(Preview) ‘Moderately Loose’ and Cautiously Stimulating; Nvidia Under Investigation; Broadening Export Bans; A TikTok Verdict and a Trump Prayer

Summary

Sharp China with Bill Bishop

Episode: (Preview) ‘Moderately Loose’ and Cautiously Stimulating; Nvidia Under Investigation; Broadening Export Bans; A TikTok Verdict and a Trump Prayer

Date: December 11, 2024
Hosts: Andrew Sharp and Bill Bishop

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Episode Overview

In this preview episode, Andrew Sharp and Bill Bishop discuss recent developments in US-China relations, focusing on China's antitrust investigation of Nvidia, the broader implications of the ongoing semiconductor trade war, and China's increasingly tough export controls, especially regarding critical minerals. The conversation delves into the strategies and possible motivations behind these actions, adding crucial context about how these moves fit into the larger dynamic as Donald Trump prepares to assume the US presidency.

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Key Discussion Points and Insights

1. Updates on Chinese Defense Minister Dong Jun

• [00:33] Dong Jun met with foreign delegations in Shanghai, but lack of photos or video raises questions.
• Bill Bishop cautions against jumping to conclusions about Dong Jun’s status (i.e., under investigation or not), noting limited public evidence.

  “I think it would be risky to say he met with some foreigners… not actually have had it happen.”

• The broader point: In China’s high government positions, anxiety and insecurity remain high.

  “Hard to rest easy in a lot of positions these days.” (Bill Bishop, [01:45])

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2. China’s Antitrust Probe into Nvidia

• [01:48] The Wall Street Journal reports China’s State Administration for Market Regulation (SAMR) has launched an antitrust investigation into Nvidia, specifically relating to its 2020 acquisition of Mellanox.
• This comes just one week after the US tightened semiconductor export controls to China, seen as a retaliatory move.
• Nvidia’s China revenue: $13.5 billion in the past four quarters (12% of global revenue).
• The investigation centers on whether Nvidia is violating bundling conditions imposed by SAMR as part of the Mellanox deal.

Regulatory Background and Precedent

• [03:38] Bill Bishop outlines that SAMR’s powers were significantly enhanced with an amended anti-monopoly law two years ago.
• He cites past major regulatory actions against companies such as Qualcomm (2015, nearly $1 billion fine) and Intel (prevented from buying Tower Semiconductor).
• Penalty potential: Fines could reach up to 10% of a company’s previous year’s revenue (uncertain if this is global or China-only).

Notable Quote – Regulatory Leverage

“It is not clear if that’s global or domestic revenue. But even if it’s just domestic… significant amount of money.”
(Bill Bishop, [04:12])

• [05:43] Nvidia is facing antitrust scrutiny not just in China, but also from the US Department of Justice. This shows the high-stakes, global nature of tech oversight.

“It does seem like it’s a pretty clear response to the chip controls and part of that ongoing story in terms of the leverage that both sides… have as we move forward here.”
(Andrew Sharp, [05:43])

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3. US-China Semiconductor Wars: Loopholes and Strategic Risks

• [06:45] Andrew Sharp voices frustrations about the US chip controls:
  • The initial 2022 controls (implementing after PLA exercises in Taiwan Strait) gave national security side the upper hand.
  • But, [07:39] “the holes in that policy have become clearer and the Biden administration hasn’t been nearly as aggressive about patching any of those holes.”
  • Even after those PLA exercises became routine, policy fixes haven’t materialized.

Notable Quote – Policy Frustration

“It’s just a little bit maddening. …China’s responding with countermeasures to even the Swiss cheese version of the chip controls. So if that’s how it’s going to go, why not implement chip controls that are actually going to achieve their intended purpose?”
(Andrew Sharp, [09:23])

Rare Earths and Critical Minerals Dependency

• Both hosts underscore that the risk to US companies extends far beyond sales in China:
  • “All these companies are reliant to varying degrees on critical components that come from China.” (Andrew Sharp, [08:20])
  • Example: Nvidia’s dependency on Chinese-sourced dysprosium for certain capacitors.

