AI Promises and Chip Precariousness, Policy Recommendations and a Changing World, Concerns and Counterpoints

A discussion of Ben's Stratechery article AI Promises and Chip Precariousness, including basic geography and evolving geopolitical considerations informing today's Taiwan tensions, the recent history of US policy surrounding chips, considerations for US policies going forward, and various concerns with lifting the chip ban and implementing stricter controls on chipmaking equipment.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:04Andrew Sharp?

  Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing?

• 0:16Ben Thompson?

  Feeling, I don't know.

• 0:18Andrew Sharp?

  Pregnant pause, oh boy.

• 0:19Ben Thompson?

  Yeah, feeling sheepish.

• 0:21Andrew Sharp?

  Why?

• 0:22Ben Thompson?

  Because I kinda wanna complain, you know, talk about my mental state, feeling tired. And I'm on with a guy with a newborn who is just the wrong person to look for any sort of sympathy to.

• 0:36Andrew Sharp?

  Absolutely. Well, why do you, why do you feel the need to complain? Tell me more.

• 0:41Ben Thompson?

  No, not complain. I, I, I think, um, I've been very, it's been an interesting week because of the article that we're talking to. We're actually launching right into it, which is the,

• 0:57Ben Thompson?

  on one hand, I feel very sort of deeply mentally exhausted and, and I think there's an aspect of because what I wrote about in this article feels so weighty. And there's almost like a terror that people actually care and listen to me and what I have to say about the points in it, that is very mentally taxing.

• 1:22Andrew Sharp?

  Taxing, yeah.

• 1:23Ben Thompson?

  Balanced by the fact that I try to be careful to not get too full of myself and think that what I do matters that much in the grand scheme of things.

• 1:34Andrew Sharp?

  Ben Thompson has spoken.

• 1:35Ben Thompson?

  I'm just a blogger, right? At the end of the day. And so I have these conflicting impulses going on. And then I also don't wanna tell you that I feel tired because you have a newborn.

• 1:47Andrew Sharp?

  Well, if you need perspective, we have a newborn. Everyone in my house is horribly sleep deprived. And last night at 5:00 AM, every smoke alarm in my house went off because one smoke alarm was low on batteries and that somehow set off every other smoke alarm. So we were all sleeping peacefully for once and then the smoke alarms intervened. So. There's the perspective you were looking for, but I do sympathize with your mentally taxed week here. And that's a good note to get into the article on, you know, we're going to start with ZX. This is a two-part email. I'm going to read part one from ZX here.

• 2:25Andrew Sharp?

  He says, "I loved Ben's latest piece and I particularly enjoyed seeing how his views evolved as he articulated bits of it throughout different podcast episodes culminating in this final tour de force. The best part was that he actually bit the bullet and put out recommendations, though I can't see decision makers following through on them. I too enjoyed watching the evolution of this argument and being part of that evolution over the last month or two. And I'm happy to revisit this discussion for one more episode, in part because this is arguably one of the most important issues in the world and not just tech.

• 3:05Andrew Sharp?

  But let's start with you biting that bullet, Ben, and providing recommendations for what chip policy should look like going forward. Per your article, we should be lifting the chip ban in its entirety, 2 nanometers for everybody. Here we go. Tell me why. Tell me how you got there.

• 3:23Ben Thompson?

  Well, I mean, this is too, I don't know how long of a reader ZX is, but in many respects, it goes back to the very beginning of stratechery when I was writing about Intel right off the bat. I wasn't in that context necessarily thinking about or referring to Taiwan, but maybe it goes back to that. It goes back to my first flight to Taiwan in 2003. I'm sitting in the back of a China Airlines flight in a middle seat, talking to LA to Taipei, talking to the girl next to me. And we're like, is this a Chinese airline or a Taiwanese airline? And you pull out the in-flight magazine and it shows the route map and there are zero routes to China.

• 4:05Ben Thompson?

  That was before there were any sort of links. You had to go through Hong Kong to get to China. And actually, at that time, Taipei to Hong Kong was the busiest air route in the world because there was, there was so many Taiwanese going into China.

• 4:18Andrew Sharp?

  It's the only way in. Yep.

• 4:19Ben Thompson?

  Yeah. And, uh, and like, well, I guess it's a Taiwanese airline. And So there's a bit where maybe initially that makes all my takes about Taiwan and about China suspect because I was that ignorant in 2003. Then again, 2003, scarily enough, was 22 years ago.

• 4:40Andrew Sharp?

  I was gonna say, got a couple of decades under your belt since then.

• 4:43Ben Thompson?

  And I've been thinking about this issue pretty much nonstop since then, the Taiwan issue. And, you know, you, you, you, you, I came to Taiwan, I thought I'd come for a year. Immediately, within like two weeks, I remember calling my parents and saying, yeah, I'm gonna be here for, for a few years. This is, this is great. And, you know, 22 years later, here I am, sitting here. And that, too, is a reason to both listen to and dismiss my argument. I am, you know, it's hard to imagine a geographical related issue that I, you know, I would struggle to be subject,

• 5:27Ben Thompson?

  you know, completely objective with. I, you know, I have a life, life and a family here. And also a reason to pay attention because I care a lot.

• 5:38Andrew Sharp?

  You're on the ground, yep.

• 5:40Ben Thompson?

  And my biases would certainly be to be a sort of a Taiwanese absolutist. I've been to China, I admire China and what they've done. I have zero desire to live in China or, or, you know, and I like Taiwan just the way it is. And would prefer, would prefer that that things don't change. But looking at that route map back in, in 2003, there's just a really fundamental geographic reality beyond the fact that there were zero flights between this island that was ethnically Chinese, 70 miles off the coast of China and had zero flights. It's the fact that China has one coastline.

• 6:26Ben Thompson?

  And there is an island 70 miles off of it that is,

• 6:32Ben Thompson?

  you you separate everything. You take away Taiwan's democracy, you take away chips, you take away geopolitical considerations. You can just look at a map and realize there is a structural issue here where a very large country has a very small country that is it's avowed still, I think technically at war. I'm not, I'm not sure exactly what the status is. And that's a structural problem. And that was in 2003 when China was not the China of today. It was on its way, I think, by and large, because of decisions that were made in the 90s in particular, but it was not yet what the situation where we're at today, where it dominates global

• 7:16Ben Thompson?

  manufacturing. It has a rapidly modernizing, you know, military. It has a huge fleet of missiles, you know, bristling along the coastline, as it were. Just from a, you know, I think a strength that I've had is in my analysis is a will, an ability and willingness to put myself in someone else's shoes. And while not agreeing or endorsing what they think, just sort of thinking, if I, if I were in this situation, what would I think? And if, if the US was in this situation and we had a large landmass,

• 7:57Ben Thompson?

  a large economy, but one coastline, and a geopolitical rival controlled an island in the middle of that coastline, we would have a problem with that. And it's not to say the US controls Taiwan per se, but this sounds kind of trivial, but there's an aspect of this discussion that at the end of the day, comes down to geography. We, and, and to this point with ZX being a longtime reader, I don't remember when I wrote an article of chips and geopolitics. I think it was probably the late 2010s, you know, basically saying, look, There's a brewing big problem here and it comes down to geography.

• 8:44Ben Thompson?

  And that's basically where we're at. That is the genesis of this entire discussion.

• 8:49Andrew Sharp?

  Well, along those lines, when you wrote Chips and Geopolitics, you didn't come out and say, we shouldn't be banning chips. You were sort of hinting at it here and there. And then this article was the most explicit you've been at prescribing a different course than the US has chosen over the last four or five years. And so I'm interested, I mean, for me, I'll be honest, you kind of lost me with some of the earlier discussions when we were talking about the chip ban over the last month or two. And I really liked the way you articulated your argument in this piece. So explain more about why you think we should be lifting the ban on chips. And you also advocate for strengthening the ban on chip making equipment,

• 9:34Andrew Sharp?

  which I think is a very important piece of what's put forth here.

• 9:38Ben Thompson?

  Okay, so yeah, Chips and Geopolitics I wrote in 2020. My first sort of, but the issues with the chip ban really started, even though it was mostly, it was codified and put into sort of a larger initiative under the Biden administration, this really started under Trump with ZTE. So ZTE was this Chinese phone maker violating a prohibition against shipping to Iran, which is definitely true. I mean, like it's how like these, you know, there's a lot of these discussions, particularly when it gets to international politics. And this has been a framework for a lot of dispute, I think, over the last few years.

• 10:22Ben Thompson?

  We're going to on this podcast and request our users sort of, not every time I'm going to come out and say, yeah, this is morally wrong. Like this isn't a discussion about morals. It's a discussion about Reality and ideally those two are not incompatible. But if there's one arena where they often are, it is international relations. And, and so that just sort of that caveat upfront. ZTE could, let's assume they're utterly and completely guilty.

• 10:58Andrew Sharp?

  Right.

• 10:58Ben Thompson?

