Mad Hedge Technology Alerts!
The U.S. appears to have made a massive blunder in its chip control blocking of China.
The U.S. Commerce Department said last week that Nvidia’s H20 graphics processing units — designed to comply with previous U.S. restrictions — would now require export licenses, as would additional chips from AMD. Nvidia says it has already halted exports of the GPUs, resulting in a quarterly charge of approximately $5.5 billion.
Could this be an example of the government getting in its own way?
Examples of these local AI chipmakers include tech powerhouse Huawei and the partially state-owned and publicly listed Cambricon Technologies, which designs GPUs.
Shares of Cambricon were up over 10% in the past five trading days amid news of the latest Nvidia controls. The stock is up over 400% in the past 12 months.
Can China fill the gap?
Huawei is the clear leader in China’s race to find an Nvidia competitor. The U.S.-blacklisted company has been working on its own improvements to compete with the leading technology.
Huawei remains about a generation behind in chips, but that won’t be the case for long.
Because TSMC’s chipmaking equipment includes U.S. technology, the company has complied with U.S. trade restrictions on Huawei and the shipment of advanced chips to China. That has left Chinese companies increasingly reliant on domestic foundries like Semiconductor Manufacturing International Corporation.
Nevertheless, SMIC is under its own export controls, which prevent it from accessing some of the world’s most advanced chipmaking equipment.
Are export controls working?
Chinese chip makers won’t need to immediately fill this H20 demand thanks to stockpiles and previous export exemptions and loopholes.
The U.S. government’s aggressive policy against the semiconductor industry is backfiring.
It is interesting that the Federal government never takes into consideration that loopholes and workarounds are possible and what the aftereffects are.
Sanctions can usually be subverted by using a third country to move the goods, and that is what we are seeing.
The end result is higher prices for all.
In general, an increase in the price of semiconductor chips would result in anything tech-related going up in price, and that is after a generation of deflation made devices cheap.
This also raises the price of doing business in AI. The GPUs needed for AI data centers will become more costly.
I could envision the future where harnessing AI software might be reserved for the well-off, because it won’t be cheap to use.
Each pressing day, the cost of business goes up as the globalization trends from post-World War 2 are being ripped to shreds by the existing administration.
Deglobalization is painful for the average person, but when you add on a tech sector in dysfunction, it really turns the screws on the investors.
What’s the end result?
In the short-term, semiconductor stocks will cool off because government obstruction means it is way harder to do business, let alone at profitable prices.
This restriction, this tariff, this rule, this forced export control, and the circus keep going with corporate management wishing one day to operate in a stable business environment.
Nothing is stable about the business environment now, forcing investment dollars to the sidelines.
In the short-term, sell any bear market rally in chip stocks.
Mad Hedge Technology Letter
April 16, 2025
Fiat Lux
Featured Trade:
(AMERICAN TECH ABLE TO OUTFLANK)
(NVDA), (TSM), (AAPL)
I understand that the U.S. administration wants to bring back American manufacturing, but that will not include Silicon Valley manufacturing.
There is a higher likelihood that if China is a no-go zone, American tech companies will venture out to a low-tariff, cheap labor country to continue their path to profits.
If you look through the numbers, it doesn’t make sense for American tech companies to manufacture goods in America.
The costs are too prohibitive.
Silicon Valley tech firms that are public on the New York markets have a fiduciary responsibility to shareholders to sustain short-term profits.
There is no mandate stating that these American tech companies must be manufactured in any specific sovereign country.
Silicon Valley companies are global, and American jobs lose out because of that.
This is a tough nut to crack because wages in rich Western countries dwarf the nominal amount in more affordable places.
U.S. Commerce Secretary Howard Lutnick said during an interview that the (China tariff) move was temporary.
Instead, he explained, tech products will be tariffed as part of the administration's planned duties on semiconductors, which could be announced later this week.
It's not just about timing. Companies would also need the workers to build devices.
While there's a degree of automation possible and while many of the components needed are made in the US, there's still a need for tens of thousands of trained electronics assemblers willing to work long, arduous hours in highly repetitive tasks.
Companies including Nvidia (NVDA), TSMC (TSM), Apple (AAPL), and others have announced increased investments in the US to win over Trump and avoid tariffs.
Nvidia said it will produce $500 billion in AI infrastructure in the US over the next four years through partners including Foxconn (601138.SS), TSMC, and Wistron (3231.TW).
And while that doesn't take away from the fact that the companies are pouring money into the US, it doesn't exactly support the idea that they're moving vast amounts of their manufacturing capabilities to America.
Even if companies brought their manufacturing bases to the US, they'd still have to deal with importing certain parts from abroad.
It's not just Apple that's contending with manufacturing headwinds; everything from laptop makers to display producers would face the same problems if they were to move to the US.
According to some estimates, prices on devices could double, resulting in demand destruction as consumers seek out less expensive options or hold onto their existing smartphones and computers for longer periods.
While it's unlikely manufacturing is coming back to the US, there's still plenty of uncertainty about how tech companies and consumers navigate the next four years of tariff shocks.
The biggest winners appear to be Vietnam or India, and much of the American tech manufacturing has their sights set on these places to reduce costs.
In short, this won’t destroy American tech and their shares will outperform in the long run, but in the short-term, it hurts, because it puts doubt into where they will produce their gizmos and gadgets.
At the very least, this gets American tech out of China, and I believe the federal government would be happy if businesses migrated to a more neutral country, even if they don’t come back home.
Either way, after this all blows over, there will be a great buying opportunity in American tech companies, which will all be trading at a discount.