“A bunch of companies and a bunch of industries could suffer.”
(Bill Bishop, [09:20])

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4. China Expands Critical Minerals Export Ban

• [10:21] New York Times headline: “China’s critical minerals embargo is even tougher than expected.”
• Key concern: The embargo extends to companies worldwide that re-export Chinese minerals to the US, targeting supply chain intermediaries in Japan, Europe, and South Korea as well as the US.

Notable Quote – Strategic Targeting

“China’s critical minerals embargo is, quote, a direct threat to Japanese and European interests to push them away from the US with the hope and expectation the Trump team will further that objective.”
(Citing Susan C. Schwab, [10:59])

• Bill Bishop agrees the embargo mainly targets US allies, especially Japan, South Korea, and the Netherlands.

  “I wrote that in the newsletter… basically I thought it was most likely targeted at Japan and Japan, South Korea and the Netherlands.”
  (Bill Bishop, [11:18])

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Memorable Moments & Quotes

• “Hard to rest easy if you’re the Defense Minister these days.”
  — Andrew Sharp, [01:40]
• “They might wonder is it really worth it to keep the Chinese market if it’s only 12% of their global revenue declining?”
  — Bill Bishop, [06:15]
• “We, for the time being, get Secretary Raimondo on the podcast before she steps down.”
  — Bill Bishop, humorously, on seeking answers from the Commerce Secretary ([09:47])
• “Certainly looks that way. But that is an assumption that we are making. And it could be separately. It could be like legitimate bad business practices by Nvidia. Yeah, it certainly is coincidental if that’s the case.”
  — Bill Bishop, on the timing of investigations ([09:53])

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Timestamps for Key Segments

• [00:33] — Dong Jun meeting updates and speculation
• [01:48] — Introduction of Nvidia investigation by Chinese regulators
• [03:38] — Context on China’s antitrust and trade leverage history
• [05:43] — Comparison to US scrutiny of Nvidia, global ramifications
• [06:45] — Frustrations with US chip control policy weaknesses
• [08:20] — Discussion on rare earths and upstream supply chain risks
• [10:21] — Analysis of China’s critical minerals embargo, broader threats
• [11:18] — Embargo’s impacts on Japan, Netherlands, and South Korea

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Summary

This episode captures the evolving dynamics as US-China tech and trade tensions escalate. Bishop and Sharp provide nuanced context on China’s regulatory moves against Nvidia, alongside analysis of the tit-for-tat strategies on both sides. The discussion explores real-world business impacts, such as potential financial penalties, supply chain security, and the wider repercussions for US allies. Both hosts frame these events not as isolated incidents, but as maneuvers that foreshadow further disruption as political and economic pressures rise—especially with Trump’s presidency on the horizon.

The preview ends with a call to subscribe for the full episode and further analysis.

Transcript

[A]

Foreign. Hello and welcome to Sharp China. I'm Andrew Sharp and you are listening to a free preview of today's episode. We should get to Nvidia. That was a great segue by you about a minute ago. We should also note, just as a follow up to last week's episode, Defense Minister Dong Jun met with the heads of delegations of various countries attending the second seminar on security situation in the Gulf of Guinea in Shanghai on Thursday. So at least there were.

[B]

But so, but there have been no pictures or videos that I've seen. So okay now, now I think, I think it would be risky to say he met with some foreigners and that not actually have had it happen. But of course for those who want to believe that it's, you know, it's all true that he's already, already under investigation, then that's the fact that there aren't pictures or video will lead some to be able to say it's all, it's all a big sort of conspiracy.

[A]

You never know.

[B]

A big, a big cover up. No, I think again we talked about it last week. It may be too early to tell with, with Dongjun. He may end up caught in something. He may have been called in for discussions and that was somehow picked up by like US intelligence and maybe they wires got crossed. Wires got crossed. It was sort of over analyzed as this means X when it really met they talk to him. But that doesn't mean they won't do X later. So, but so far seems like Dongjun is still probably pretty nervous and sweaty but still, still, still out there.