  The problem is the US did have it in their capability to basically kill ZTE. Say, you're not getting chips and oh, by the way, because we control essential technology that goes into chip making around the world. We're also banning anyone who makes chips from selling them to you. And we're the United States and we can do that. And, and why can the United States do that? The United States could do that because we basically controlled the world militarily. And we control the world economically via our, our, our consumer market. And, and so it was a valid and credible threat that basically killed ZTE kind of for, for a year.

• 11:37Ben Thompson?

  And I don't know to what extent, and I wrote this at the time, like, like this is gonna set in motion. A, a response that in the very long run is going to be problematic for lots of reasons. The China, you go back, uh, in, in like the, China's always had a drive to build their own chip industry. Like since the 50s or 60s. Honestly, you could make a case that it was a, a mistake all along. Whereas say a Japan, of course, chips are important. So they plugged into the worldwide chip industry and carved out a huge niche.

• 12:20Ben Thompson?

  And then much of which was sort of taken by South Korea. But Taiwan is sort of a similar thing where like they plugged into the global supply chain. And the whole reason we're in the situation we are is because of that. China didn't do that. China's like, no, we, we need to do the whole thing ourselves.

• 12:37Andrew Sharp?

  Yeah.

• 12:37Ben Thompson?

  And they failed miserably for lots of understandable reasons. It's a very hard thing to do. You, you need volume, you need customers. You go back to Bob Nois, uh, you know, at, I think it was still Fairchild Semiconductor. Brings out a chip that cost them a dollar to make and he sells it for 25 cents. Why did he do that? Because he realized that the the actual cost of chip making is all upfront. The way to get to profitability is not to sell a chip at a profit. It's to drive volume such that the profitability on a per chip basis, the the the the bar to clear drops precipitously to our marginal cost,

• 13:18Ben Thompson?

  which the marginal cost is the is the is the actual materials in the chip, which are negligible. It's the electricity and it's the workforce that actually puts it together, which Fairchild had exported to Asia. And and you know, the the extent to which the semiconductor industry was the tip of the spear when it comes to globalization. They wanted those, you know, uh, workers in Hong Kong was the first place they went. It quickly spread to Taiwan and Singapore to be out there literally hunched over on a bench connecting wires. That's how assembly of chips actually worked. And guess what? Brutal work. And when you had a a component you wanted to sell for 25 cents,

• 14:03Ben Thompson?

  you didn't want to be paying an American worker $2.50 to do it. And and so like from from day one, this has been sort of into the system of how semiconductor of how semiconductors work. And guess what? It turned out that, and this goes back to our trade discussion from last year. This is another example of where in the long run,

• 14:26Ben Thompson?

  cheap labor was exported first, but then everything else sort of followed it in overtime. And so we started out with Taiwanese and Singaporeans and and Hong Kongese assembling the chips and we ended up where actually the whole thing just happens in Taiwan.

• 14:42Andrew Sharp?

  Right.

• 14:42Ben Thompson?

  And and the the problem is so China was not a part of that.

• 14:50Ben Thompson?

  And they would never have been a part of it as long as they could keep buying the chips that they need, just because it's so hard. And this is, this is a critical point. Like, you, you don't, just because the government wishes it doesn't make it happen. You need, this, by the way, this is a lesson that the US, I think, is going to learn or is in the process of learning. This is the, this is the intel lesson. Just because you, you can make, 18A, it looks like it's going to be a great process. That's not enough. You actually need the customers. What goes into getting customers is very complex. You need the volume. And, and China was never going to have that. And ZTE was the first step in

• 15:29Ben Thompson?

  creating the demand. You pull semiconductors. You pull a semiconductor industry into existence. It has to be demand driven. And ZTE set the conditions for not the government pushing a semiconductor industry into existence, but industry pulling a semiconductor industry into existence. And that's how it has to happen.

• 15:54Andrew Sharp?

  Mm hmm. I mean, it'd also focus the government on this area and motivated them to start pouring billions and billions of dollars into it every year. It's funny, I was laughing about it.

• 16:06Ben Thompson?

  I think, I think that, that most people have that perspective from you. I don't really share that perspective. And I know Bill and I sort of argued about that a, a couple of weeks ago. I think the role of government and subsidies and pushing, and by the way, this is a very valid critique of any, of any ideas I have about Intel in this article.

• 16:27Andrew Sharp?

  That's the symmetry between the US government and Intel and what China is trying to do with its chip making industry does make me smile because both countries are sort of fumbling around in the darkness, trying to create alternatives to TSMC. But you're saying the private demand is essential if you actually want to move forward and make progress.

• 16:47Ben Thompson?

  Yeah, I'm, yeah. Semiconductors are so difficult. It's so hard. And when you can just go elsewhere and buy what you need, and you can buy it at basically the marginal cost of production. If if necessary, which is practically zero. I just don't think it's viable to build a second semiconductor supply chain in any sort of open market.

• 17:10Andrew Sharp?

  That's fair, but from what I understand is the ZTE ban triggered a lot of purchases of, let's say, chip making equipment in anticipation of future sanctions and export controls on all of this. And so it accelerated it in that respect. Whether that, so that's all I mean.

• 17:31Ben Thompson?

  No, that that absolutely happened. And then the Huawei thing happened, I believe, in in 2020. I think that might have been what what triggered chips in politics, actually, was was the the same ban being extended or a similar ban being being applied to Huawei. And Huawei, now you're you're dealing with the the big fish, like the most important company in China. The the our most important company, maybe, I don't know, it might be the most important company in China. It is in many respects, the technological arm of the Chinese government. It is a a private company. The ties, I think, like all the US concerns about Huawei, I think, are totally legitimate. And also Huawei is deserves tremendous respect and is probably still underrated by technologists,

• 18:14Ben Thompson?

  by people in the US, and it is, they've done incredible stuff. Did they completely wholesale rip off Cisco routers? Yes, they did. And but but morals don't matter, like reality on the ground matters. And it in this, don't clip that morals don't matter. Of course, they matter. But in this is why I gave the caveat sort of.

• 18:34Andrew Sharp?

  We're getting grace from the audience. Yes.

• 18:36Ben Thompson?

  But once what ZTE maybe could have been a one off. Once you went after Huawei, we're locked in. It it's not just that the government, it's not about just pushing and dumping dollars and the government wanting this to happen. It's a very deep rooted, deep felt that we on the demand side are going to make the sacrifices necessary to pull this into existence, not because we're patriots. And this isn't to deny the patriotism of Huawei or anyone else, but because. As our very existence depends on it. Turns out that's a pretty good incentive to sort of make make things happen. And and and so you have the Huawei example.

• 19:19Ben Thompson?

  And then and then you have the Biden administration basically formalizing all this and making it broadly applicable.

• 19:26Andrew Sharp?

  And tethering it directly to AI because Huawei had transgressed in various ways leading up to those sanctions. And then ZTE you mentioned was violating the sanctions on Iran on Iran. But the Biden controls were passed A before ChatGPT and B targeted on the AI sector. Recognizing that this was going to be critical to the future of geopolitics and national security.

• 19:52Ben Thompson?

  That's right. That's right. And and by the way, the all legitimate points like like I think that that's a key part of this discussion. And why it was it's so hard to write because we I can talk a lot. I can pontificate. I'm happy to give life advice about trade offs and your priority stack and what goes on top. Actually facing them in the face, looking them in the face and saying, yes, your arguments are legitimate and I am trading them away in my advice. Is hard to do and you're wide open to attack because it's like, oh, this X, Y, Z. I'm like, yeah, you're right. It is true. Like like the the implication of giving China access to leading edge chips is

• 20:35Ben Thompson?

  they will have AI systems on par for us and very well may have better ones. And you want you want that to happen? No, I don't want it to happen. They're like, but that's why there's there's there's this broader context. And what I would just say about this journey that ZX is talking about is I think I actually quite clearly articulated the core takeaway.

• 21:01Ben Thompson?

  Of the article I wrote this week when the Huawei ban happened. That like, like the Z T U one, I'm like, look, uh, we're spurring, we're creating the conditions for a competitive industry that I don't think would have existed otherwise. That was like, that was, that was half of it. The second half, which I did write in that, in the update after Huawei, turns out it's worth reading the daily updates. Sometimes I don't actually put it in a free article until five years later, is we are significantly diminishing the deterrent factor of TSMC with this action. Right now, we are in a world where the entire foundations of society for both the U S and for China are dependent on Taiwan.

• 21:45Ben Thompson?

  And, and by the way, this, this was radical in 2020 and 2020 actually validated the point because you had the COVID crisis. You had all the, the automakers is probably the easiest example where what do auto, what do they do? They're used to ruling the roost, right? The, uh, a car, they're the integrators, they make the engine. That's the most important component, like, you know, at least before E Vs. And, and, and so they're used to calling the shots. There's a whole supply chain that serves them. And so COVID happens and they call up all their suppliers and say freeze on all deliveries for, for the next two months or whatever it might be. And they just have to take it because what else are they going to do?

• 22:30Ben Thompson?

