Last month, US semiconductor stocks, including Nvidia and AMD, grabbed the headlines after announcing that the US government had imposed additional restrictions on their sale of some advanced chips to China. The stocks suffered a steep sell-off. It is but one of the latest measures — and most certainly not the last — in a widening US-Sino tech war. Indeed, the US intends to broaden current export curbs to include more chip-making tools produced by US companies such as Lam Research Corp. And companies that invest in advanced chip-making capacity in China will be barred from receiving government subsidies under the US CHIPS and Science Act.
Geopolitical tensions between the US and China have been simmering for some time, most notably during Donald Trump’s presidency, when he ordered the high-profile ban on Huawei Technologies. The two countries then engaged in an escalating tit-for-tat trade war. However, the US and China tech war has, quite assuredly, little to do with trade imbalances.
This is a war waged by the US to contain China’s rapid progress in next-generation IT and biotechnology, and particularly in artificial intelligence (AI) and bioengineering, high-performance computing as well as clean energy. Although the US continues to dominate in the high-tech space, China is catching up fast and, in some areas, may have even surpassed the former. For instance, it has the world’s most extensive 5G wireless network and rural broadband access, driving digital economy applications and smart industrial manufacturing. Huawei was a leading telecommunications player for next-generation networks and smartphones. E-commerce and digital payments are ubiquitous in the country, well before the pandemic drove adoption in the rest of the world.
In fact, the US is embracing the same game plan employed by incumbents to defend against new challengers (disruptors) — by leveraging its incumbent position, investments and domination in old and existing technologies. The ultimate objective is to maintain its tech leadership and preserve its hegemony in the future digital world.
Thus, there is a long (and growing) list of Chinese companies on the US Entity List (trade blacklist), which are prohibited from doing business with any company with US operations. The sanctions are aimed at crippling their abilities to acquire and gain from US-origin intellectual property, equipment, goods and services.
The US is also actively drawing countries that are key parts of the complex global supply chain for chip-making — semiconductor chips are at the heart of the fourth industrial revolution — into its orbit. For instance, it has forced a halt to the sale of extreme ultraviolet lithography (EUV) systems, which are highly crucial to producing advanced chips, from Netherlands-based company ASML to Chinese chipmakers. And it is trying to expand the ban to encompass less-advanced deep ultraviolet lithography (DUV) systems. We could go on, but you get the picture.
China, for its part, is intensifying efforts to expand the capabilities of its semiconductor sector, from manufacturing its own chip-making equipment and design software to producing advanced chips. Advanced chips are needed in everything from smartphones to electric vehicles, data centres, quantum computing, AI, 5G and military weapons. The country has set up state-backed funds dedicated to the high-tech industries totalling in the hundreds of billions of dollars. It has rolled out, and continues to roll out, various expansive and long-term industrial policies, such as the latest AI development master plan in Shanghai to incentivise domestic innovations. Just like the US, China is equally certain that next-generation technologies is one area in which it absolutely has to reduce reliance on foreign technologies and achieve a level of self-sufficiency — to secure its own position in the same future digital world.
To understand why advanced tech is the critical battleground in the broader strategic war between the world’s two largest economies today, we take a step back into history and, in particular, humanity’s socioeconomic evolution over the past 200 or so years.
Lesson 1: Industrial revolutions and the rise of the West
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Mankind has always had a thirst for conquest and empire building, motivated by the quest for power, glory and riches. Based on our own lifetime’s experiences, it must seem as if the current world dominance by the West — its economic and military supremacy — is a foregone conclusion. But in fact, the rise of the West is a fairly recent phenomenon.
For much of the past two millennia, Asia was at the centre of economic and trade activities. Economic wealth is a function of the size of the population (workforce) and back then, was mostly derived from land. Not surprisingly, populous countries like India and China were the largest economies for long periods in history. China was the source of many innovations, including gunpowder, papermaking, the compass and printing, and accounted for 33% of global GDP circa 1820. And then the centre of the world shifted (see Chart 1).
To be sure, Western colonialism-imperialism — by the Portuguese, Spaniards, Dutch and British — began earlier, around 1500, and had made them richer from plundered wealth resources and trade (including slavery). But for more than 300 years, growth in its share of the global economy remained slow. This changed quite suddenly at the turn of the 19th century.
Economic growth shifted into high gear, initially in Western Europe — it overtook China to become the single largest economy in the world within a mere five decades — and continued gathering momentum in the US. By the early 20th century, domination by the West had extended far and beyond, conquering-colonising up to 80% of the entire world, including all of Africa, most of Asia (save for China and Japan), Latin America, Canada and as far south as Australia and New Zealand. There are many contributory factors for this phenomenon. But the most significant events happening in the West during this period (1820-1913) were the first and second industrial revolutions.
