The disputes between the United States and China over cloud-computing services and critical materials will decelerate AI development and the green transition globally.
What is Happening?
The United States is preparing to restrict Chinese companies’ access to US cloud computing services in response to Chinese export restrictions on critical materials used for the production of semiconductors. Critical materials are also used for manufacturing batteries for EVs, where China dominates at every stage of the supply chain. Chinese companies are using US cloud computing services as a way to bypass export controls on chips. The US rule would limit the transfer of chips to China and decelerate the country’s AI development temporarily, as domestic cloud companies own over 80% of market share. The proposed US restriction would likely require American cloud-service providers to seek government permission before providing cloud-computing services with advanced AI chips to Chinese customers. The National Defense Authorization Act (NDAA) already prohibited US government agencies from using products or services that contain semiconductors made by China’s leading manufacturers. This conflict is part of a larger dispute over supply chain access to advanced technology, with concerns about China’s AI advancement and military application. The United States Commerce Department is expected to implement the rule in the coming weeks.
The key materials China will stop exporting starting August 1st, 2023 are gallium (Ga) and germanium (Ge). Gallium was rated as the most critical material by Alastair Neill, a Board of Directors member for the Critical Minerals Institute, who described it as “…a substance that has specific electrical properties that enable it to serve as a foundation for computers and other electronic devices.” Germanium-silicon is used in some applications to replace gallium, the combination is less efficient, but more affordable and easier to reach than gallium. In 2021, China produced 98% of the global gallium supply, and 95% of the United States’ gallium imports came from China, according to the US Department of Energy and the US Geological Survey. In 2020, the estimated US consumption of germanium was 75% of global output not produced by Russia or China.
Who’s Involved?
| Stakeholder | How much INFLUENCE / POWER do they have? (Low 1-5 High) | How much INTEREST do they have? (Low 1-5 High) | What are their MOTIVES / OBJECTIVES? | Ongoing and/or Recent Actions |
|---|---|---|---|---|
| Amazon Web Services (AWB) | 3 | 3 | • Stable supply chain • Operations restrictions would significantly hurt revenue | • The US is likely to curb the companies cloud-based services to China • Declined to give comment about the rule |
| Microsoft Azure | 3 | 3 | • To maintain a dominating market share in South Asia along with Amazon, and Google. Their collective market share in the region is over 80%. | • The US is likely to curb the company’s cloud-based services to China • Declined to give comment about the rule |
| Nvidia | 2 | 4 | • Limit the loss of opportunities and impact on future business as revenue in China accounts for 22% of its global earnings | • In response to the law, the company created a variant of AI Chips that falls below the performance threshold given by the Department of Commerce • The US is expected to ban the sale of new AI Chips regardless of performance • Declined to give comment about the rule |
| The United States | 4 | 5 | • Want to keep its businesses and the US semiconductor industry strong but also decrease dependency on critical material supply chain with China | • The Commerce Department is expected to implement the rule in the coming weeks • “The Defense Department is proactively taking steps to increase domestic mining and processing of critical materials for the microelectronics and space supply chain, including gallium and germanium,” Reuters reported. |
| China | 5 | 5 | • Become self-supported • Chinese cloud-service providers to expand in South Asia | • Critical materials export restrictions to start on August 1st • China’s export controls on metals used in semiconductors are “just a start”. Restrictions on rare earths could follow |
Note: Influence and Interest ratings have been given on a comparative basis between the stakeholders.
What are the Likely Responses?
The statement by Alastair Neill, director at the Critical Minerals Institute, suggests that inventories of gallium and germanium outside of China are limited, with only around six months’ worth of supply for the United States. Establishing new production facilities to address the supply shortage would require significant investment and time, potentially resulting in a risky proposition if China reverses its restrictions in the future. The lack of inventory reserves for gallium in the US Defense Department (DoD) adds to the concern about the potential impact of the supply restrictions on critical minerals used in various industries, including defense applications. The restrictions could spur US investments for sourcing critical materials.
China’s former Vice Commerce Minister Wei Jianguo described her county’s measure as a “well-thought-out heavy punch” and “just a start”. Chinese analysts say the measures send a message to the Biden Administration which has been targeting China’s chip sector and pushed partners such as Netherlands and Japan to follow. China poses the power to hit global automakers as the country produces 61% of global natural graphite and 98% of final processed material to make EV battery anodes, according to Benchmark Mineral Intelligence.
Among the US companies, Nvidia is expected to take a big brunt of this policy because around 22% of its revenues come from China. “Over the long term, restrictions prohibiting the sale of our data center graphic processing units to China, if implemented, would result in a permanent loss of opportunities for the US industry to compete and lead in one of the world’s largest markets and impact on our future business and financial results,” Nvidia’s CFO said. Cloud-service providers such as Microsoft Azure and Amazon Web Services will also be affected, but their presence in China isn’t significant. The top 4 local cloud providers in China account for over 80% of the country’s cloud revenue. Outside of the export control regime, US lawmakers have also been considering implementing steps to limit US operations of Chinese cloud-service providers such as Alibaba and Tencent. The limitation could open doors for new domestic sales by Microsoft Azure and AWS, adding new revenue as a substitute for the losses in China.
In light of the US restrictions, Chinese big technology firms Alibaba and NetEase expressed confidence in receiving support from authorities in Beijing and Zhejiang. These companies are intensifying the competition in South Asia, where Microsoft Azure and Amazon Web Services represent the main players. Relocating operations or terminating existing partnerships can give rise to various financial and logistical challenges. The implementation of the latest sanction will prompt investors to explore markets akin to China, and this is where India stands to gain. Recently, Foxconn Technology declared its intention to invest $500 million in establishing a new manufacturing facility in India.
After her recent visit to China, US Treasury Secretary Janet Yellen stated that although significant differences persist, strained ties between the two nations are on “surer footing.” The meeting showcased a commitment to manage the relationship responsibly and find ways for both countries to thrive together in the global economy. “China hopes the US will uphold a rational and pragmatic attitude, meet China halfway, and push China-U.S. relations back on track soon,” Chinese Premier Li Qiang said in a statement. Yellen rejected the idea of decoupling the US and Chinese economies, highlighting the substantial use of American products and services by China’s middle class. The US secretary emphasized that Washington’s targeted actions against China were motivated by national security concerns. Since there isn’t a sign of any new regulations after the meeting, it is highly likely that the negotiations will continue.
Sources
https://analyticsindiamag.com/big-techs-in-a-pickle-with-us-china-cloud-war/
https://jp.reuters.com/article/china-usa-yellen-idCAKBN2YN0AW