  They like, the, the, the entity who was at the nexus of the supply chain, they get to call the shots. And so that's what the automakers did. And amongst those suppliers, and they, maybe they go down the priority list suppliers, how do they organize the priority list suppliers? Well, how much does this component cost, right? So they probably had a, a deep discussion with their transmission supplier. It's a very expensive component. It's difficult to do. Yeah, I understand it's going to be tough for you. Let's figure this out, blah, blah, blah. When you get down to the parts that don't cost very much, whatever, you just send out an email, they can deal. The problem is those parts that don't cost very much included these $1 chips for doing power windows, right? Uh, who cares? It's a dollar chip.

• 23:13Ben Thompson?

  The problem is that dollar chip, the existence of it is downstream of massive investments years and years ago. It's built on a fab that was cutting edge in 2002. That is, is, is up that there's no competition for it because you would never build another old fab, but it continues to run because all the cost was just building the fab. The marginal cost of that chip is practically zero. So that's why you only have to pay a dollar for it. But there's this real fundamental mismatch that is hard for manufacturers like the auto companies to really internalize, which is this

• 23:53Ben Thompson?

  chip may be shockingly cheap, but what goes into that chip existing is incredibly complex and has not just a significant financial component and its creation, but a significant temporal element in that it had to be created at a particular moment in time, which was far in the past. And guess what? When you just mindlessly shut off all your suppliers, that entities is

• 24:18Andrew Sharp?

  They go find other customers.

• 24:20Ben Thompson?

  It's a commodity. We'll sell it to someone else. And then you start up your factories two months later, or a month later, or whenever it was, demand is skyrocketing.

• 24:28Andrew Sharp?

  At the back of the line, buddy.

• 24:30Ben Thompson?

  And, okay, you will put you back in, back in line at the back of the line. And now you're, you thought you were king of the hill. And actually, this little $1 chip has completely destroyed your business for, for, for weeks or months on end.

• 24:45Andrew Sharp?

  And that's just being at the back of the line. If TSMC were destroyed, it would wreak havoc throughout the United States economy and the global economy, in part because of these trailing edge issues. And obviously, the leading edge is his own story there. But yes, all of this was highlighted in 2020 with COVID. And as AI becomes more central to the story of the future of the economy, the leading edge is just as important.

• 25:11Ben Thompson?

  Well, it's not just, it's all of it. It, it, like, like, what the, the lesson of 2020 should have been, our economy is to a shockingly greater degree than anyone realized utterly

• 25:22Ben Thompson?

  Dependent on the continued existence of TSMC. And by extension, the continued independence of Taiwan, de facto independence. So I have to be careful with my, with, with, with my, with my words here. And, and, and the alternative is that we have a total dependency on China. For these components that at the end of the day, the, the, the level of trust that's entailed in computing is very large. This gets back to kind of the UK and Apple bit that we talked about earlier in the week. We had this whole discussion about it. At the end of the day, you can, you can talk about encryption all you want. You are placing total faith in the maker of your device. They like, like there is a level of trust entailed in computing. Someone has to be root.

• 26:08Ben Thompson?

  And what we are shaping ourselves up for is making China root of everything. And, and the, and so the, there's.

• 26:16Andrew Sharp?

  Making China root of everything in the trailing edge is the concern in the short and medium term. Is that right?

• 26:22Ben Thompson?

  And, and, and, and in the, in the long term for the, for, for the leading edge. And this gets, this gets to, this gets to the, the, this, this whole point. Which is, we, we've set China on the path, going back to ZTE and Huawei. First, we created the clear need to build a second, a second supply chain. Then number two, we, we created the clear sort of demand in, in incentives. And along the way, we, it's not just that there was like, we, we could kill you. It's that as long as T, like China's dependence on chips is just as large as ours is. And they ideally get all the, or for many years, got all those chips from Taiwan.

• 27:04Ben Thompson?

  And so there was a real mutually assured destruction aspect to Taiwan's existence. Which is, you know, and who knows, maybe after 2020, the US's threat wouldn't be credible. But hey, you want to invade Taiwan, we're going to bomb those, we're going to bomb those fabs on the way out. Uh, and, and you're not going to have access to, to all these chips either. Cause we're not going to have, and honestly, maybe.

• 27:31Ben Thompson?

  It's fair to wonder if that threat was credible, but at least it was possible, right? That LA, no one's gonna get access and we're not there yet, but we've we've set ourselves on a path for China to build and to your point, they got the head start was the response, the immediate response to ET and Huawei was to buy as much equipment as they could. And this sort of clouded this whole discussion. You know, these companies are lobbying the Commerce Department. Oh, look, this massive percentage of our revenue comes from China. Well, yeah, because they're buying equipment that that is going straight into storage because they they know it's looking like they might not get access to the long run. So what's the actual real number? It's sort of, sort of hard to tell, but, but you also have just, we have to figure out how to make

• 28:16Ben Thompson?

  all these components on our own, which is insane thing. It's insane economically. You, you, you, there's no, this is, we've talked about this TSMC and Intel. There's no reason for an Apple or an Nvidia to go to, go to Intel, none. It just doesn't, it doesn't make any sense. It doesn't make any sense for any company to build trailing edge semiconductor capability that can support the car industry. No economic sense, none. Why? You can just go to TSMC and buy it. Uh, you go to TSMC and get, get your chips fabbed. You only do that because you have no, for national security reasons, but even then it's almost impossible. The one way to make it happen is I literally don't have, Huawei, I don't have chips.

• 28:59Ben Thompson?

  I like, my existence as a company is dependent on this happening. Suddenly you have a possibility.

• 29:05Andrew Sharp?

  SMIC, let's talk.

• 29:08Ben Thompson?

  And so the US created those conditions. They created the conditions for China to become self-sufficient. And again, they're not self-sufficient yet. Even these Ascend chips that, that, you know, SMIC is getting reports now, or, you know, we talked about, it shouldn't have been a surprise they're doing seven nanometers. It was almost certainly unprofitable. Now we're three years on or something. It sounds like they may be profitable now, which, which is totally plausible. I think that's believable. You've they've had three years to sort of figure it out to do this crazy quad patterning. And by the way, they lost almost certainly billions and billions of dollars along the way in a way that Intel understandably could not have borne with their 10 nanometer problems. If they kept at it long enough, they probably would have gotten it, but they would have got bankrupt in the process. Well, guess what?

• 29:53Ben Thompson?

  A way to not go bankrupt is to have no choice. And here the government funding does make sense like, like you're going to be backed up, you're going to figure this out. And now they probably are making seven nanometer chips and very evolved versions of them that are probably much faster than the old seven nanometer chips of old. And they're, they're probably doing it properly.

• 30:11Andrew Sharp?

  Huawei's yields are apparently improving as well. They had 20% yields that are apparently up to 40% now. Who can say how real those numbers are, but it's reasonable to assume that there's real progress being made and it's reflected in some of the products that Huawei has been bringing to market. But we're now 30 minutes into the podcast and your take is that we should lift the chip ban and try to recreate the conditions that existed in 2017 and bind China to TSMC once again going forward. Is that right?

• 30:46Ben Thompson?

  Yes. So the Trump administration, again, I think, I'm not sure the ZTE and Huawei bans were fully thought through in the implications. So that's a negative checkmark. On the positive side, the one really important thing they got done in the single most important chip regulation or convincing or, or, or jawboning was EUV, there's not a single EUV machine in China. Now, this does not mean China will never make an EUV machine. Like it's been invented once, it can be invented again. And, and so at some point they will figure out how to make an EUV machine, but. It is, I think, still reasonable, even with SMIC's impressive progress with DUV

• 31:30Ben Thompson?

  machines and quad patterning and all these sorts of pieces, and their willingness to not worry about yields. I think at some point, there's just a hard wall. Like, like, you need to figure out how to get that beam of light that does the actual etching, small enough to go down to these small. The light is still wider than the actual, like, like, size of these chips, but it like, DUV, it's just, it's like a bridge too far.

• 31:55Andrew Sharp?

  Chips are infinitesimally small. So, yeah.

• 31:58Ben Thompson?

  And so, so the, I think EUV is a wall. And China does not have an EUV machine. They know an EUV machine exists. They know in broad strokes how it works. At some point, they will make one. It would be a lot easier to make one if they had even one in the country. Because you could actually, like, like, like, like, see what it is.

• 32:17Andrew Sharp?

  I mean, reverse engineering is a specialty of the Chinese economy, generally speaking.

• 32:21Ben Thompson?

  Yeah. And again, this is where, in the empathetic mindset, we reverse engineered a lot of stuff from England in the, like, 1800s and 1900s, right? This is, it is sort of, it is what it is. We're in the real world here.

• 32:34Andrew Sharp?

  Yeah, that was, I was not being derogatory there. They're unbelievable at what they're able to accomplish.

• 32:39Ben Thompson?