[A]

Hard to rest easy if you're the Defense Minister these days.

[B]

Hard to rest easy in a lot of positions these days.

[A]

That's right. Well we'll keep everyone updated if news emerges on the Dong John front. Maybe even video photo evidence that he's not under arrest or under investigation. Speaking of investigations though, the Wall Street Journal writes Beijing fired its latest salvo in the U.S. china semiconductor wars by announcing an antitrust probe into U.S. chip juggernaut Nvidia. A week after Washington ratcheted up controls on China's access to high end semi semiconductors. Industry watchers said the move was aimed at sending a message that China was won't stand by quietly when targeted by trade and technology sanctions, a message with particular relevance as Donald Trump prepares to assume the presidency next month. Shares of Nvidia, which makes the bulk of the cutting edge chips that power artificial intelligence servers, were down 2.3% in midday U.S. trading. The company's China revenue totaled $13.5 billion in the past four quarters, accounting for 12% of its global total. And just for reference, what's specifically being investigated by the State Administration for Market Regulation is Nvidia's takeover of Mellanox, which was lauded by Nvidia as a, as a way to sell a more comprehensive product by also providing the networking gear to connect GPUs. And the state Administration for Market Regulation thinks that they may be in breach of any monopoly regulations because of the bundling of products, at least according to the Chinese agency and Bloomberg. So how much precedent is there for an investigation like this? Is this a new kind of choke point that China could be utilizing more frequently?

[B]

I mean they, they've the same are the State Administration for Market Regulation. I mean they've, they are a significantly strengthened body. The anti monopoly law has been amended two years ago and it's significantly more powerful. It's been used. I'm looking at a Ticene article right now. Even before the amendment in 2015, Qualcomm was fined 8% of its 2013 Chinese revenue for violations which at the time was almost a billion dollars. You've got.

[A]

And they held up a Qualcomm too.

[B]

And they blocked intel from buying Tower Semiconductor. Yeah, and according to the law, the amended anti monopoly law allows fines of up to 10% of a company's previous year's revenue for anti competitive behavior. But it is not clear if that's global or domestic revenue. But even if it's just domestic revenue, that's a pretty significant amount of money that they could theoretically find Nvidia. And actually so the announcement yesterday was very, very thin. There's a good Tyson article today. Let me if I can just read off it because please, the Chinese. The regulator signed off on the 2020 deal and apparently there were seven conditions that the company agreed to only but they say only five of which were disclosed publicly. The five conditions that were disclosed publicly were the companies must not enforce any form of bundling when selling Nvidia GPU accelerators and Mellanox high speed network devices in the Chinese market, nor impose any unreasonable terms on buyers. They must not restrict customers from purchasing or using either type of product must not discriminate against customers who purchase only one type of product continue to supply relevant products to the Chinese market under fair, reasonable and non discriminatory principles ensure interoperability between Nvidia and Mellanox products and third party devices maintain Mellanox's open source commitments for certain software. The regulator has not said specifically what of those seven in total conditions Nvidia might be violating. So we don't actually know for sure.

[A]

Right. Well and I mean Nvidia is also under investigation or might be under investigation. There was some dispute, but I mean there's scrutiny on Nvidia in the United States from the doj and so certainly it's not unique to China and their regulators, but it does seem like it's a pretty clear response to the chip controls and part of that ongoing story in terms of the leverage that both sides of the US China relationship have as we move forward here.

[B]

Right. And then the question really for Nvidia is how. I mean they have. And I think Ben Thompson over Susecary, he may have written about Mellanox Nvidia. I mean I think they, it's become a very, very, very strategic part of what they sell now. And so forcing Nvidia to, you know, depending on what they sort of what the Chinese want as the sort of the, the mitigation of the remediation. You know, they might wonder is it really worth it to keep the Chinese market if it's only 12% of their global revenue declining?

