JUMP REPORT

I don’t believe in edge. I think it’s a fairy tale. The world is too competitive. Going back to AI, investing is where chess was in 1996, when there was an enormous race between human grandmasters and algorithms, and Deep Blue started to beat Garry Kasparov by using brute compute force. The above is from this interview with Gavin Baker, […]

Every investor in Micron Technology, Inc. (NASDAQ:MU) should be aware of the most powerful shareholder groups…

The company is optimistic that it can settle a criminal lawsuit brought by the Department of Justice.

(Bloomberg) — On a scorching hot day in late August, representatives of Taiwan’s government and industry crowded into the clinical cool of a state-of-the-art semiconductor facility for a symbolic moment in the global tech conflict.They were attending the opening ceremony for a training center built by Dutch company ASML Holding at a cost of about $16 million, small change for an industry used to spending $10 billion or more on a single advanced manufacturing plant.The real value of the site in the southern city of Tainan is strategic: It’s one of just two such facilities outside the Netherlands capable of training semiconductor engineers to fabricate cutting-edge chips on ASML machines. Fellow U.S. ally South Korea hosts the other — and Washington is working hard to ensure China never acquires the same technology.  As the U.S.-China confrontation takes root, the ability to craft chips for everything from artificial intelligence and data centers to autonomous cars and smartphones has become an issue of national security, injecting government into business decisions over where to manufacture chips and to whom to sell them. Those tensions could kick into overdrive as Communist Party leaders set a five-year plan that includes developing China’s domestic technology industry, notably its chip capabilities.Semiconductors made from silicon wafers mounted with billions of microscopic transistors are the basic component of modern digital life and the building blocks of innovation for the future. They are arguably one of the world’s most important industries, with sales of $412 billion last year; scale that up to the electronics industry that depends on chips, and it’s worth some $5.2 trillion globally, according to German manufacturers.Politics is roiling that business model, sparking a drive for more autonomy from the U.S. to China, Europe and Japan. “We’re in a new world where governments are more concerned about the security of their digital infrastructure and the resiliency of their supply chains,” said Jimmy Goodrich, vice president of global policy with the Washington-based Semiconductor Industry Association. “The techno-nationalist trends gaining traction in multiple capitals around the world are a challenge to the semiconductor industry.”At once highly globalized and yet concentrated in the hands of a few countries, the industry has choke points that the U.S. under the presidency of Donald Trump has sought to exploit in order to thwart China’s plans to become a world leader in chip production.Washington says Beijing can only achieve that goal through state subvention at the expense of U.S. industry, while furthering Communist Party access to high-tech tools for surveillance and repression. China rejects the allegations, accusing the U.S. of hypocrisy and acting out of political motivation.For both sides, Taiwan, which is responsible for some 70% of chips manufactured to order,  is the new front line.Beijing is increasingly hostile toward Taiwan, a democratically governed island it regards as its territory. Taiwan Semiconductor Manufacturing Co.’s status as the world’s largest contract chipmaker — a trend taking over the industry — the go-to supplier for Apple Inc. and the focus of next-generation chip-making, adds another dimension to China’s enmity, and to its standoff with the U.S.TSMC has become “turf that all geopolitical players want to secure,” founder Morris Chang said in November.Just a couple of kilometers from the new training center, cranes dot a massive construction site where TSMC is building “fabs” in which it will manufacture the most advanced chips in the world — chips that are no longer available to China’s Huawei Technologies due to U.S. export controls. Huawei used to be TSMC’s second-largest customer, accounting for 14% of sales; those shipments stopped in September.The White House has also imposed export restrictions on China’s largest chipmaker, Semiconductor Manufacturing International Corp., having already squashed Fujian Jinhua Integrated Circuit Co., once among Beijing’s biggest hopes to climb the chip ladder. The U.S. is also reaching out to key players at home and abroad to ask them to reconsider their relations with China.  