  Right. And so, so the, so you have this, this sort of wall, and I think that wall is still meaningful. We went to five nanometers, then we've gone to three nanometers. This year, we're coming out with two nanometers. In a few years, it'll be basically one nanometer equivalent. They're starting to change the names. There's a bit where all this is, is marketing speak, but these are meaningful shifts. Like, you, you, the chips become exponentially smaller, which you, means you either get way more efficiency, or way more speed, or some combination of the two. They run more cooler. Like, there's just lots, there is, remains un-allied goods and positive. The entire computing industry and history is

• 33:22Ben Thompson?

  based on this process continuing. And so, they're, like, we're, we're still talking about a pretty massive gap that is set in the long run to continue to expand. For quite a while. And so all the talk about what China has done to have good enough chips as far as these ascend AI accelerators go. The reality is they're still pretty substantially behind what comes out of TSMC. And there's a real significant wall between them overcoming that. Again, I think they will get over that wall. I, I, it's still going to, it's going to take some amount of time. And in that amount of time, the gap is going to continue to widen.

• 34:02Ben Thompson?

  And so despite all these factors, despite the fact that every company in China knows they need their own supply chain. Despite the fact this is a priority for the government and they'll funnel all this money. I still think this wall is so significant. And the benefits of super powerful chips are so massive. All the reasons why these chip regulations exist because we don't want China to have them for fear of what they will do with them. Is exactly why I think if the chip ban went away. Huawei can talk all they want about the great progress SMIC has made. They're putting an order in for TSMC's leading edge tomorrow. And yeah, ByteDance and Alibaba and DeepSeek and everyone else.

• 34:45Ben Thompson?

  They're buying Nvidia chips tomorrow, the, the top of the line ones if they can. And that again, and so the response here, yeah, but they will also then be building their, yes, they will. But I think it matters the extent to which if your life depends on it versus, oh yes, we should also be doing this thing in parallel. I, I just think like semiconductors are so hard and so difficult that this will meaningfully blunt China's progress in actual semiconductors, in semiconductor manufacturing equipment. Because so much energy and money and focus will go to, oh, thank God, we finally have advanced chips. By the way, we need to build AI. We, we like, like, so let's, let's buy from TSMC. Is this an ideal situation? If my recommendation.

• 35:32Ben Thompson?

  Is one that would have been better in 2015 and 2016, 2017. Maybe I should have come out more full throated, not buried it in a daily update with Huawei. I should have been yelling at the rooftops then to say, we are going down the wrong road. This is where it plays out. I think that's a totally fair critique. But this is sort of the, the reason I felt I had to write this now. By coincidence, that Bloomberg report came out about the Trump administration probably strengthening chip controls. You saw this was going to be the natural reaction to deep seek. You saw like, oh, they're, they're catching up as it is. We need to crack down harder. We need to do it more. And my takeaway is, look, no, this is our last chance to. This is why I started all the, I mean, honestly, all the opening part of the article about AI

• 36:16Ben Thompson?

  probably was a distraction from getting the main point. Part of it, I just, I, I've been trying to write this article for so long. It was hard to get me off the mat to do it. And that was like an easy way to get started. And so, and then it was two in the morning. I'm like, I can't rewrite this and edit it. It's just going out the way it is. It's like.

• 36:33Andrew Sharp?

  You voiced that complaint earlier and I disagree. I actually think it was an important way to frame the discussion of TSMC and its importance to the American economy, because it's easy to overlook that for all the hype around everything that AI is going to do, everything that AI makes possible today, what it might make possible tomorrow, all of it is still reliant on Nvidia, which is still reliant on TSMC. And if you take TSMC off the map in some sort of invasion scenario, everyone is screwed and all of this progress grinds to a halt. And I thought it was important to make that point on the way into the discussion of why

• 37:15Andrew Sharp?

  it's important to protect TSMC and think about incentives here and think about the most effective ways to deter China from invading Taiwan. So. I liked the intro more than you did.

• 37:27Ben Thompson?

  I appreciate it. Thank you. Thank you. The, the, the, uh, yeah, that's exactly it. I mean, honestly, I think the AI industry, just from a broad perspective, is a phenomenal endorsement of capitalism. People want to complain about, oh, we need top-down state control XYZ. This is actually an amazing example of how a private industry can do things more effectively and efficiently than a centralized top-down thing can do. We, I called it the Goldilocks moment. Like, we sit here on the side, we're like, is it actually economically sustainable to be building these leading-edge models that people, that can be distilled and people can quickly catch up? Um, it's a fair question, but it's, it's an open enough question that it's happening and it's

• 38:08Ben Thompson?

  happening on multiple fronts. Anthropic is, is getting investors and investing. OpenAI is getting investors and investing. Google is investing. We, we, we have, we have multiple companies. We have XAI coming out of nowhere. And by the way, I love Grok. It is like, I, it actually is making me questioning some of my, on what had, my bit about OpenAI controlling the, the consumer interface and mindshare is really important. I think that still holds. For me, I was going on about, yeah, I see how people think Anthropic is a little better than, than OpenAI, but I like the OpenAI app and I just, I'm used to it and I'm sticking with it. Uh, no, I have almost completely, like, deep research is still amazing, but Grok for just your general chatbot, it's just, it's so

• 38:53Ben Thompson?

  much better. It like, in my, in my, in my estimation. And so the, and so, yeah, but which is great. There's massive competition happening here. It's not enough competition to make people stop investing. So we're getting the best of both worlds. Meanwhile, we have prices being driven down to nothing. We have these open source alternatives that are coming along. We have all these hyperscalers that are making these decisions. We have the Neo clouds that are coming up and, and, and absorbing capacity if you want. I just saw something on Twitter about how H100 utilization is back to being sky high after DeepSeek, which we saw in China as well, where, where suddenly it's like, wow, this is like, and you have companies who are always kind of wary of getting locked in to these companies. Like, well, at the worst, there is an open source if we always need to go in that direction. And Llama obviously is, has been a player in this regard, too. They

• 39:38Ben Thompson?

  have some, you know, they have a big challenge in front of them. We're not going to see anything, I think, until this LlamaCon, but what they have from a reasoning model and can they, you know? Really get back in the game. Again, terrifying if you're worried about AI Doom. And so I'm just acknowledging that we'll get people emailing about it. I'm not, we don't have room to get into that right now. Other than to say the doomers have to adjust to a reality that DeepSeek exists. Like I called it the like the minimum open product or minimum like, like that is the level that is just available to anyone. And any like being precious about anything at that level or below is by definition crazy, right? You, you go back to GPT two not being released because it's too dangerous.

• 40:20Ben Thompson?

  It's like fast forward a very short amount of time and, and sort of here, here, here we are. And in this.

• 40:27Andrew Sharp?

  It's all working.

• 40:28Ben Thompson?

  It's all working and there's a single dependency, which is even more than Nvidia, which I think we could be overcome. It is TSMC and, and TSMC. This why I started with the island. It's why I started with that in-flight magazine. It is, it is, and you have a, the other problem is you have this mismatch of interests between the US and China. The, the US of course wants to support Taiwanese democracy and economically is dependent on TSMC. China doesn't care at the end of the day about either. They want Taiwan and if it's bombed to smithereens and is, uh, uh, that's fine. They'll still take it and be happy about it.

• 41:13Ben Thompson?

  And that's like, there's, there's a, there's a, it's, it's a mismatch of desire and motivations that I think is, is very problematic. In sort of the long run of time. And it, it just worries me to accentuate that. China already wants it more. And then if they take away incentives to not do it, that, that, that just makes the situation worse. And, and, and so.

• 41:43Ben Thompson?

  Yeah, I don't know. So do we give them a

• 41:46Andrew Sharp?

  I mean, that's what I like about your argument. I'm not sure I agree wholeheartedly, but I thought it was a compelling case. And to your point on China's willingness to buy from whoever is fabbing the best chips, like, we've had indications over the past couple of years. It occurred to me while you were talking, TSMC has been accused of fabbing for Huawei subsidiaries over the past few years. So even as Huawei is working with SMIC and having all the success with the Ascend chips, like, clearly, or allegedly, there's still some appeal to working with TSMC. And also, another feature of the Chinese market is that it is unbelievably competitive. And so, a company

• 42:28Andrew Sharp?

  like ByteDance, a company like Huawei, like, everybody is going to be vying for the best chips.

• 42:32Ben Thompson?

  Yeah, no one is compromising their product.

• 42:34Andrew Sharp?

  To stay ahead.

• 42:35Ben Thompson?

  That's right.

• 42:35Andrew Sharp?

  Exactly. And that's important to keep in mind, that it may be a communist country, but it is very, very capitalist and cutthroat in a lot of respects. And in terms of some of the previous debates that we had, I think that one of the problems that I had, talking through it with you, is we were talking about the chip ban and chip loopholes in general terms. And what the chip ban has entailed over the last several years, is really two things. Where on one hand, we're banning actual chips, and then, on the other hand, we're banning chip making equipment. And so, some of the loopholes that exist on the equipment side, have been pretty maddening to me,

• 43:18Andrew Sharp?

  just as a matter of coherence. Like, if you're worried about protecting this advantage, and protecting America's long-term technological dominance, which had been one of your stated concerns, we were talking a couple of weeks ago, the fact that you would ban chips and highlight the importance of this area, and then not ban some of the critical chip making equipment, and make sure you cut out the knees of the PRC chipmakers,

• 43:48Andrew Sharp?