Economic growth, and wealth, is a function of the size of the population (workforce) and productivity. Prior to the two industrial revolutions, economic activities in the West revolved mainly around small-scale farming and handicrafts. Output was mostly tied to ownership and working of the land, typically producing just enough food to support small local populations.
The industrial revolutions brought about huge step increases in productivity. Humans successfully applied energy harnessed from fossil fuels, starting from the coal mines in Britain to power steam engines — used for mechanisation in farms and industrial production as well as locomotives — electricity and internal combustion engines (ICE).
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The substitution of human and animal muscle power in agriculture resulted in a huge growth in food output, feeding an explosion in population. The increased population freed up labour from agricultural activities was now able to work in factories. ICE vehicles and steamships, coupled with extensive networks of railroads and roads, enabled the distribution of goods to farther beyond — opening up new markets.
All that increase in demand led to greater economies of scale. Businesses were able to mass-produce goods faster and cheaper, thus gaining significant competitive advantages in trade. But soon, companies in old economies in Western Europe were displaced by that in the New World, the US. They were the establishment with old tech and old investments. It is easier for new entrants, without the burden of legacy, to invest in and adopt newer technologies. In the same way, start-ups will always threaten to disrupt the incumbents.
The US economy gained momentum, even as that of Western Europe began to decline circa 1870 (the start of the second industrial revolution) — its share of global GDP continued to rise. The ensuing industrial boom generated huge growth in wealth, wages and production. Advancements in medicine and medical equipment further improved life expectancy and lifted the people’s standards of living. More people, freed from worrying over their next meals, could now pursue knowledge and scientific discoveries, funded by growing profits and capital. It led to further innovations, more sophisticated machines and labour-saving inventions, including assembly-line manufacturing in factories — resulting in even greater labour productivity and operational efficiency gains.
The Roaring Twenties ushered in an era of modernism, urbanisation and very rapid economic growth in the US. Fast-rising per capita income and wealth went on to fuel massive social changes and mass consumerism. Henry Ford innovated the moving assembly line for the mass production of cars in 1913, reducing the time required to build a car from more than 12 hours to one hour and 33 minutes. As a result, cars became widely affordable to the average American. The widening availability of electricity drove a proliferation of new inventions in consumer goods, including televisions, vacuum cleaners, refrigerators and washing machines, and in mass entertainment, motion pictures and movie theatres. In the process, companies made huge profits and people were optimistic. Stock prices soared, driven by exuberant speculation. Inevitably, the bubble burst in the worst stock market crash in history in 1929, and heralded the start of the Great Depression.
Nevertheless, the US pressed its advantages further after World War II, leveraging its economic and military superiority into unprecedented political influence. It engineered the US dollar’s central role in the global financial system, under the Bretton Woods currency system, and shaped international institutions such as the International Monetary Fund (IMF), the World Bank and the North Atlantic Treaty Organization (Nato).
The gold standard was ultimately abandoned in 1971, but the greenback remained the settlement currency for international trade and financial transactions, and world reserve currency. Untethered to gold, a pure fiat money international monetary order based on the US dollar provided the necessary flexibility and liquidity to drive global trade and finance, and economic growth in the ensuing years. We have previously written about the exorbitant advantages of the US dollar as the world reserve currency, including cheaper-than-otherwise cost of borrowings.
Economic wealth is self-perpetuating. More money for research and development gave the US a headstart in the third industrial revolution in the 1970s — growth in electronics, communications, IT and computers, and partial automation in production — that extended through to the internet revolution in the 1990s.
Economic wealth also allowed the US to far outspend every other nation in expanding its military superiority and maintain hundreds of military bases worldwide. This military power preponderance sustained a long period of relative peace and order, as well as economic and financial stability in the world. The absence of large-scale conflicts (after the end of the Cold War in 1991), and China’s economic reforms under Deng Xiaoping after 1978 and eventual entry into the World Trade Organization (WTO) in 2001 fostered an era of unprecedented cooperation among nations.
New technologies enabled companies to enhance the logistics of supply chains, permitting even more specialisation and allowing production to go global. Standard container shipping, invented in the mid-1950s, became a key driver of global trade. Cheap dollars catalysed the shale revolution, giving US companies yet more advantages in low-cost energy.
Globalisation — the relative free flow of innovations, ideas, goods and services, labour and capital — spurred economic growth and the entire world made massive gains, although it also created widening inequality. Wealth for capital-asset owners increased exponentially, profiting from the abundance of cheap labour in developing countries. Capitalism works! Incomes in poor countries rose, extreme poverty fell precipitously, as did child mortality. An increased percentage of the world population benefited from education and literacy and better healthcare. Quality of life improved worldwide.
