(Preview) Myriad Holes in US Chip Controls; New Reports on TSMC and Huawei; The Latest "Stimulus" News; Mixed Signals on Private Tutoring

Summary

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Episode Overview

Theme:
This episode of Sharp China with Bill Bishop delves into the intricacies and shortcomings of US chip export controls on China, particularly the myriad ways Chinese companies—most notably, Huawei—are evading these sanctions. The hosts also examine new revelations involving TSMC (Taiwan Semiconductor Manufacturing Company) and Huawei’s supply chain tactics, as well as broader questions about regulatory capture within the US government and the ongoing challenges of enforcement. The conversation is timely, as it arrives amidst new reports and just ahead of a pivotal US election.

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Key Discussion Points & Insights

1. Opening Banter and Sports Talk [00:21–02:23]

• The episode starts on a light and humorous note, with Andrew and Bill discussing Washington Commanders football and their personal sports loyalties.
• Memorable Quote:
  • Andrew Sharp: "Are you backing out of the podcast? Two years down the drain." [01:02]
  • Bill Bishop (lighthearted): "Come up at our second anniversary. I'm just not sure I can do this anymore." [01:05]
• Sets a relaxed, conversational tone before pivoting to China and industry policy.

2. Revisiting Chinese Sanctions Evasion in Chip Manufacturing [02:23–04:42]

• Andrew cites a comprehensive article from Semi Analysis titled "Fab Whack a Mole: Chinese companies are evading U.S. sanctions."
• The article highlights Huawei’s massive, state-backed efforts to build a domestic semiconductor supply chain and evade restrictions.
  • Quote from Semi Analysis:
    • "Of all sanctions evading schemes, Huawei's Fab network is the most alarming. It is a clear national security concern as Huawei is CCP affiliated and a leader in Chinese AI." [02:53]
    • "The scale and speed are staggering… Huawei Fab Network will spend $7.3 billion on foreign labor fabrication equipment in 2024, making it the fourth largest purchaser in the world... More than half of this equipment currently comes from US companies." [03:39]
• Andrew frames the conversation by emphasizing the seriousness and breadth of the issue and notes the lack of substantive government enforcement.

3. Regulatory Capture at the US Department of Commerce [04:42–06:09]

• Bill Bishop explains how industry capture affects the Bureau of Industry and Security (BIS) within the Commerce Department.
• Ex-BIS officials often move to industry roles at companies affected by their regulations, creating a revolving door that complicates enforcement.
• Bill Bishop:
  • "Inside Commerce you have BIS, and BIS has long had a revolving door between regulators and then the industry they regulate. And it continues to be the case." [04:42]
  • "It makes sense that industry would do whatever they could to, you know, legally... affect regulatory policy." [05:06]
• Bill notes the lack of updates to the October 7th chip controls, reflecting enforcement inertia and, perhaps, electoral calculation.

4. Weakness of US Chip Control Enforcement & Huawei’s Workarounds [06:09–07:51]

• The hosts expand on reports of Huawei circumventing US controls, referencing past investigations by Nikkei Asia and Bloomberg.
• Despite known breaches (e.g., TSMC allegedly making chips for Huawei via intermediaries), the Biden administration has not imposed new measures.
• Bill Bishop:
  • "This is just a really good crystallization of I think how when it comes to Huawei, at least the Biden administration really has fallen down in terms of actually enforcing all the various controls and sanctions that are already on the books." [06:56]
• The TSMC incident is dissected: TSMC reportedly self-disclosed after Tech Insight’s teardown revealed Huawei chips had been produced with their fabrication—despite restrictions.
• Bill observes the compliance risks and potential for broader undisclosed issues within TSMC's network.

5. The TSMC, Huawei, and Cutout Shell Company Tactics [07:51–09:06]

• After Tech Insight’s findings, it becomes clear an alleged cutout company ("Sofco") was set up by former Huawei staff to obtain chips from TSMC.
• Nikkei Asia reports TSMC has suspended shipments to two more chip developers linked to Huawei, signaling uncovering systemic efforts to bypass controls.
• Bill Bishop’s Analogy:
  • "Sort of like when you turn the light on in your kitchen and there's one roach, you know, there's never just one roach. I think there's something similar here at TSMC where they had a compliance issue… Maybe the legal team at TSMC is saying, wait a minute, maybe we should dig a little deeper, and they're going to start finding other problems." [08:31]

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Notable Quotes & Memorable Moments