  Just strikes me as frankly, just insane and incompetent. And so that was the piece of your article that also resonated with me and is important to consider in tandem with the idea of lifting any of the bans. We're also talking about closing some of the massive loopholes on chip making equipment, and that is crucial.

• 44:12Ben Thompson?

  Yeah, you put your finger on what I think is, most people who object or get their hackles raised by this article are offended or bothered by the trade off I'm implying from AI. That basically we're giving China the tools necessary to build their own AI systems. And yes, that is, that's why it's up front and it's a painful trade off. It's also one that you go back to, there's long debates about nuclear and you know, clearly there were people, you know, we know now there are people in the US nuclear program that basically just gave it, gave it to Russia for whatever reason, whether they're communist or whatever it might be.

• 44:55Ben Thompson?

  You can also look back in the fullness of time and make an argument that that was actually, those people were traitors and also did more for world peace than, than almost anyone. Because, and this is, it's a hard, like, I almost feel like my skin crawling making this point because they were traitors.

• 45:15Andrew Sharp?

  It's a real common room bit of logic, but yeah, you can certainly make the argument.

• 45:19Ben Thompson?

  Mutual assured destruction worked. It really did. And is there a level of arrogance and not thinking through what it actually means for one country to control what some people would argue is analogous to nuclear weapons in terms of being a superpower and the capability to dominate other, other entities, like when it comes to AI? Is it actually in some respects more sustainable in the long run that AI is diffused generally? And by the way, that's kind of been my argument about the, the whole safety issue. It's not that I dismiss the safety issue, it's that I don't think that this is containable.

• 46:05Ben Thompson?

  You know, in a way that there's a lot of hand waving about about how we're going to actually limit this and control this. And I think DeepSeek sort of really hammered this point home. AI is coming. We need not just AI, good AI, we need good AI to defend ourselves against bad AI. And this is sort of that same argument writ large, which is a balance of powers. Maybe the only long term sustainable way about this. So anyhow, I haven't even responded to your point yet. So that that's part number one. That's trade off. Number one. Trade off. Number two is arguably more painful and does in some respects go against the argument that you just said that I'd made previously. Saying we're going to block all US semiconductor

• 46:49Ben Thompson?

  equipment from China is putting the kiss of death on our semiconductor manufacturing industry in the long run, or at least our dominance of it. Because China will go down that path. Some number of alleys may or may not decide, hey, if US is sort of sacrificing this, we'll just sell to China. That's actually going to be bigger and larger in the long run. And we can take over these areas that the US has dominated. You're setting yourself up for 30, 40, maybe shorter, 10, 20 years, where it's not just that China has its own semiconductor manufacturing equipment, but also now they're selling outside of China to the world and undercutting us, basically doing to our semiconductor equipment manufacturers

• 47:34Ben Thompson?

  what China has done to every other industry. And we've seen how that has gone. And that that in many respects, this is the grace that you would give to the Commerce Department for all these loopholes, which is, you know what, China making seven nanometer work with almost exclusively American or Western, I should say, Western equipment.

• 47:56Ben Thompson?

  Yeah, that sucks, but also it's a good thing because that means they're not making their own semiconductor equipment and they're not moving down that learning curve to do it. And, and so this is the other big trade off that is in this article. And this is the consequence of writing this article in 2025 versus writing it in 2017 or whenever it might've been written. I think that the value and importance of maximizing Chinese dependence on Taiwan is significant enough that at this point, we've waited so long that it's not just that we're sacrificing a world where we dominate AI and no one else does.

• 48:37Ben Thompson?

  And by the way, I think this is where DeepSeek should change some minds in that regard. But also we're sacrificing the long run dominance of our semiconductor equipment manufacturing industry. And that, at least for me, is actually an even more painful pill to swallow. And just the AI was, it's not that it's a big deal. It's that I've already resigned myself to that fact mentally. The second one for me personally is, is in many respects, a more difficult trade off to make.

• 49:00Andrew Sharp?

  Yeah, well, and I mean, the state of the export controls now is full of holes. And Semi Analysis last year wrote, "Current sanctions are strict downstream on AI accelerator chips and similar. They are looser upstream on equipment to produce these chips and nonexistent for components of that equipment. This strongly incentivizes and enables China to develop an indigenous capability in manufacturing equipment, eventually rendering sanctions toothless. Instead, restrictions should be stricter upstream, tight on equipment and tighter on its key components. For example, current controls prohibit exports of EUV scanners into China, yet they do not restrict EUV optics from Zeiss.

• 49:45Andrew Sharp?

  This makes no sense. ASML and any chipmaker using EUV can tell you that projection optics are the number one critical component. While it is not practical to control every nut and bolt, certain items obviously must be. Where to draw the line? There are fewer than 100 critical components from specific suppliers." That should be restricted, including EUV projection optics, precision mask stages, and radio frequency plasma generators. So having read that piece, when you were talking about lifting the chip band and relaxing the chip band a month ago, because you were concerned about the long term industry, that's where I was like, well, so are we still going to be selling all the

• 50:28Andrew Sharp?

  components that allow them to work on developing their own chip making industry? And it is a lot more coherent if we're closing those loopholes and then saying, keep buying from TSMC for the next 10 to 15 years, and then let's see where we are. Now, the other aspect of the argument that is tricky is in order to actually control the flow of chip making equipment, America would have to work with Japan and Tokyo Electron and the Netherlands and ASML and Germany and Zeiss. And whether the US can do that effectively is an open question. I mean, that's what the Bloomberg story this week was focused on, is the Trump officials meeting with Japanese and Dutch counterparts to discuss

• 51:13Andrew Sharp?

  tightening these export controls. And the Biden administration tried that, and they were unsuccessful at convincing ASML and Tokyo Electron to get on board. But we'll wait and see to see how effective the Trump administration can be and what sort of carrots and sticks might play into that process. I think that's one of the biggest questions of 2025 is they try to craft their policy in this area.

• 51:41Ben Thompson?

  Yeah, well, the biggest question is zoomed out is really, what is the structure of the world in 20 years or shorter or longer or what it might be? And this is where, you know, I mean, this is, who am I? I'm a tech blogger to be making pronouncements about this. And, you know, my concern that I'm really just thinking way too much about things, I'm just spouting my opinions. But it's sort of inescapable with this point and with these geographic considerations.

• 52:19Ben Thompson?

  We've operated and decisions have been downstream from 25 years as the US global hegemon. And before that, it was the West versus versus the communist world. And that the West was dominated by the US. So the US has basically dominated its economic and technological sphere for since the end of World War II. And that and I've been thinking, you know, just big picture, what went wrong? Like, what are the issues that we ran into? And I think the, you know, the US, all this worked, the US, like, we're going to leverage our consumer market to rebuild Europe, to rebuild Japan. And, and yes, it's going to cost us some degree of manufacturing, but there's only so much

• 53:04Ben Thompson?

  of that that a Japan or a Germany can actually absorb because they're just smaller countries. The US is by far the biggest country in this coalition. And so there was a lot of latitude to be generous in a way that Pax Americana was deeply generous to the rest of the world in exchange is that we're going to be policemen and we're going to make, we're going to guarantee peace. That, that worked. And the problem with China is China's just too big. That, that's really the issue. It's not that you can, we can get into the specifics of debate and China overly subsidizes its, its export industry and insufficiently, you know, pushes its consumer market. And that's the real problem.

• 53:48Ben Thompson?

  And all those can be right in various ways and discussions, but there's, at some point, you zoom out far enough, it actually goes back to the map. China is a very large country. And by virtue of that, when and if they ever got their shit together, it was just going to be in the structure where the US dollar is dominant, heavily favors.

• 54:15Ben Thompson?

  External production of goods and importing to the US just from like, like, and this is a whole TSMC bit. We've talked about currency and, and all the bits that goes into it. Uh, you know, the dollar is not just strong. It's also particularly strong against the Taiwanese dollar in a way that, that maybe doesn't make, make, make total, total economic sense, which is a, a, a big advantage for, for TSMC. But, but China enters into this system and it just got too expensive. It's too expensive and the US, you know, the, it's not an accident. We could point to politicians and Doge and all this sort. It's not an accident. The debt exploded in conjunction with, with the Chinese growth and, and takeover of this. It's not

• 54:57Ben Thompson?

  an accident that where US manufacturing really went away and where all these center towns got devastated was in the context of China. The, it is just so big that a system predicated on one country being generous just wasn't sustainable when that generosity was flowing to an entity that wasn't just of equivalent size geographically, but population size is actually much larger. And, and so there's, this is why structure. Is this actually sustainable in the long run? And you would, again, it's always hard to know exactly what Trump is doing, but there's, there's a lot. There is an Occam's razor explanation of a lot of

• 55:40Ben Thompson?

  the weirdness where the weirdness makes sense in the context of Pax Americana and the US being at the center. But if you're, if what you're actually thinking about is a world where that's over, then a lot more stuff sort of makes a lot more sense. And, and it, you know, things like tariffs that we've talked about, things like really sort of being aggressive within your, your continued sphere of influence, which is the Americas, things like really, uh, just not caring what the Europeans there do and tell them the way it's going to be because, uh, that's not necessarily like, like that, that if you're living in the Pax Americana world, it seems absolutely bizarre.

