Comment by maxglute | Hacker News Reader

Comment by maxglute | Hacker News Reader

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Yeah PRC probably going to dump 1T into indigenize semi efforts by end of decade, but IMO good chance they're going to treat strategic semi as commodity utility business than make NASDAQ lines go up model. When western semi has 1st tier suppliers taking 30% margin, asml taking 50%, tsmc taking 50%, nvidia taking lol 70%, there's alot of fat on the pyramid to trim. PRC doing cost plus 10-20% will basically be able to brrrt chips stupid cheap if they have mature domestic tool scaling, enough to wipe litho+yield inefficiencies.

Western semi still "safe" since west+co aren't going to source from PRC leading edge due to national security, but pretty soon they're either going to need to compress margins to compete which means cutting costs, which means cutting R&D because shareholder going to get theirs or western semi business model going to run on permenant subsidies. Which is what will probably happen considering their performance is why stonk lines go up right now. That 1T PRC spend and choose to simply discount for utility chips is going to wipe multipel trillion of western semi market cap and all the economic implications that entails so it might not even be bad idea.

The NASDAQ line go up model is why the AI boom is happening and a major factor in why it is Western companies leading the charge. The more bigger issue is that the west refused to sell chips to China so they had to figure out how to make their own. And margin compression is what free markets do. That is one of the big motivators to putting free markets everywhere, the freer the market the more compressed the margins become. All the people working hard at crappy jobs start working hard at high paying jobs instead until the competition drives the money out of the sector.

There is a theme in the industries China does well in - western regulators ban cut-throat competition, China competes very hard and wins. The situation at scale is pretty straightforward. Usually it is environmental or labour policy, so this case of the root cause being sanctions is a bit unusual. But, once again, how Nvidia is meant to compete in China when their best products can't be sold there?

> margin compression is what free markets do

Except the market pretty much can't do this with Nvidia. Nobody is showing any sign of catching up: it is entirely possible we are seeing a runaway train and without the intervention of a massive state like China to create a viable competitor, there will never be one.

This situation has been going on for 5 years now. It's ridiculous to assume there will never be competition. You. could have said the same about Intel a couple of decades ago.

Free markets suppose to compress margins, perfect market theoretically drive profits down to zero (aka involution). But you compress margin and you lose current western semi business model that is functionally monopoly suppliers/producers who can sustain 50%+ margins to keep their monopoly. Shed those margins down to 20% because competitor enters market, harder to fund R&D to keep lead, it's still "enough" to be profitable, but then western commercial companies have to think harder how to split that compressed margin between investors and R&D. Right now we know what this leads to. Investors get paid, companies beg for subsidies. Not that PRC companies aren't concerned, look at PRC stock capitlization, not nearly to the same degree.

Free markets? No, competition does that. Competition requires free markets but free markets don't guarantee competition.

I poorly paraphrased profits converge to zero under perfect competitive market. Yes real world not perfect competitive markets. Oligor/duo/monopolies form, sometimes subsidies other shenanigans pick winner(s), winners extract huge margins/rents to build moats lock out new competition. Sometimes they collude / settle on business model with higher margins, i.e. 10-20% being normal/commodity, 50% for software and semi is top end of luxury goods. New state backed competitor enters and decides they can live on 10% margin, and then incumbants business model falls apart unless state also steps in to match.

E: And state can, but I don't know if state generally willing/able to backstop companies to 50% margin long term. I can't think of any, maybe some major state oil. Nvidia/TSMC with $$$ margins getting some CHIPs injection really meant for bailing out broke ass Intel was already anomalous, and it was basically to bribe them to onshore production.

Note "converging to zero" doesn't really mean zero because economics includes opportunity costs. It just means that outsized gains don't exist over the longer term without some kind of market power. In the long run, most industries end up making the same returns.

I've found that this does not match reality. People have strong beliefs in value of specific things, even when that value is not economically there. The value of software is indeed zero, which seems to make people value hiring software engineers greatly over paying for software, and, tbh, that makes approximately zero sense in a lot of cases. The value of medical care is high, even when it's not (meaning there is plenty of medical and "medical" products that don't have real value). The value of houses is high and absolutely certain. Thinks like certain brands (even when the company behind them has disappeared), most obviously of watches.

This tends towards the economic reality but it certainly does not match it.

> There is a theme in the industries China does well in - western regulators ban cut-throat competition,

The problem is not regulation, it is the lack of it: anti-monopolist practices and deregulation of the finance industry has led us to insane bubbles, dead markets and extreme wealth concentration. Any competition gets bought, crushed, or undercut via bankrolling. This is what you get when the 0.0001% gets to pull the strings again. Must watch (3 parts): https://www.arte.tv/en/videos/103517-001-A/capitalism-in-ame...

I think you have no idea how a command economy works. Haha.

It’s literally state sponsored monopolies.

They flood an industry with funds and let them all compete with each other. Then they back the biggest winner. A command economy usually mandates X units of Y good. This isn’t quite that.

That’s only the first year after that it’s command and control for the vast majority.

Also you take is highly simplistic. Even the small players are command and control. You’re likely just not aware how it works.

Its a pretty big detriment to American thinking that they take cold-war era characterizations of the Russian economy and then apply them to 2025 China.

The current Chinese worries are about having too much competition rather than too little, Google "involution" to read about it.

work with china every day.

I am talking about the economy in the Western model, it works well if there is competition. And it usually needs the state to do moonshots, like the literal moon shot or Silicon Valley. But the American economy was the most impressive during the Roosevelt years. The war production was insane, with 75% state planned, state built and state owned factories. The private sector was dominated by oligarchy owned monopolies, which means it wasn't impressive¹. The government had no time for conservative fairy tales and needed to take initiative.

What helped was the public outrage over the insane profits the American oligarchs reaped during WOI. This enabled Roosevelt during WOII to set a maximum profit margin for the oligarchy owned factories and fined those who evaded the law. It was a shock for the conservatives to see how the bureaucracy turned America's mediocre output around with a fast, efficient and lean production monster. The monopolists had to resort to propaganda, claiming the government's success as theirs, injecting the falsehoods we now all take for granted.

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1. As an exercise, think what would be possible if all the cash piles didn't sit at big tech, but instead enabled competition. Meta isn't still more than a useless addiction factory.

"your margin is my opportunity" - bezos

The absolute irony of China being more capitalist than the US in some ways.

Your analysis is out of date I think. This has already happened. Poor NXP just got their asses handed to them by the PRC. The fab they have in Italy looks nice but PRC has many of those.

Also Texas Instruments, STMicro, Onsemi, Microchip Tech, i.e. what PRC is doing after going big in mature nodes last few years they likely will also do in leading edge. IMO there's argument that since leading edge will definitely be strategically bifurcated PRC and western semi can pseudo collude to maintain higher margins, especially if PRC wants to claw back investment. But if western semi continues to drive economy/growth there's also incentive to weaponize margins.

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