China’s intentions are so alarming to America because chips can be dual-use items with military applications, according to a former official familiar with the U.S. administration’s efforts. “They are the fundamental basis of our qualitative military advantage, from missiles to radars to submarines,” the official said.After decades when the industry was encouraged to go global, Trump is attempting to reel it back home. The CHIPS for America Act introduced to Congress in June aims to set up incentives to support semiconductor manufacturing and research in the U.S.One executive at a Chinese semiconductor company, asking not to be named due to commercial and political sensitivities, said three of its deals had been aborted because of concerns raised by the Committee on Foreign Investment in the U.S., or CFIUS, which reviews the national security implications of transactions. Germany has also been effectively cut off, making any deals very difficult, the person said.China “firmly opposes the unjustified suppression” of its companies by the U.S. “under the weakest pretext of national security,” and will continue to defend them, Foreign Ministry spokesman Wang Wenbin told reporters in late September.China — the world’s biggest semiconductor market, accounting for more than 50% of all chips sold — isn’t standing by as its high-tech ambitions are kneecapped. That outsized demand means many major deals need Beijing’s sign-off: Qualcomm gave up its pursuit of NXP Semiconductors in 2018 after failing to win approval from China.China’s five-year plan for the chip industry will lend it the same strategic importance Beijing gave to its atomic bomb program. What's more, a law passed Oct. 17 may allow China to hit back at the U.S., with speculation that it could prompt export controls on rare earths used in chip production.Still, the rolling restrictions imposed by Trump haven’t just hit China’s chip capabilities but are upending the entire industry. And there’s scant sign of a climbdown, whoever wins the U.S. election in November.   Citing the need to promote “digital sovereignty,” the European Commission is exploring a 30 billion-euro ($35 billion) drive to raise Europe’s share of the world chip market to 20%, from less than 10% now.  Japan is also looking to bolster its domestic capacity. At least one Japanese delegation traveled to Taiwan in May and June this year in the hope of convincing TSMC to invest in Japan, a person with knowledge of the visit said. But TSMC announced in May that it was building a $12 billion facility in Arizona, and the company declined to receive any foreign visitors seeking to woo it, said another person familiar with the company’s thinking. Both asked not to be named discussing corporate strategy.Meanwhile South Korea, home to Samsung, the No. 1 memory chipmaker, is striving for more self-reliance after Japan imposed export curbs last year on chemicals used in semiconductor manufacture during a flare-up in the countries’ tensions over Japan’s wartime past.While the U.S. remains dominant with giants like Intel Corp and Qualcomm and a virtual monopoly on the software essential to chip design, “there’s no region in the world that can proclaim strategic autonomy in semiconductors,” said Jan-Peter Kleinhans, director of the Technology and Geopolitics project at Berlin-based think tank Stiftung Neue Verantwortung. “Take out any of these players and the value chain falls down.”In January, days before Trump signed an initial trade deal with China, Secretary of State Michael Pompeo sat down for dinner with around 30 CEOs in Silicon Valley. He was the guest of Keith Krach, a 30-year veteran of the tech scene who was appointed undersecretary for economic growth in June 2019.Pompeo had a message for them: China’s Communist Party “is a threat to your companies because they don’t want to compete, they want to put you out of business,” Krach recalled him saying, he told a virtual conference of the German Marshall Fund of the United States on Sept. 29.Trump may have weaponized the semiconductor value chain, but it was the Obama administration that first acted on the threat posed by China, unveiling a semiconductor strategy in January 2017 as one of its last acts. Trump picked up the baton, but the nature of the supply chain means that others are in the U.S. line of sight.Israel — a high-tech R&D hub where Intel is the largest private employer — exported semiconductors worth about $2.1 billion last year, with about half going to China, data compiled by UN Comtrade shows.That closeness to China risks becoming a liability. Zvika Orron, a partner at Israel’s Viola Ventures who leads semiconductor investing, said