there was so much focus on let's make deals, right? And there's still a lot of focus on that because there's still money left to be spent and deals to be renegotiated. Once you make the deal, how do you follow up with them? These are five, ten year projects. So there was this portfolio manager whose purpose was to make sure that the conditions are being met if the conditions needed to be changed. What if technology shifts and we want them to produce some other thing? How do you do that within the CHIPS team concept, Right. Do you want that still to be in the Commerce Department? Do you want that to be somewhere else? How do you want to do that? I think there's strengths and weaknesses to all these approaches. I don't think it's a good outcome for you to just do a tax credit. I don't think it's a good idea just to do grants, but some kind of thinking around how to institutionalize this now that we've had our first lessons with chips, I think will be really, really interesting. Secondly is how much coordination do you want between protect and promote? Because in practice, the expert controls and promotion of building fabs there was really no formal mechanism for there to be good communication between these agencies and these. Now it happened, right? So I would have good conversations with Ellen Esteban team, really good, you know, really good staff on both sides. They were able to communicate more. But oftentimes we kind of looked at each other and said, you know, we should work with each other more formally, but we don't unless there was like very specific interagency ask for us to do that. But that was rare. So, for example, we had to define what we thought critical technologies were that we wanted to prioritize at chips that we wanted to invest in. You could easily think of that as well. What critical technologies then do we then need to control? Right. But we didn't think about it that way until we had a discussion with folks at BIS and, and Defense and others. Is it worth creating like a watchtower where everything related to industrial policy is being considered and you give them the tool sets, both demand side and supply side and export control side to execute this vision that you have rather than doing everything piecemeal? I remember having a conversation with the commerce Secretary and I told her, I said, you realize you're the closest thing we have to a semiconductor czar. You're the only one that really sees what we're doing in terms of control as well as investments. And it's really up to you as to how much we coordinate, how much you want us to coordinate. And it feels like maybe it should be someone's responsibility to oversee everything there. And, you know, the White House did a lot of that, but they had a lot of different things that were pulling them in different directions. And so in a world in which it's not just semiconductors, but all critical sectors capabilities, does it make sense to create? What institution does it take to execute all of that? I think is an interesting question for us to ask in usa Question.
- [72:49]
A
Yeah. And I think, particularly as we're living in a world where the Department of Defense is increasingly getting these huge loan authorities and striking purchase floor, price, floor agreements and what have you, that Commerce, Defense conversation, as well as all these export agencies, which we haven't really talked about, but there's a lot of different pieces and a lot of different tools on the table. And, you know, there is not one craftsman. There is not some central, like, you know, netty organization that's in charge of, you know, dialing all these things in for. For better or for worse, I guess.
- [73:33]
B
But yeah, for sure.
- [73:34]
A
Okay.
- [73:35]
B
Yeah.
- [73:36]
A
All right. Last one for you, Dan.
- [73:38]
B
Sure. The.
- [73:40]
A
Okay. Say you have like $5 million to spend to build a little team or commission some, you know, more ambitious things than what a China Talk essay contest can deliver. How are you spending that money?
- [74:00]
B
$5 million.
- [74:02]
A
Okay, 10.
- [74:03]
B
No, I'm going to, I'm going to, I'm going to, yeah, sure. I'm going to exclude myself here. I think, I think the CHIPS team, the one that was there now, the one that's, the one that's there now, one that was there before, is one of the best group of people I've ever met and I think a national treasure as a team and what they were able to do and what they're continued to be able to do. If I had $10 million, I would find a way to pay all of them more money so they could stay longer and continue to execute because I think institutional muscle is very important for the country. So if there's a way to, you know, there's some people obviously that came from, they've made their money and they came to government to serve. Maybe they don't need the pay bump, but there were a lot of up and coming early career folks that could have gone elsewhere that decided to join. I would have loved to find a way to compensate them like more market value so, so that they could stay and longer. So that's maybe where I would spend 10 million. If you were to say 10 billion, that's a different question. But I think 10 million, I wanted to say, I think we're in an interesting time, Jordan, in which we do lots of technical analysis here at Tech Insights and we sort of look at, we have pretty much the best market intelligence. As to the industry, what's striking to me is the US and the, and China are both so dependent on foreign sources for their AI hardware and critical technologies. Neither are anywhere close to being self sufficient. And I suspect that'll be the case for many years. And so industrial policy is as much as we talked about insourcing and domestic production, it's also about international relations too, recognizing the dependence. And as we said, maybe there's a right level of dependence. And so I have to, you know, I have to give a lot of credit to companies like TSMC and Samsung and SK Hynix for choosing to invest and partner with the United States in whatever political environment they see, find themselves willing to look past the faults and choosing to believe in the best of America and partner with them. And that partly because of White House pressure, partly because of customers sending the right signals. But I think at heart when I talk to these executives, I think it's because they fundamentally believe in the United States and what it stands for. And I think we should just never forget that. And so when I said I would love for the Outro song to be Kendrick Lamar's Mad City, there is a line at the very beginning in which Kendrick's taken us down memory lane of his childhood and the neighborhood he grew up in, which was really rough. Some violence happened in his neighborhood, and someone's talking to him and he says, man down. And it says to Kendrick, where are you from? Questioning where he is from. And you should probably bleep this out because I'm going to, you know, drop the F bomb here because it's in the song. He says, fuck who you know, where are you from? Right? And then to reiterate the point, worry your grandma. Stay right. And I thought of that song when I was looking at the images of Korean workers in Georgia being shackled and being deported. And I understand the argument about, you know, being law abiding and everything else, but when you look at the news coverage in Korea, one commentator, I think it's sort of seared into my brain. He said, it seems the United States wants our money and our technology, but they don't want us. And I think that in a world in which both the US and China are dependent on technologies from other sources and industrial policy is as much about international relations as it is domestic production, it really matters what kind of environment that we create for companies and for workers that are here to be able to feel welcome and be part of the United States when they're here. So I'm hoping that that's part of the goal of industrial policy, because at the end of the day, we're not just talking about technologies or countries, we're talking about people. And when I remember when I was working at sk, being sent to the United States as an expat was like a coveted thing, right? That means they could send their families, they could educate their children in the United States, perhaps go to the United States, like colleges and things like that. It's something that a lot of executives and best talent wanted to do. I would hope that we could continue to have that as a soft power draw that is an integral part of industrial policy, no matter where you fall into the political spectrum and where you fall into sort of hawkishness against China. I think it's just the integral part that underlies the basis for both our hard power and our soft power as a country.
- [79:51]
A
Well, I think that's a beautiful place to end it. Dan Kim thanks so much for being a part of Chinatalk.
- [79:57]
B
All right. Thanks, Jordan.