Again, some companies made huge profits. The longest bull market in US history began in 2009 and lasted until the Covid-19 pandemic. Today, nine out of the 10 most valuable publicly listed companies in the world are US companies, including Apple, Alphabet (parent company of Google), Microsoft, Amazon, Tesla, Berkshire Hathaway and Johnson & Johnson. The New York Stock Exchange and Nasdaq are the two largest stock exchanges in the world by market cap by a very long distance, underlining the US’ economic strength.
Lesson 2: Countries with large populations will catch up
Through globalisation — as countries embraced key aspects of Western liberal democracies, best practices and governance models, open economies and trade, and critically, transfer of knowledge in science and technology — the rest of the world is catching up, fast. As the technology and economic gap with the West narrow, it is inevitable that countries with large and increasing populations will eventually grow their economies bigger. China is now the world’s biggest economy (GDP based on purchasing power parity, PPP). India is third, after the US, while Indonesia and Brazil are ranked seventh and eighth respectively.
As we showed last week, the US is faced with the challenge of an ageing workforce and population growth that has been slowing for decades — exacerbated by the more recent rise in anti-immigration sentiment — as are most countries in the developed world. China has one of the fastest ageing populations in the world today, due partly to its one-child policy from the 1970s.
History taught us how rapid advancements in, and the resulting innovations from, science and technology during the last three industrial revolutions led to enormous productivity gains, gave businesses formidable competitive advantages and greatly lifted people’s well-being and standards of living. So much so that the West was able to dominate the world — politically, economically and militarily — despite far smaller populations and land mass.
Thus, for the US to maintain its sole superpower status, it has to retain its scientific and technological leadership — by any means necessary. China too understands this very well. It may or may not have the same global domination ambitions as the US. But the country is clearly no longer willing to cede control and accept a diminished position in the world, subservient to the West.
Lesson 3: Advanced tech will determine who wins the 21st century
Innovations from the past industrial revolutions shaped the world we now live in. Going forward, the future of humankind will be determined by the unfolding digital transformation — where the physical, digital and biological worlds converge. In this fourth industrial revolution, future innovations and productivity gains will be driven by the foundational technologies — akin to steam power and electricity — of AI, machine learning and big data algorithms, biotech and bioengineering. The potential economic value at stake is immense, expected in tens of trillions of dollars.
McKinsey & Co (Mckinsey Technology Trends Outlook 2022 report) estimates the global value from AI at US$10 trillion to US$15 trillion, including in product and service development, supply chain management and manufacturing, and marketing and sales. Companies that have adopted AI exhibited 2.1 times revenue growth and 2.5 times total returns to shareholders (higher revenue and/or lower costs) for the five years through FY2019.
The immersive-reality space is expected to have a market size of US$1.2 trillion by 2035, though significant advancements are still some years out, while the market value for space technologies may exceed US$1 trillion annually by 2030.
Incidences of cyberattack are on the rise, with potential costs-losses forecast at some US$10.5 trillion by 2025. Accordingly, spending on digital trust technologies are also expected to grow exponentially, including for zero-trust architecture and digital identity.
Bioengineering is estimated to provide US$2 trillion to US$4 trillion in business opportunities annually from 2030 to 2040. Perhaps the most well-known application is the mRNA therapy (the use of synthetic mRNA) for Covid-19 vaccines. Other applications include gene therapy (to treat previously incurable diseases and address diseases before they are symptomatic), cultivated meat (growing small samples of animal cells in a controlled environment) and creating new materials (that are more environmentally friendly, higher quality and cost effective).
As the economic costs of climate change become increasingly evident, there is growing urgency for the transition to clean energy. It is estimated that some US$2.4 trillion in annual capex is required from 2031 to 2035 for the net zero transition. That includes investments in renewable energy (such as solar, wind and geothermal), hydrogen-based fuels, battery storage, EV-charging infrastructure and smart grids.
Meanwhile, the addressable market for sustainable consumption, the use of processes as well as goods and services produced with minimal environmental impact, is expected to hit US$4 trillion to US$6 trillion by 2030. One good example is the electrification of vehicles globally.
