Mental Models 4 Life

This blog post Sizing up the New Axis by Noah Smith that compares the combined economic strength of China and Russia against that of US and its key allies provides interesting insights into the robustness of the industrial base and manufacturing supply chains of the two blocs.

On energy supply, which includes fossil fuels and renewable energy, the two blocs each appear self-sufficient. The oil shale industry, in particular, has transformed the US from a net importer of oil and gas to a net exporter. The following diagram from Volts.wtf, which shows the production of fossil fuels and minerals critical to renewable energy circa 2019, is still illustrative of the current state, which can be verified using one’s favourite AI tool (mine is http://perplexity.ai).

The processing of many of the critical minerals are still largely done in China due to its cost advantages, but these can largely be shifted to other countries as necessary. Australia has a big role in lithium production, concentrated mostly in the two ASX-listed companies Pilbara Minerals and Mineral Resources, both of whom operate at the profitable, low-cost end of lithium mining and quite deliberately avoid the expensive subsequent processing steps.

Noah Smith’s 2022 article briefly touches on the relative strength of semi-conductor manufacturing, concluding that while China continues to invest mightily in semi-conductor manufacturing, the US bloc will likely maintain a decisive advantage over the next decade or so. Since 2022, semi-conductor manufacturing has become an even more contested area, with the US imposing export controls to limit China’s ability to access, for example, NVIDIA’s advanced chips for AI workload and ASML’s advanced chip manufacturing machines. New industrial policies like the CHIPS Act were also introduced to boost semi-conductor manufacturing capabilities in the US, with co-funding for domestic companies like Intel to significantly lift and expand its foundry facilities, and also incentives to induce foreign companies like TSMC with leading-edge technology know-how to build new foundries in the US. China has responded in kind with export controls on critical raw materials like gallium and germanium, for which China has a strategic monopoly on supply. China’s national champions SMIC and Huawei also surprised the industry in May 2024 with the release of new 5 nanometer chips in Huawei phones, an advanced level of semi-conductor manufacturing thought to be beyond the reach of China’s semi-conductor industry for quite a few more years. A lot of this fascinating contest is described in Chris Miller’s book Chip War: The Fight for the World’s Most Critical Technology. One can also gain a better appreciation of the critical roles Taiwan’s TSMC and Netherlands’ ASML play in the global semiconductor supply chain, and the competitive advantage chip-design companies like NVIDIA and AMD currently enjoy, through these highly recommended (but long!) episodes on the Acquired podcast:

• TSMC: The Complete History and Strategy https://www.acquired.fm/episodes/tsmc
• The Complete History & Strategy of Nvidia: Part 1 https://www.acquired.fm/episodes/nvidia-the-gpu-company-1993-2006 Part 2 https://www.acquired.fm/episodes/nvidia-the-machine-learning-company-2006-2022 Part 3 https://www.acquired.fm/episodes/nvidia-the-dawn-of-the-ai-era

This continued de-risking of the US and Chinese economies from each other, with US moving down the traditional value chain to (re)build manufacturing capabilities in its spheres of control, and China moving up the value chain to further enhance its technical knowhow from manufacturing into designs, is playing out not just in semiconductor manufacturing, but also in ship building, artificial intelligence, and a range of other areas. This contest will continue to shape the global geoeconomics for the next couple of decades and is worth watching closely.