• 56:24Ben Thompson?

  If you're thinking, actually, this whole thing is going away. Do you want that to happen to you? Or do you want to aggressively go there on your own? And this also ties into the China Taiwan thing. Like, the US sort of stepping back from Europe. One way to think about it is, okay, Pax Americana can't control the whole world, but it's going to continue to exist. We're just shifting from Europe to Asia. And so we're going to double down on defending Taiwan and defending the first island chain. You know, the Philippines, Taiwan and Japan. You think about the first island chain. That gets back to my point. China sees it as a chain as well, a chain they don't like very much, right? But maybe that's one solution.

• 57:05Ben Thompson?

  But in that solution, Taiwan is a real flashpoint because that's the most important link in the chain. In the second one, which is a depressing, and I'm not necessarily saying this is a good thing, but potentially realistic view, which is China is becoming so large and so powerful that it's inevitable there are going to be the Asian hegemon. And that by definition has to include Taiwan. We can debate these points, but the implication in terms of TSMC is the exact same. There's just no world where this isn't this critical flashpoint going forward.

• 57:41Andrew Sharp?

  Inevitable problem, yeah. And so the goal in that scenario is to

• 57:46Ben Thompson?

  It's buying time.

• 57:47Andrew Sharp?

  Create economic incentives that help you buy time. Yeah.

• 57:50Ben Thompson?

  It's buying time. And that's really, there is no more disgusting trade off to make than to say, I'm going to trade away AI and I'm going to, or trade away our semiconductor equipment manufacturing just for 10 more years, just for 15 more years. But that's the problem of waiting till 2025. And, and I don't feel great about it. It's why I'm tired. It's tiring. It's not that it's physically tiring. It's tiring to force yourself to consider and make trade offs that feel terrible.

• 58:27Andrew Sharp?

  Well, I'm tired too. I'm right there beside you, so it's all good.

• 58:30Ben Thompson?

  For a much more legitimate reason.

• 58:32Andrew Sharp?

  ZX, part two. I just enjoyed this email. Implicit in the essay is Ben's skepticism that we'll get to AGI in the near term, and in the long term, Taiwan will become a part of China. It's understandable why he doesn't say that explicitly. In that world, it's rational to empower Chinese AI in exchange for long-term US semiconductor manufacturing competitiveness. But if one takes seriously the sincerely held belief in big AI labs that we will get to AGI in the next few years, which will result in a step change, then allowing Chinese AI to access the best chips is insane. From an AI safety perspective, this will intensify the AI race even

• 59:14Andrew Sharp?

  more and increase the probability of doom, which he writes as P parentheses doom. I'll just note for the record that the worst part of me working in tech now is that all you nerds use message board terminology with a straight face on a regular basis. You even dropped P doom in your article this week. It's horrible stuff, but ZX continues. I'm glad I got a smile out of you there. Maybe the Straussian reading is Ben is advocating for policies that will likely fail as the structural forces against US semi manufacturing are just too great, but in the process will bring us closer to the pre 2018 world where both the

• 59:55Andrew Sharp?

  US and China depend on Taiwan. Nobody is incentivized to go to war and Taiwan can be Taiwan and Ben can continue to stay in Taipei. So Ben, do you have a comment on that Straussian reading? Straussian reading is another big tech guy phrase these days. In the real world, we just call that subtext, but do you have thoughts on what ZX had to say there?

• 1:00:19Ben Thompson?

  Well, I think Straussian reading was very popularized by Tyler Cowen, who was quite influential in Washington DC. So I think you've been swimming in those waters longer than you might think.

• 1:00:29Andrew Sharp?

  George Mason's finest.

• 1:00:30Ben Thompson?

  Yeah, I don't think he originated it, but he's very closely associated with it. He, maybe he is, I don't remember, but it goes back to Leo Strauss. Anyhow.

• 1:00:37Andrew Sharp?

  Leo Strauss is the originator. Yep.

• 1:00:40Ben Thompson?

  No, no, but I can't remember if he, but I can't remember if Leo Strauss invented Straussian reading as a phrase, or I think it might have been Tyler referring to Leo Strauss, whatever. We can come back to, maybe someone will email us, the etymology.

• 1:00:55Andrew Sharp?

  Yeah, we'll settle it on the mailbag episode.

• 1:00:57Ben Thompson?

  Yeah, Straussian reading is basically what is actually being said here. And yeah, I mean,

• 1:01:04Ben Thompson?

  That's why I want to be upfront, like, I'm clearly not objective here, like, like, and the challenge of Stasian readings is sometimes they're intentional and sometimes they're unintentional, right? What, to what extent am I motivated by wanting Taiwan to stay exactly the way, the way it is? Uh, very, very fair question, but I'm not sure with Stasian, I think I'm pretty explicit. Well, no, the Stasian bit is having the whole way to revive intel. That's where this article arguably went off the rails. Like, there's a lot of crazy proposals I put in there, in part because it's such a hard problem. So there was, you know, there, there's a, an aspect of me making a choice, let's expand the Overton window, there's another big tech guy term, let's expand the Overton window

• 1:01:46Ben Thompson?

  very wide and just throw stuff out there, knowing not all this, like, like, yeah, the US is gonna build a data center with Gaudi AI accelerators being probably available. That sounds stupid, right? In isolation. The reason it's in there, let's indemnify for copyright, uh, like, the reason it's in there is just to, the point is to emphasize, we, we have to pull out all the stops here. Everything needs to be tried. And implicit in the absurdity of some of the recommendations, the unlikeliness of them happening, is perhaps the deep rooted concern that none of it's gonna work. That, that we are just structurally dependent on Taiwan and outside of a war, that's not

• 1:02:30Ben Thompson?

  going to change. So, let's do everything possible to avoid that war and preserve the status quo as long as possible.

• 1:02:38Andrew Sharp?

  Mm-hmm.

• 1:02:39Ben Thompson?

  It's a fair, it's a fair, it's a fair point. Um, and, and, and that, that might be right. It might be right. Do you like, like, and then you, I talk about the Trump administration, this shift, you know, are, is this an ongoing shift away from Pax Americana to a multipolar world? Uh, it may be, and it very well may fail, just because these shifts don't happen because you want them to. Just like you don't create a semiconductor industry because you want it to. It has to be pulled into existence. Do new world orders happen because you want them to? Or do they get pulled into existence? Existence by breakages of the old one.

• 1:03:17Andrew Sharp?

  Right. I mean, that's on the Intel point. We didn't really talk about that because I on the other, I said, I'm happy to discuss the chip ban because it is one of the most important issues in the world. I could not stomach another hour long discussion of how to revive Intel. But my takeaway from that section of the article was that subsidizing demand in various ways is what's going to be critical to onshoring, leading edge production. And absent a war scenario that removes TSMC from the equation entirely and creates that demand organically and very painfully, I might add, in any peacetime scenario,

• 1:03:57Andrew Sharp?

  if the US government is serious about creating onshore, leading edge manufacturing, the government's going to have to be both creative and really, really aggressive. If we're serious about enhancing Intel capabilities.

• 1:04:10Ben Thompson?

  Yeah. The problem with the CHIPS Act is twofold. Number one is the one we've talked about, which is, and I agree with Trump, it's subsidizing supply, not demand. It's on the wrong side of the equation. The second problem is it's dramatically too small. I'm sorry, pat yourself on the back for $50 billion. We're talking like, this is like a trillion dollar initiative.

• 1:04:30Andrew Sharp?

  Well, and that's what I appreciate. I mean, in terms of the prescriptions that you offer for US chips, at the risk of not doing a Straussian reading here, I mean, I think the chip making effort in this country may fail because the government is unlikely to be reading stratechery. But the recommendations themselves reflect an understanding of how the chip industry actually operates and how companies like Nvidia would actually behave. And I feel like that particular understanding has eluded, you know, US bureaucrats over the last several years as they nominally take this problem seriously, but also haven't really committed full bore.

• 1:05:12Ben Thompson?

  I mean, you're, you're just, you're, you're causing problems for me, Andrew. I'm trying to come on here and say that I'm just a blogger. The way it comes from, I know this is being read. And the terror is that people do actually follow my advice.

• 1:05:28Andrew Sharp?

  Well, then I hope it's heated.

• 1:05:30Ben Thompson?

  And then what verdict do I bear? But I think the broader point, you're right. This isn't the conversation about Intel. That's in there because it needs to be in there. People are, some people got fixated on that, like, oh, this doesn't make sense. I'm like, yeah, that's, my whole point here is to press on people. What a hole we're in. There's no good solutions right now.

• 1:05:55Andrew Sharp?