The world needs more, not less, global cooperation with looming tech disruptions
As the historian-philosopher Yuval Noah Harari so eloquently articulated (21 Lessons for the 21st Century), humans have two abilities — physical and cognitive. In the past 200 years, machines have been taking over the physical aspects of economic activities, replacing human and animal muscle — driving productivity and economic wealth. But humans have always retained the immense edge in cognitive functions. In other words, machines did the heavy lifting, faster and cheaper, but it is our brains that perceive, learn, analyse, communicate, understand human emotions, predict behaviour and decisions, and solve problems. Thus, even as jobs were lost to machines, there were always more new jobs that were created, especially in services industries, which require uniquely human cognitive abilities (bankers, lawyers, analysts, doctors and drivers). What happens when this is no longer the case?
Increasingly, automation and robots are replacing human jobs — and they are no longer just about brute force or low-skill factory assembly line jobs. Bioscience now tells us that the vaunted human intuition is little more than a process of pattern recognition at the subconscious level — our billions of neurons calculate probabilities in split seconds.
Better understanding of this biochemical mechanism (that underpins human emotions, desires and choices) means AI — armed with biometric sensors and leveraging biometric databases collected from millions of individuals — can better understand and predict human behaviour. A self-learning AI will, in the foreseeable future, know us better than we know ourselves — and can make faster and better decisions for us! Think Netflix’s machine learning algorithm making personalised recommendations to us, based on our past selections as well as that of others with similar tastes and preferences. This is a mere precursor of what is to come.
And more, an integrated network of machines can predict not just the actions of one person, but also interact and communicate with all other machines. We make decisions based on our own experiences and knowledge but an integrated AI makes decisions based on the experiences and knowledge of millions of machines connected to the same network. Information-data are collected and analysed, then updated and disseminated instantaneously throughout the network.
A good driver avoids accidents by predicting the intentions of pedestrians and other drivers in the vicinity. AI-powered autonomous cars with the right sensors could do all that more accurately and reliably than humans, and they will be communicating with all other vehicles on the road. There will be no miscommunication of intentions, which will significantly reduce accidents.
AI has the computing power to perform gazillion probability calculations, predict the most likely outcome, and adjust decisions accordingly to achieve the outcome it wants. In the long term, no human job will be absolutely safe from automation. Could the world continue to create new jobs to replace the ones that will be lost? And if not, what will happen to humans?
In conclusion
Clearly, the economics from advanced tech are immense — for the initial investments, resulting additional revenue, cost savings and productivity gains, not to mention all the future innovations that will stem from these advancements in the future digital world and their associated values. As history has proved, economic wealth translates to employment and higher standards of living — and with it comes military power and political clout.
The first three industrial revolutions gave the West the necessary advantages to outcompete everyone else and dominate the world economically, militarily and politically for the past two centuries. The fourth industrial revolution will bring about the next huge leap in productivity and super-level competitive advantages. And at the heart of advanced tech is semiconductor chips.
The US-China tech war, therefore, is not about trade imbalances, not by a long shot. It is about the power to shape global tech standards and regulatory frameworks for data protection, cybersecurity and AI-bioengineering ethics, to influence-set rules for future global trade and financial systems and so on. In short, it will disrupt the current world order and Western domination.
The threats from climate change and tech disruptions are global issues that require countries to work together to minimise the impact. Unfortunately, given the enormous stakes, cooperative relationships appear increasingly unlikely. As we said at the start, the West is reacting, as all incumbents do to leverage all their existing advantages to stop the challenger.
Since cooperation is increasingly unlikely, geopolitics will lead to a dual sphere of influence. The future digital world will bifurcate into mutually exclusive tech ecosystems for the internet, infrastructure and equipment, software and communications, financial and payment platforms. In effect, this means higher trade barriers and costs, and lower efficiencies — leading to prolonged supply constraints and higher inflation, as we wrote last week. Or until one or the other finally wins the 21st century and, perhaps, determines the fate of mankind.
Thus, for all the good intentions and great articulations for peaceful coexistence, the US-Sino geopolitical conflict will surely only intensify in the foreseeable future. In fact, despite this very long article, what we have written is a simplistic view of the current geopolitical situation, focused mainly on the US and China. Notably, we have not even taken into consideration the rise of India and other nations, including Asean (and Indonesia, in particular), which would quite likely further compound geopolitical contestation and the consequential economic costs. We need to factor this inevitability into all our decisions.
The Global Portfolio fell 2.2% for the week ended Sept 28, lesser than the MSCI World Net Return Index’s 3.1% drop. This is due, primarily, to our high cash holdings. Yihai International Holding (+4.6%) was the only gainer while Alibaba Group Holding (-10.1%), Guangzhou Automobile Group Co (-7.5%) and DBS Group Holdings (-4.3%) were the biggest losers. Total portfolio returns since inception now stand at 14.8%, trailing the benchmark index’s 25.8% returns over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