there’s a hesitancy on the Israeli side to look to China because of worry that Chinese funding could imperil future U.S. deals. Carice Witte, founder of the SIGNAL nonprofit focused on Israel-China ties, said the U.S. is bound to “start asking more questions.”The U.K. is another pinch point thanks to Arm Ltd., whose instruction set — the basic code that allows chips to communicate with software — underlies everything from smartphones to the world’s fastest supercomputer. Arm currently sells to China, but the company’s takeover by Nvidia Corp puts that business in doubt. If the $40 billion deal wins regulatory approval, Arm would become part of an American company, a development that has provoked concerns it would be even more subject to U.S. export controls. Nvidia and Arm have said the change of control won’t alter its status in that regard. While the U.K. government has yet to show its hand, it allowed the sale of Arm to Softbank of Japan in 2016, so wouldn’t normally be expected to intervene now. But the newly strategic nature of the industry has prompted lawmakers to call for a review of the deal’s implications. Here too there are concerns at being caught between the U.S. and China.Losing a world-class technology company to the U.S. for the Department of Justice to “weaponize” is not a good place to be, according to a person with knowledge of British national security considerations. The risk, they said, is a U.K. strategic asset becomes “recognized as part of the U.S. arsenal” in its campaign against China.Over the Taiwan Strait on mainland China, the mood at the 2020 World Semiconductor Conference in Nanjing in late August was gloomy. Chinese executives worried what the Trump administration might do next to hobble Beijing’s progress.“The conflict remains very fluid, which makes it impossible to predict what next moves both sides are going to take,” said Huang Yan, application and sales director at Senodia Technology, a Shanghai-based chip design company that develops sensor chips for smartphones.China is on course to import $300 billion of semiconductors for the third straight year, underscoring its dependence on U.S. technology. That’s something President Xi Jinping is determined to end.Xi has pledged an estimated $1.4 trillion through 2025 for technologies from artificial intelligence to wireless networks. A focus of Beijing is to accelerate research into so-called third-generation semiconductors — circuits made of materials such as silicon carbide and gallium nitride, a fledgling technology where no country dominates.Yet without silicon capabilities it will be difficult for China to build a proper semiconductor industry, said a senior TSMC official. Another person from a company involved in third-generation chip production said designing them is an art, and even poaching a team of designers won’t necessarily guarantee success.The consensus is it won’t be easy for China to catch up, especially at the cutting-edge where TSMC and Samsung are producing chips whose circuits are measured in single-digit nanometers, or billionths of a meter. SMIC would have to double annual research spending in the next two-to-three years just to prevent its technology gap with those companies widening, says Bloomberg Intelligence analyst Charles Shum.The tussle raises the prospect of a broader decoupling of the global industry with two distinct supply chains. As with 5G, the question then becomes one of the extent of each system: Does China’s high-tech gravity pull in Southeast Asia and parts of Europe, or is it confined to its immediate neighborhood? How many allies will side with the U.S.?To be sure, the chip industry is still thriving, with the benchmark Philadelphia Semiconductor Index up about 30% this year. Geopolitics is now a feature of boardrooms, said the SIA’s Goodrich, but 5G and AI are likely to cause more market upheaval.The direction of travel still worries key players. Shares of Micron Technology Inc., the largest U.S. chipmaker, fell in September after it was forced to halt shipments to Huawei, its biggest customer.Complete decoupling would harm U.S. competitiveness and hurt China, raising the prospect of less money for R&D, slowing innovation, said Goodrich. “A world in which the U.S. and China are independent from one another is a negative outcome for everyone.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

Micron (NASDAQ: MU), one of the world’s top memory chipmakers, has been a polarizing investment over the past year. The bulls expect a cyclical rebound in memory prices to stabilize its growth. Micron’s stock has stayed nearly flat this year, and its fourth quarter report in late September didn’t meaningfully tilt the scales in either direction.