  And you also wrote about trying to subsidize demand three years ago. And the government still hasn't really taken action on that front. And so that's where it's like, people need to sense the urgency and act.

• 1:06:07Ben Thompson?

  And that's the whole Intel problem is everyone's fixated on Intel lost their lead on the leading edge. The reason that's problematic is because that was the reason for them to get demand. Whenever they built a foundry. If they, if they built, if they went this foundry route meaningfully, if they did the Pat Gelsinger plan in 2013, or even better, 2010, or even better. When they realized they missed out on mobile. The reason why, say, an Apple would go there and endure all the pain and figure it out. Is because they wanted the fastest possible chips and Intel had the capability of making the fastest possible chips. In a world today where they have nothing, there's no reason to go to, to an Intel.

• 1:06:50Ben Thompson?

  And even if 18A is marginally better than TSMC's 2 nanometer process, the gap isn't nearly significant enough in the way it was a decade ago. That's the cost. The cost isn't just that, I mean, obviously Intel's chips being inferior to AMD's chips has been a big problem for them. But the other cost is they lost their bridge to being a foundry when they lost their, their, their, their, their process, their process edge. Another thing just to address here, everyone is like, no, we just need to get TSMC to build more in, build more in America. From TSMC, from a pure corporate perspective and a responsibility to shareholder perspective, that's exactly what they should do. TSMC should be high tailing it out of Taiwan to a certain extent. The problem is that Taiwanese government isn't stupid.

• 1:07:35Ben Thompson?

  And, and there's like, there, the reason why the fastest chips in the US right now are 5 nanometer. They call them 4 nanometer, but it's an evolution of 5 nanometer. And they're building three nanometer. The three nanometer will come online once TSMC is down to one nanometer. Or I think they're calling it A16 or whatever, whatever it might be. Basically, the Taiwanese government has said you cannot export the leading edge and the N minus one node. N minus two, you can do that. Why are they doing that? Because the number one reason the US will come to Taiwan's defense is for that reason.

• 1:08:11Andrew Sharp?

  TSMC.

• 1:08:12Ben Thompson?

  So wait, I mean, I, of all the things Trump says, when he complains about the Taiwanese government trying to hold the US hostage. That's, yes, they are. That's exactly what they are doing. They're not stupid. Like, like, like, it is the number one reason why the US comes to Taiwan's defense. Now, as part of this, I mentioned the trailing edge. I think a huge problem. That's what that, that is, you know, and the trailing edge situation is tough because especially now because China's doing it. This is a terrible market, like prices is going to zero, even if you like to. It's not just the, to build a trailing edge fab would never make its money back. It's probably going to lose money on an ongoing basis.

• 1:08:54Ben Thompson?

  Like it's, it's, it's pretty dire, the economics realities about this.

• 1:08:59Andrew Sharp?

  Once China develops more trailing edge capabilities and makes it less economical for anyone else to operate.

• 1:09:06Ben Thompson?

  It's already happening. It's already happening. Just total price, price crashes sort of in this area. And that, that's going to continue. Uh, and so, yeah, but, but again, it's the same thing where, you know, we will, almost all of that is in Taiwan. Uh, the old TSMC is building, building that for ages and, and we don't get any of that from Intel. Intel, the way Intel worked is they would, as soon as they moved on to the next process, they shut down the old one. And repurposed as much of that equipment as they could and sold off the rest. Because they made their money by charging super high, by earning high margins on the front end. TSMC interestingly has shifted to that. Like, one thing that's been really interesting is they've taken five nanometer and they've converted some number of those lines to three nanometer.

• 1:09:50Ben Thompson?

  Because the problem is that like there's when you goes comes to your window in your car, you don't need a 3 nanometer chip. It's not worth the cost. You can have it all chip. It's fine. And so it's a challenge filling the especially because there's so much demand for leading edge. They're building like there's so many five or 3 nanometer or 5 meter fabs that they've built. Those are not going to stay filled. And so they're actually adopting a much more Intel approach to to what they're doing out of necessity. That's just the price of being on the leading edge. And it's been a really interesting transition for TSMC. I think one of the big mistakes TSMC made was underpricing 5 nanometer and underpricing 3 nanometers, not just because they have they could because they were the only players,

• 1:10:32Ben Thompson?

  but also because you're not going to make as much money in the long run because these you're not going to make all this cash flow off depreciated assets. They're not going to be filled. You're going to have to repurpose the equipment. So you have to charge more money upfront. So just from a pure analyst perspective, that's been a really interesting. But if TSMC takes over Intel's assets, you don't just make them work. You have to completely restart the whole thing. An Intel transistor is different than a TSMC transistor all the way down to the molecular level. The chemicals are different. The sizes are different. The density is different. Everything is different. It's not a trivial thing. And so you rebuild it. You get the equipment or whatever it might be. All the R and D is still in Taiwan. All the you know, and and all those government limitations and regulations are still there.

• 1:11:15Ben Thompson?

  And and why would the Taiwanese government agree to letting the US

• 1:11:20Andrew Sharp?

  Export that.

• 1:11:21Ben Thompson?

  Yeah, the US is like, we need your chip industry so that we don't need to defend you anymore. It's like, wait, why? Why? Like, so I I I admire

• 1:11:31Andrew Sharp?

  I mean, it strikes me as like

• 1:11:32Ben Thompson?

  greatly, but like

• 1:11:33Andrew Sharp?

  A good idea that you're just sort of spitballing with in a conference room. But yes,

• 1:11:40Ben Thompson?

  Everyone else gets a vote.

• 1:11:41Andrew Sharp?

  of how that would work.

• 1:11:42Ben Thompson?

  Everyone else gets a vote. The enemy gets a vote, right? In this case, Taiwan's not the enemy, but they get a vote and China gets a vote. And it's we don't just get to Make stuff happen because we demand that it happen. Maybe we could 15 years ago, but we don't get to do that now.

• 1:11:58Andrew Sharp?

  Well, and speaking of everyone else getting a vote, I mean, I had various sort of counterpoints and concerns in the wake of reading your article.

• 1:12:06Ben Thompson?

  Oh, wait, we've got a lot. You do. I do. I'm going to give you the 30 second answer to that.

• 1:12:12Andrew Sharp?

  No, I don't want to go through each one, but I do think as far as Pax Americana is concerned, I mean, the one thing that occurs to me as far as your proposal binding TSMC to the Chinese economy, I'm not sure how much that would actually sway Xi Jinping in the medium term here. Like providing China with unlimited access to TSMC probably won't be enough to dissuade the PRC from doing everything it can to indigenize its chip supply chain. And then also TSMC or no TSMC, taking Taiwan by force is going to entail tremendous costs

• 1:12:51Andrew Sharp?

  to the PRC. But from Xi's perspective, it's possible and probably likely that at some point he will decide those costs are worth it. And that's why if we're talking about the chip ban, it makes sense in the meantime to use every tool that we have to weaken China in every way that we can.

• 1:13:13Ben Thompson?

  Yep.

• 1:13:15Andrew Sharp?

  And the other thing as far as Pax Americana is concerned, what worries me about the idea that China has its geopolitical sphere, the US has its political sphere, Monroe Doctrine 2.0, the problem with that thinking in my eyes, based on consuming news about the US and China for the last two and a half years. And this is also why I don't ultimately think that Trump is going to concede anything on Taiwan. The PRC's expansionist impulses won't end with Taiwan if they do ultimately reunify with Taiwan.

• 1:13:51Andrew Sharp?

  And I mentioned this at the end of Sharp China yesterday, Palmer Lucky made a similar point on a podcast recently, but like if China takes Taiwan, just nothing from the past 10 years suggests that that's where it ends. Japan is right there. They were conducting drills around Australia and New Zealand this past week. And I just feel like the next step will be further harassing other allies in the Pacific. And that will ultimately be felt in the US. And so it's not like there's some stable equilibrium that would be reached if China does reunify with Taiwan. And it's in the American interest

• 1:14:31Andrew Sharp?

  to defend Taiwan because of that. That's at least the way I have understood the problem. And I don't, I don't know whether we're in a position to credibly deter them from a military perspective. I also don't know whether the PLA is in a position to actually take Taiwan now. And that is a source of ongoing speculation in the foreign policy community. But that's just, and I'm not really responding to your point, but the point that President Trump is potentially looking at the world that way, it strikes me as naive.

• 1:15:03Ben Thompson?

  Maybe. It may be naive to think that we can, if we just, I mean, if we just hold our ground in Taiwan, that will be, that, that, that will be enough. I mean, there's shades of this of if Russia invades Ukraine, they're going to invade all of Europe. Um, you know, I actually didn't know this historically, the only times Russia has invaded Europe is when Europe invaded Russia first. Um, so, uh, like there's, is there some aspect of self-projection from the European sort of Western mindset onto, onto these pieces? Obviously, there's, there's the, you know, the Cold War era where, where clearly, you

• 1:15:44Ben Thompson?

  know, the USSR was, was, was pushing abroad. So, um, who knows? Uh, you might be right, but it also might not matter when you get to the actual hard, cold hard calculations of war. War is about manufacturing. Uh, right now, we are not, we're not competitive. We have, I think in a skirmish, in a battle, I would heavily favor the US. The question is what happens when it gets past that initial skirmish and battle into a war of attrition? Uh, then I'm, then I'm. A little more pessimistic, I think would be a fair way to put it. The other thing I would say is, I think you mentioned this, but is AGI about to happen? Are we getting to the takeoff point?