[A]

Right. Well in that respect the chip controls sort of insulate Nvidia a little bit here because they're less reliant on that market already and going forward, who knows how much they're going to be able to rely on the PRC market. I was surprised it was only 12% of the global revenue. I will say I, I read this story and found myself thinking back to our conversation about the chip controls. There were two thoughts I had that were nagging at me after we finished talking last week. The first one has nothing to do with Nvidia. But just for my own sanity, I need to get this off my chest. We've mentioned on this show a number of Times that the 2022 chip controls were implemented in part as a reaction to PLA exercises in the Taiwan Strait after.

[B]

Well, they were, they were, they were able to get through with fewer water with less watering down.

[A]

Correct. That created an opening for various people on the national security side to put together aggressive, comprehensive and sort of forward thinking restrictions. What makes me feel like I'm going crazy is that the holes in that policy have become clearer and the Biden administration hasn't been nearly as aggressive about patching any of those holes. But it's not like the PLA exercises in the Taiwan Strait have stopped over the last two years. Like from what I can tell, the reaction to the Pelosi visit just established a new baseline and those sorts of exercises now happen on a regular basis, including this week. And so it's just a little bit maddening. The other thought I had, which is exemplified by this story, is that as much as the chip companies and someone like Jensen Huang might be worried about protecting certain categories of products that are being sold in the China, I also think this is a reminder there are bigger risks than just those sales, the sales of advanced chips, advanced chip making equipment. Because like as an example next on the rundown, we have rare earths. All these companies are reliant to varying degrees on critical components that come from China. I read a story in the New York Times a couple weeks ago that mentioned Nvidia is reliant on dysprosium from China for some of its capacitors. And if the relationship really devolves into a tit for tat, there are a bunch of different ways that a company like Nvidia could suffer. So it's not just about protecting the market.

[B]

A bunch of companies and a bunch of industries could suffer.

[A]

Yeah. And you see this response from China, I think that's what makes the watered down version of the chip controls so frustrating, is like China's responding with countermeasures to even the Swiss cheese version of the chip controls. So if that's how it's going to go, why not implement chip controls that are actually going to achieve their intended purpose? But I guess we have to give up on that.

[B]

Or we, for the time being, get Secretary Raimondo on the podcast before she steps down.

[A]

That's true.

[B]

She's Downtown episode. She is downtown for now. And again, you know, we, everyone is assuming that this Nvidia announcement, the investigation announcement, is linked to the latest round of chip controls. You know, no one has said, yes, it's tit for tat. Certainly looks that way. But that is an assumption that we are making. And it could be separately. It could be like legitimate bad business practices by Nvidia. Yeah, it certainly is coincidental if that's the case.

[A]

Indeed. All right, well, to keep it moving, here, a headline from the New York Times. China's critical minerals embargo is even tougher than expected. And they write, alarm is rising among multinational companies doing business with China about Beijing's decision last week to order a trade embargo on the export of four critical minerals to the United States. The central subject of concern is a provision extending the ban to companies in other countries that transfer minerals to American firms after acquiring them from China. China's critical minerals embargo is, quote, a direct threat to Japanese and European interests to push them away from the US with the hope and expectation the Trump team will further that objective, said Susan C. Schwab, who was the United States trade representative during President George W. Bush's second term. Bill, do you have any thoughts on that development?

[B]

No. I mean, I agree. I wrote that in the newsletter when the Controls the announcement came out last week that basically I thought it was most likely targeted at Japan and Japan, South Korea and the Netherlands.

[A]

All right, and that is the end of the free preview. If you'd like to hear the rest of today's conversation and get access to full episodes of Sharp China each week, you can go to your Show Notes and subscribe to either Bill's newsletter, Cynicism, or the Stratechary Bundle, which includes several other podcasts from me and daily writing from my friend Ben Thompson. I'm an incredibly biased news consumer, so I think both are indispensable resources. But either way, Bill and I are going to be here every week talking all things China, and we would love to have you on board. So check out your Show Notes, subscribe and we will talk to you soon.