trade war – 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.

[2887] Guess the 1Q19 Malaysian GDP growth

The 2019 first quarter GDP will be out on May 16. Since we live in an age of trigger warning, let us play the game first:

How fast do you think did the Malaysian economy expand in 1Q19 from a year ago?

Slower than 3.6% (17%, 4 Votes)
3.6% - 4.0% (26%, 6 Votes)
4.1% - 4.5% (30%, 7 Votes)
4.6% - 5.0% (26%, 6 Votes)
5.1% - 5.5% (0%, 0 Votes)
Faster than 5.5% (0%, 0 Votes)

Total Voters: 23

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The consensus views are that growth for the quarter will be weak, possibly in the lower half of the 4.0%-5.0% range. Some are even betting on something lower. There are at least two justifications for the pessimism.

One, industrial production grew only 2.7% YoY during the quarter, largely due to contraction in mining production. Supply disruption continued to bedevil the sector after a major incident in Sabah last year. Manufacturing did largely okay, except in February. This leads us to the second factor.

Exports. Exports plunged quite drastically in February and a bit in March. While some of it had to do with supply constraints in the mining sector, manufactured goods exports also dropped, which indicated weakness in external demand. The country until recently had benefited from the trade war through trade diversion and business relocation. This could be seen from FDI and trade data. But prolonged and wider trade war would slow the expansion of global trade volume, possibly to a point where trade diversion would not overcome effects from slower trade growth. If the February and March export trend continues (exports for the quarter was down and in fact, so did export volume) in the second quarter, that might indicate we have reached that point where positive trade relocation factor is giving way to volume growth slowdown. The the escalating China and the US trade conflict is very likely the one major contributing factor to Bank Negara Malaysia cutting its policy rate by 25 basis point rate last week.

These two trends could hit the domestic economy in terms of employment. But so far, employment statistics have been going strong. It has not budged from 3.3% and anecdotally, there has been no story of widespread layoffs caused by weakened domestic and external demand. There were layoffs, but those appear directly induced by government policy, not demand per se. For instance, the non-renewal of contracts for political appointees and other politically-linked projects, which are not quite demand-driven.

There are complaints of economic slowdown among the public and in the media for awhile now, but again, that has not quite affected employment statistics by one bit. This makes the slowdown in the past few quarters puzzling to me. A pure supply-driven slowdown could explain this and there were supply problems. It is also possible that firms are hoarding labor supply, with a view of better economic performance in the near future.

From pure GDP growth statistics perspective, there might be some good news. Net exports might be doing better, or more accurately, external demand is doing better than domestic demand. Export volume index fell 2.2% YoY for the first quarter; import volume dropped 3.1%. The usual goods exports decreased 0.7% versus import drop of 2.5%. This could boost the GDP growth up by way of net exports, even if it is just math at work. If the actual GDP growth does surprise the market on the upside, I think it would come from here.

The downside is, the import volume drop suggests private consumption growth had slowed down. After all, imports are just a reflection of domestic demand. But to be honest, the consumption growth in the past several quarters have been extraordinarily high due to the changes in the tax regime. Such growth should decelerate and we would only see a “normal” growth rate for consumption in the fourth quarter of this year once the tax factor has been equalized across the relevant period (This of course is purely from year-on-year perspective and this is where quarter-on-quarter calculation offers a quicker and a better way of measuring changes).

As for government spending, it should be on the recovery mode and I think the worst should be behind us (or nearby, if it is not behind). As for gross fixed capital formation, I would want to say the same thing, but I really do not know.