supply chain – the _

[2983] Reading Chip War and some questions for Malaysia

I had expected it to be a technical reading but I was pleasantly surprised at the ease I read through Chris Miller’s Chip War: The Fight for the World’s Most Critical Technology. It is a 400-page book published back in 2022 at a time when chip availability was still a big problem that caused delays in delivery of everything that had semiconductors in it. Those goods included small electronics like cell phones and gaming consoles as well as large items such as cars. I had to wait for almost two years for the delivery of a new car from Japan. Even as the semiconductor market conditions improved by 2023, the issues discussed by Miller in his book remain relevant as the China-US tech war heats up further and as the use of AI among the public spreads.

For most parts, Chip War goes through the history of semiconductors and it is less so about contemporary contest between China and US. In this sense, I feel the title is a slight misnomer. When I first thought of the book title, I had imagined a little bit of reading notes from my work place: supply chain, industry interlinkages, international trade, policies, tariffs, war. While the author discusses these topics, they are all subsumed under the historical narrative that covered industry development during World War II and right up to the present day. And the historical narrative, in many ways, is written around multiple personalities (scientists, engineers, military men and politicians) who played (and still play) a role in the development of semiconductors. Contemporary issues are covered in a few chapters close to the end.

The author does provide brief technical description for things like early transistors, modern chips, and advanced equipment needed to make those chips. But that does not affect the readability of the book negatively, which is good thing. It is just not that technical. Some may find the non-technicality as a negative, since more than one engineer in multiple reviews have criticized Miller for oversimplifying various processes.

The United States is the main focus of the book, given its centrality in developing and the marketing semiconductors. Several other countries are mentioned extensively too. Soviet Union/Russia for its failure. Taiwan, South Korea and Japan for their successes. And China for being the new kid on the block and how the country is challenging US technological supremacy in a way the Soviet Union never could.

Malaysia has two or three mentions throughout the book, as the country plays major roles in testing and packaging of semiconductors. Those roles are not as sexy as designing or fabricating chips, but it is still essential in keeping the industry running.

Here, I want to touch something discussed in the book that has a direct impact on a specific Malaysian policy: the development of Malaysia’s 5G infrastructure within the context of China-US tech war.

Malaysia through its state-owned entreprise Digital National Berhad (DNB) is building the country’s 5G network with equipment and expertise supplied primarily by Ericsson. The selection of Ericsson is not without controversy, with the other contender being Huawei of China. The current government under Pakatan Harapan however appears unhappy with the DNB-Ericsson arrangement and has hinted that Malaysia should have a second network built by Huawei.

Of relevance here is that Huawei has come under strict restrictions imposed by the US, restrictions which have deprived the company from the latest chips needed to run 5G network. This has forced China to hasten the development of its own indigenous chip industry and indeed since 2020 when the US first tightened export controls on Huawei, the company and the general Chinese semiconductor industry have made progress in advancing its own chip design and manufacturing capability. Yet China is behind that of the US and its allies in terms chip technology. These allies include Taiwan that run the world’s most advanced chip manufacturing facilities (TSMC’s), and the Netherlands that makes the world’s most advanced chipmaking machinery (ASML’s). China is now able to design and manufacture 5nm chips (as of 2023?) but struggles to close the gap with 2nm chips that US-centric supply chain is now focusing on.

In more general terms, China might be 3-5 years behind the US chip technology. The 3-5 years gap might sound small, but for an industry governed by Moore’s Law, it is not something someone could shrug off.

Under these conditions, my question is, would it make sense to turn to Huawei for Malaysia’s 5G infrastructure (assuming building a second 5G network makes sense at all)?

From the way Miller described it in Chip War, Huawei faces difficulties in securing advanced chips needed for 5G equipment, unlike Ericsson.

And if Malaysia does get a second 5G network to be built by Huawei, would that 5G infrastructure be inferior to the first one due to restrictions faced by Huawei ?

Or is Chinese chip technology, wherever it is on the trailing edge, good enough for Malaysian purposes?

From Malaysian perspective, this does not sound like a geopolitical concern (Sinophobia?) that some in government make it out to be. Rather, it is a practical technological concern.