• 1:16:28Ben Thompson?

  AI creates AI and it's going to create these capabilities, military capabilities, whatever it might be, that does become dominant in and it's sure, Ben, all your arguments make sense, just not right now in 2025, because the next five years, the next 10 years, five years are the single most critical time. So all the times for us to control the chips, even if it means sacrificing everything else, we just need to control it right now. Um, I would, I don't buy that argument and not because I don't, even, even, even if you grant that that's going to happen, we're still dependent on how these chips like that's what undergirds the AGI, right? So China could say, nice AGI you have there.

• 1:17:12Ben Thompson?

  Here's some missiles in Dushinchu, right? Like that, that, so that was fun while it lasted. Uh, there you go. So, so that, that, that's sort of objection, that's objection number one. Uh, objection number two is, and, and this is probably the biggest pushback I have on the Biden's view. I think it's hard to, to unpack the Biden administration's approach to chip controls to their AI regulations in general. I think all of this was influenced by the AI safety as contingent, which is also this weirdly acceleration contingent, which is AI is really dangerous, going to kill us all, therefore we must build AI as quickly as possible. Um, never fully made complete sense, to be totally honest with you, but I think that

• 1:17:54Ben Thompson?

  that had a very heavy influence on the administration and therefore we're going to simultaneously regulate AI and we're going to impose this chip ban. And yes, there's long-term costs, but it's really important for the next, next few years.

• 1:18:08Andrew Sharp?

  Mm hmm.

• 1:18:08Ben Thompson?

  The, the issue with that is from a Chinese perspective, there is the meme, nothing happens and that meme exists, like the thermostatic.

• 1:18:18Ben Thompson?

  Just things staying the way they are is extremely powerful. All my concerns, all my worries. You might say, Ben, you're just being like the people that thought about the worst possible outcomes of COVID. And actually, it was just a respiratory virus that if we had just treated it normally and not thought up the worst case scenario, actually would have been a much better place. And, and I think that's a very powerful response. And the meme, nothing happens, exists for a reason. China and the US are deeply enmeshed. China and Taiwan are deeply enmeshed. They're, it's not worth it to go to war. And, uh, and the other reason it's not worth to go to war from a Chinese perspective is every year that goes on, their relative advantage to Taiwan and to the US gets stronger and stronger. Again, Taiwan is off the coast of China.

• 1:19:03Ben Thompson?

  They have home court advantage, right? So just as they, as they become more capable, the, then the balance shifts. If we actually believe that AI takeoff is happening, that this AI is coming, that's going to be so amazing. It's going to make all these other AIs is going to control the world. That changes that calculus. Suddenly it's like, oh, it's not that we're getting stronger every year, so we might as well wait. It's, oh, if we wait too long, US is back, baby, with the killer AGI and all these sorts of things that, again, I think that, that, that's, you know.

• 1:19:38Andrew Sharp?

  No, that accelerates the timeline.

• 1:19:40Ben Thompson?

  Right.

• 1:19:40Andrew Sharp?

  Absolutely.

• 1:19:40Ben Thompson?

  So, so.

• 1:19:42Andrew Sharp?

  And, and that, I mean, that the advantages of the chip in is you're locking in a technological advantage that will compound over the next 10 years. But to your point on the US not being the only actors, China could potentially watch that happening and say, well, it's time for us to, you know, take a boat trip.

• 1:20:01Ben Thompson?

  Now or never.

• 1:20:02Andrew Sharp?

  About 70 miles.

• 1:20:03Ben Thompson?

  Yep.

• 1:20:03Andrew Sharp?

  And I, that's the unstated risk inherent to all of this. If we further close the loopholes and comprehensively lock in an advantage and handicap China's economy and technological progress, then we're accelerating a timeline that jeopardizes the future of TSMC, America's entire economy, the safety and freedoms of Taiwanese people.

• 1:20:27Andrew Sharp?

  And just the stability of the world order and the entire world like and that's what I took away from your piece and I think it's just important to keep in mind is that that is a real risk and it's often overlooked in the conversations around what the US should be doing and why everybody should tighten the restrictions and there's all this saber rattling particularly in the wake of deep seek and it's like maybe but

• 1:20:56Ben Thompson?

  Is that the totally wrong takeaway from deep seek right isn't the

• 1:20:59Andrew Sharp?

  Right.

• 1:21:00Ben Thompson?

  Takeaway that it's not going to work we're not going to live it

• 1:21:03Andrew Sharp?

  Well. You lose me there too I mean that's the thing is like deep seek was working on Nvidia chips and could just as easily be evidence of how important American chips can be and a reminder that they're still central to this story every success story in AI and we have not comprehensively controlled the flow of those chips over the last several years so it can kind of go either direction on that one.

• 1:21:30Ben Thompson?

  Yeah, um, and to your point though, uh, that's why I felt like I had to write this article just because at least I just maybe it's hard to write an article where you know you might be wrong and if you're wrong it's sort of catastrophically so because oh no China has AI oops uh it's better than us sorry about that oh they're made in Taiwan trivially because they got to AGI first right all the things could be on the opposite side and really screwed that one up Ben um you know so number one uh I'm just a blogger I take no responsibility um but but number two uh it was

• 1:22:13Ben Thompson?

  kind of driving me a little batty that I I've been talking about this deterrence issue with TSMC in Taiwan and moving from a world of both dependent Taiwan to us being really dependent on Taiwan and China dependent on Taiwan for years and it feels like I no one else brings this up and maybe I'm wrong I but I had and it's hard to make those recommendations that entail such painful trade offs but

• 1:22:42Ben Thompson?

  At least I said my part and and now it's to the powers that be to to figure out what to do with it. So now I want to go take a nap.

• 1:22:51Andrew Sharp?

  Yes. Have a great weekend, powers that be. Have a great weekend, Ben. I hope no smoke alarms go off during the middle of your nap in the next couple of hours. But we are coming back on Monday. Lot of great mail coming in the last week or so. People have celebrated my return by writing a lot of great emails. So thank you to the audience. Email at sharp tech.fm if others out there have takes and maybe we'll address them next week. Any final thoughts, Ben, before we sign off here?

• 1:23:19Ben Thompson?

  No, I almost all apology. I feel like this was a meandering podcast. I think my daily updates came out super late this week. Like I was working on this on Monday and then like 6pm. I'm like, I gotta, this isn't gonna get done. And so I shifted to write about Apple, which came out like super late. And then this came out late and my article yesterday, it's, and then now I'm talking about myself again. It's like, this is what I hate when bloggers do is no one cares about you. I tell this to writers, like you're out there selling a product. Don't like, I don't like appeals to the audience. Oh, can you please support me? I want to do this. No, you do a great product. You put it for sale and and and no one cares about you. Like, everyone has their own life, right?

• 1:24:04Ben Thompson?

  All that said, and yet here I am talking about myself and

• 1:24:10Andrew Sharp?

  Well, it's a difference between writing and podcasting. Lot of, lot of

• 1:24:14Ben Thompson?

  No, I turn it out every week. I turn it out every week. Like it's, and it's not a problem. It's, I love thinking about this. It's great talking to you. I'm so glad you're back. I missed you. It's, it's been really interesting, actually. It's been really interesting. I just, there was something about this that took so much out of me. That it's, it's, and maybe that's a reason to

• 1:24:36Andrew Sharp?

  Deeply personal.

• 1:24:37Ben Thompson?

  Yeah, maybe that's why. I don't know. It's just, it's just, I don't have a take other than it's just been an interesting to thing to self-observe, to be To be, have been writing for so long and doing this for so long and to almost not have had even just as like physiological response to, to doing some writing. I don't know. It's kind of interesting.

• 1:25:00Andrew Sharp?

  Yes. Well, I appreciated the writing. It did build on a lot of the conversations we'd had and it felt like a couple of the different Sharp Tech episodes, some of the debates with me, some of what you were talking about with Bill last week. It was like the first drafts of what came together on Strategery this week.

• 1:25:17Ben Thompson?

  Well, thank you.

• 1:25:18Andrew Sharp?

  And I think you've earned a nap, you know? You're clearly tortured over there, but I will talk to you on Monday.

• 1:25:26Ben Thompson?

  Little too full of myself. Need to go touch grass.

• 1:25:27Andrew Sharp?

  And we'll keep it rolling. You did remind me that people in the government read Strategery. I was under no illusions that they don't, but they hadn't listened to you to date on the chip industry. Enjoy your weekend, Ben, and we will circle back next week with plenty of mailbag questions and keep it rolling from there.

• 1:25:45Ben Thompson?

  Talk to you later.