• Bill Bishop: "Inside Commerce you have BIS, and BIS has long had a revolving door between regulators and then the industry they regulate. And it continues to be the case." [04:42]
• Andrew Sharp (on the scale of Chinese fab network): "More than half of this equipment currently comes from US companies. So, again, that puts a finer point on our discussion last week." [03:52]
• Bill Bishop (on TSMC): "It's sort of like when you turn the light on in your kitchen and there's one roach, you know, there's never just one roach." [08:31]

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Important Timestamps

• 00:21 – 02:23: Personal banter, sports talk, sets friendly tone
• 02:23 – 04:42: Introduction and summary of Semi Analysis article, outlining scope of Chinese evasion and reliance on US equipment
• 04:42 – 06:09: Discussion of US Commerce Department's BIS, regulatory capture, and the absence of policy updates
• 06:09 – 07:51: Examination of public vs. private knowledge of Huawei's tactics and lack of enforcement response
• 07:51 – 09:06: Details on TSMC’s compliance challenges, identification of cutout shell companies, and analogy on systemic exposure

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Recap & Overall Flow

• The episode is anchored by recent investigative reporting on how Chinese firms, primarily Huawei, continue to obtain US semiconductor equipment and chips despite export controls.
• Host Bill Bishop provides structural context on regulatory challenges, describing the deep entwinement between government and industry.
• Recent developments at TSMC underscore the ongoing cat-and-mouse dynamic and hint at the broader, largely unchecked nature of sanctions evasion.
• The hosts conclude their free preview stressing that these revelations point to much larger and systemic enforcement issues within the US approach to technology controls on China.

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For more in-depth discussion and analysis, listeners are encouraged to subscribe to the full podcast or associated newsletters as detailed by the hosts.

Transcript

[A]

Foreign. Welcome to Sharp, China. I'm Andrew Sharp, and you are listening to a free preview of today's episode. Hello, and welcome back to another episode of Sharp China. I'm Andrew Sharp, and on the other line, Bill Bishop. Bill, how you doing?

[B]

I'm doing well, Andrew. Hi, everybody. Hope you're all well.

[A]

Good to see you. We're not going to talk about the election a week out here, but I will say the the city, Washington, Washington, D.C. is alive with Commander's fever. We hit a new crescendo in the wake of the Jaden Daniels Hail Mary this weekend. Are you feeling it?

[B]

I grew up with Ed Redskin's sheets on my bed. So it's been about 25 years since you could care about the commanders. Who knows? They'll probably break our hearts again. But it was certainly an exciting game.

[A]

Well, it was pretty hilarious because I grew up a Cowboys fan. I've never told you.

[B]

I got to stop right there. Stop right there. I did not know that.

[A]

Are you backing out of the podcast? Two years down the drain.

[B]

Come up at our second anniversary. I'm just not sure I can do this anymore.

[A]

I'm so sorry. I'm so sorry to confess.

[B]

Okay. The Cowboys suck. The Cowboys suck. It doesn't matter.

[A]

They do suck well. And I renounced the Cowboys, like eight years ago. And then over the last couple weeks, I've been joking with Ben Thompson that A, I'm not going to let my son make the same mistake that I did. He's going to have to root for the commanders, and B, I'm starting to like the commanders because I like everyone else in the city being in a good mood. And so last week, last Friday, Ben sent me a commander's jersey for myself and for my son Charles. And so I was watching the Hail Mary go wearing a brand new commander's jersey.

[B]

Well, so I'm hopeful on one of your techery videos. I like that. Sharp. Sharp Tech videos. I hope you guys are both in your Jaden Daniels jerseys.

[A]

Yes. Well, I believe later this week you'll be able to see me in a Jaden Daniels jersey because I wore it for the podcast recording salesforce.

[B]

You know what they say, right? Is, mama, don't let your boys grow up to be Cowboys fans.

[A]

Yeah, well, my mom lapsed. I did it because I really enjoyed how infuriated it made my dad to root for the Cowboys that entertained me at six years old. But.

[B]

Rebel. Rebel.

