Conflict chips – what’s Tencent’s role in the semiconductor war?

Here’s what you need to know this week:

• Affairs of state: Conflict chips – what’s Tencent’s role in the semiconductor war?

State-by-state:

• Google accepted Parler back onto the Play Store
• Apple is gaining an edge on Meta in ads
• Microsoft offered the US military advanced devices
• Amazon got mixed reviews on The Rings of Power
• Tencent had to make an investment u-turn

US officials have issued orders to chipmakers, including Nvidia and AMD, that special licensing will be required to continue selling advanced artificial intelligence chips to Chinese customers, effectively stifling supply to its economic and military rival. 

Why? The US restrictions are part of a strategy to deny China access to the advanced technology that it cannot yet manufacture for itself. Advanced chips – which include semiconductor material and integrated circuits – are crucial for advanced computing. At present, very few companies can design and manufacture the most powerful versions, but applications like facial recognition, autonomous vehicle direction and rapid searching all require high-end hardware.

Who makes advanced chips? Taiwan and the US are clear industry leaders. US-based companies Nvidia, AMD and Apple are all customers of the Taiwan Semiconductor Manufacturing Company (TSMC), located in Taiwan, which is the world’s largest semiconductor foundry and the leading global source of semiconductor material. 

In China, the government contends that Taiwan is an inalienable part of Chinese territory, making TSMC and its role in the global semiconductor industry a point of geopolitical tension. Xi has tried to encourage the building of more TSMC fabs (fabrication plants) within China. 

In the US, Congress recently passed a $52 billion federal programme to increase domestic production, with the additional aim of limiting the development of chip factories in China by TSMC and Intel.

Digital diplomacy. A spokesperson for China’s foreign ministry called the licensing order a bid for “technological hegemony”, but Washington described the restrictions as an effort to stop powerful chips being used for military purposes against the US and its allies – including advanced software to pilot defence systems, monitor video and satellite images and enhance military intelligence.

Some Chinese analysts have highlighted that the order could benefit domestic chipmakers. Professor Steve Tsang, Director of the Soas China Institute, told me: “It should have a major short term impact in significantly slowing the development of artificial intelligence in China, but will also provide an additional impetus for the Chinese state to redouble its efforts to develop high-end chips.”

Tencent. China’s largest and most valuable company has been engaged in chip engineering for several years, with much of the development happening at the research lab in Penglai that it established in 2020. Last year Tencent Cloud claimed to have developed three world-leading artificial intelligence chips that could significantly outperform industry benchmarks. 

Most notable is Zixiao, Tencent’s “artificial intelligence reasoning” chip that the company said would offer 100 per cent performance improvement over industry-leading designs in tests using video and image processing, as well as natural language and search functions. 

Can China catch up? Whether China will be able to establish some form of chip self-sufficiency is still unclear. Tencent’s claims about Zixiao have not been verified, and in the short to medium term the new US measures will slow the Chinese down meaningfully. Xi’s administration has committed to spending $150 billion on the domestic production of semiconductors by 2030, but for now the country accounts for just 7.6 per cent of the global supply and more than 50 per cent of demand. 

“Very few countries are able to develop cutting edge semiconductor technology. China aims to do so but it has never succeeded. Previously it relied on US technology and Taiwanese manufacturing with access to US technology,” Tsang said. “Lockdown certainly hasn’t helped. China’s education system is not there yet, and the restrictive approach of the Xi administration is largely responsible for the US policy change in stopping technology access. China will be playing catch up.”

Nvidia. The order is also impacting the US-based companies. Nvidia shares plunged 7.7 per cent on news of the restriction. 

“Nvidia is a clear industry leader, so Chinese customers that relied on its chips will have to use less advanced versions at less economical terms instead of the cutting-edge technology they expect,” Rui Ma, an analyst at TechBuzzChina, told me.

Nvidia’s most powerful chips – the A100 and H100 graphics processors – are able to accelerate very data intensive computing like machine learning applications, and will be subject to the new licensing restrictions. The company has issued a statement saying it would continue “engaging with customers in China” on the sale of products not subject to the new requirements. 

“Nvidia has pointed out that this isn’t necessarily a ban, just an additional licensing requirement, but any requirement that contracts chip supply doesn’t bode well for the future of advanced technology in China,” Ma said.

Why this story? These tiny chips have massive implications. Tencent and Nvidia – two companies on either side of a burgeoning global conflict – are being pushed to develop faster and more advanced chips to support powerful military capabilities. A long period of interdependence, where manufacturing and material extraction happened along a web of global supply chains, is breaking down. The future order of technological hegemony, and thereby military hegemony, might well be determined by a tiny chip built by one of these massive companies.

A right-wing app, Parler, has made it back onto the Google Play Store, while Donald Trump’s Truth Social is still barred. Both social media platforms have faced criticism and bans over claims that they facilitated incitement to violence at the Capitol Hill insurrection and subsequently glorified the events of 6 January 2021. Parler has implemented new content moderation procedures and convinced Google that it is removing hate speech with a high degree of reliability. Truth Social has not made convincing changes, and so remains off the store and unavailable to roughly 44 per cent of US users. 

Apple’s privacy changes have allowed it to gain ground on Meta’s advertising business. Google and Facebook – covert partners in the famous Jedi Blue arrangement (read about it here) – may be losing their grip on the advertising business. A new study has found that Apple is expanding its advertising business after making changes to iOS that prevent other advertising platforms from tracking users as effectively. In 2021, Apple saw 4 per cent growth in adoption of its advertising business, while Facebook and Google ad adoption fell by 3 and 2 per cent respectively. Apple, as the maker of the iPhone and setter of the operating system rules, is squeezing into the driving seat of the online ads market. 

The US military will get access to Microsoft’s combat goggles in a partnership worth $21.9 billion. Microsoft has announced that the US Army purchased 5,000 specially-designed Microsoft Hololens augmented reality headsets, which offer users a heads-up display with high-resolution night and thermal sensor data. The order is valued at over $370 million and follows a $480 million contract to produce 100,000 headsets in 2018. The provision of advanced technology to the US military has caused some controversy – Microsoft’s CEO Satya Nadella has defended the company’s military contracts, saying it “would not withhold technology from institutions that we have elected in democracies to protect the freedoms we enjoy.” Activists and rights organisations claim that such technology supports action which ultimately leads to civilian deaths.

Amazon’s Rings of Power broke viewing records on its opening day, but “review bombing” marred the return to Middle Earth. 25 million people streamed the first episode of the new series, making it the most successful launch ever on the platform – fitting given the production has been costed at roughly $1 billion. The show’s success wasn’t reflected in the reviews. Amazon has been forced to delay review posting for three days to combat the influx of “review bombing” which saw a cascade of “anti-woke” criticism of the shows non-white cast by trolls and bots. As Matt d’Ancona wrote for Tortoise last week, it’s uniquely bigoted to argue about skin tone in an imaginary world populated by elves, hobbits and dragons.

Tencent’s transformation into Xi’s model company continues. The latest episode in the internet giant’s compliance with the Chinese government’s agenda has seen it pivot from a global investor – with a massive international portfolio of investments in gaming and other technology – to a net equity seller, divesting nearly $14.5 billion of its $88 billion holdings. The reason: Xi wants Tencent to reduce its level of exposure to foreign markets and reign in its support for international companies to focus on Chinese businesses, whilst being able to survive the coming period of economic downturn.

Thanks for reading,

Luke Gbedemah
@LukeGbedemah

Additional reporting by Sebastian Hervas-Jones