[2951] Politics of prices is counter-productive

There has been a global supply constraint of various kinds for at least a year now. The supply chain disruption was expected by many—I quickly noted the post-war Malayan supply-side crisis as a parallel. Nevertheless, few people expected the constraints would be this tight for so long. I certainly did not.

The tightness has slipped over into the Malaysian consumer market. Chicken, beef, vegetables are the usual suspects.

The waitlists for cars are long due to a persistent global chip shortage: I test drove a Peugeot several weeks back and that experience to me underscores how modern ground vehicles these days are more and more an electronic device than a mechanical one. I knew vehicles had an ever increasing electronics (and electrical) components to them. Several months earlier, I read a report showing how the share of electronic cost relative to total car manufacturing cost has gone up drastically in the past 20 years, from less than 1% to maybe 40%-60%. But there is a difference between reading it, and riding the thing. The dashboard is a computer screen popping more information any older car could show. When I say dashboard, I mean a dashboard full of dynamic data, with customizable menu. The air-conditioning controls are only accessible through a separate central LCD screen, which also controls other aspects of the car. Even the brakes can be controlled by the computer, along with so many other things.

It is not just chip and electronic components are in short supply. Somebody on Twitter jokingly said “oh, this is the chip shortages they were talking about” in reference to shortages of fries at McDonald’s in Malaysia and Japan.

Consumer prices are rising, and it would have risen higher if it was not for price control mechanism and subsidies in place in Malaysia. This is readily observed from the following chart, where consumer prices are not rising as fast as producer prices. The latter is a proxy to global prices.

PPI vs CPI

Nevertheless, despite enjoying the shield, consumers have been complaining about rising living costs. They demand actions. More than a few activists and politicians have demanded the same.

All governments are sensitive to such criticisms and this government, especially as weak, incompetent and clueless as it is, is doubly so. The opposition has been relentless in their criticism. Some Pakatan Harapan supporters have highlighted how their government played a better and proactive role in addressing prices, and go on to claim a Pakatan Harapan government would have been far more effective in managing cost of living problem. And when Pakatan Harapan was in power, Barisan Nasional and Pas, on top of their usual racist rhetoric, also attacked the government for rising living costs regardless of whether prices was actually rising (prices then were actually very stable due to the imposition of an overly generous blanket fuel subsidy).

I dislike politics of prices. While it has its uses in cases when there are monopoly abuses and regulatory hurdles (the drop in broadband prices are a great exception), in the current climate prices are largely out of the government hands. The truth is, if Pakatan Harapan was in power, they too would not be able to do much about it either.

But that does not matter. Such is the politics of prices.

The problem is with the supply itself and the players of politics of prices simply ignore the cause of the problem. Some even go has far as misdiagnosing it as unhelpfully as greed.

A supply-driven crisis like this requires investment to loosen up the supply chain: expansion of ports, new technology to hasten production and delivery, new plants, more workers, etc. Yet, the aversion for price hikes have led to large government subsidies (think fuel), which takes fund away from productive investment purposes that are needed to address the supply chain disruption.

Politics of prices not only ignore the source of price pressures Malaysian consumers are experiencing. They ignore wages. Prices and wages are part of the same coin: wages are prices of labor. Notwithstanding issues relating to income distribution between employees and employers, and technology-driven price cuts among others, the politics of prices suppresses price growth, and through it, risk of suppressing wage growth.

More than once, the politics of prices have led to calls for wage cuts. The targets have been high-paying professionals and ministers (and their unqualified advisors), but too often, it has gone a little bit too far. Mahathir as the 7th Prime Minister for instance, is a fan of pay cuts and that unfortunately set the tone for the whole economy when he was in power. Coupled with his obsession with government debt (government debt and transparency were a problem), and his history with the gold dinar movement, it felt like he wanted a deflationary environment.

All that set the tone for austerity. There was really no austerity in place—government spending went up and the economy expanded—but the narrative set by the PM made it difficult to convince many out there that that was no austerity. And the economy, even as it expanded, took heed of the deflationary sentiment.