[A]

Exactly. Disagreeable from the very beginning. But in any event, yes, it's good to be here. It's great to see you. And as for the show today, I want to start with where we ended last week, the chip controls. I'm going to read an article from Semi Analysis that was published on Monday. Semi Analysis, for those who don't know, is probably the best resource we have for chip news and analysis. And the headline of their Monday article was Fab Whack a Mole. Chinese companies are evading U.S. sanctions. And related to last week's discussion, they wrote, of all sanctions evading schemes, Huawei's Fab network is the most alarming. It is a clear national security concern as Huawei is CCP affiliated and a leader in Chinese AI. In response to US restrictions, Huawei embarked on a massive government sponsored development project to build out a domestic semiconductor supply chain. And then elsewhere they note that, quote, the scale and speed are staggering. We estimate the Huawei Fab Network will spend $7.3 billion on foreign labor fabrication equipment in 2024, making it the fourth largest purchaser in the world. If SMIC and CXMT are included, both of which work closely with Huawei, they would be the second largest purchaser in the world, only behind TSMC and far ahead of any US firm. More than half of this equipment currently comes from US companies. So again, that puts a finer point on our discussion last week. And in general, I thought this was a remarkable article. It was super comprehensive, full of useful specifics and examples. So we'll put it in the show, notes for people and especially recommended for any policymakers who may be listening. But, and I want to get into more of the specifics, but to frame it with big picture thoughts, you wrote on Monday that industry Capture of the U.S. department of Commerce should be a much bigger story. So if you were talking to someone in D.C. who's not familiar with the specifics of what's been happening here, what would you say to explain what this story has, has been so far and why it should be a bigger story?

[B]

Well, you know, inside Commerce you have bis and you know, BIS has long had a revolving door between regulators and then the industry they regulate. And it continues to be the case. You know, you have multiple sort of government affairs executives at the chip companies who were senior officials in bis. There's a lot of overlap. And so the industry, I mean, it's a massive industry. Billions and billions of dollars of revenue, hundreds of billions, trillions now when you count Nvidia of market cap involved. And so it makes sense that industry would do whatever they could to, you know, legally not saying anything's illegal here, but they would do whatever they can to affect regulatory policy. And I think what we're, you know, for example, we are now October, we're recording on October 29th.

[A]

Yep.

[B]

No update, no annual update on the October 7th chip controls. And we've talked about this multiple times on the podcast. Certainly don't think they're happening before the election. I'm skeptical they'll happen in the waning days of the Biden administration. The investment controls that were released yesterday are not part of the chip controls update. They're separate.

[A]

Right. And I don't have the specific language here, but I believe in past updates that Commerce has implemented, they have signaled the intent to annually update the export control.

[B]

They have. And so, and so this, this article from Dylan and his team at Semianalysis I think goes. You know, again, some of this has been reported. We've talked about there was the Nikkei Asia a couple of years ago, two years ago this September. Then there was the Bloomberg story last year. This Huawei network is and the way that they are still being able to get chips fab using US Equipment that they're not supposed to be able to get access to has been known and it's been known inside the US Government. And yet the Biden administration has not really done anything about that. And you know, this article maybe will force again, maybe not because the election's a week away and people, you know, there are bigger issues at stake. But, but this is just a really good crystallization of I think how when it comes to Huawei, at least the Biden administration really has fallen down in terms of actually enforcing all the various controls and sanctions that are already on the books. It ties back to this I think is also important in the context of what's happening at tsmc where I think on the last podcast we talked about how TSMC went to this government said hey, we might have a problem. It looks like we were fabbing something whose end user was actually Huawei. And they said oh we, we heard, we learned about it. So we, we self declared and from various media reporting it's because there was a report by Texas Tech Insights that tore down a chip that wasn't from Huawei but found or was from Huawei and then found found something that had been found by TSMC which wasn't supposed to happen. And Tech Insight, they shared their report with TSMC4 went public.

[A]

Yeah. So I wondered about that, whether any of this would be public if not for that Tech Insight piece.

[B]

I'm skeptical. Since then we've learned that that company was a. Basically a Huawei, was a cutout. Journalists were able to discover that the company was set up. This company, sofco, I think, is what it's called, was set up. The initial legal representative was a former Huawei employee. Then it was. He stepped aside and, you know, but it was very clear, clickly, to the journalists who dug into it that this company had some pretty interesting connections to the Huawei universe. Today we learn from Nikkei Asia, TSMC now has suspended shipments to two more chip developers because they think they have ties to Huawei, and they were being used to circumvent chip controls on Huawei. And so this is a big problem for TSMC because, you know, sort of like when you turn the light on in your kitchen and there's one roach, you know, there's never just one roach. I think there's something similar here at TSMC where they had a compliance issue. And now all of a sudden, maybe the. Maybe the legal team at TSMC is saying, wait a minute, maybe we should dig a little deeper, and they're going to start finding other problems. So that's two more. Is that really it?

[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, you can go to your Show Notes and subscribe to either Bill's newsletter, Cynicism, or the Stratechri 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. Sam.