Why China May Need to Break Up Some Big Businesses

Key Concepts:

• Semiconductor restrictions and potential walk back
• Targeted vs. broad-based sanctions
• US-China competition in specific verticals (chips, aerospace, critical minerals, telecommunications)
• Balancing access to China's alpha with American national security
• Divestiture of business lines within large Chinese companies
• Verticals where US and China are not directly competitive
• Reshoring and securing American supply chains
• Role of government policy in supporting American industry

1. Semiconductor Restrictions and Targeted Sanctions

The discussion begins with the likelihood of a shift away from broad restrictions on semiconductor access to China. The speaker anticipates a move towards more "pointed and targeted" sanctions, focusing on specific sectors or companies rather than sweeping measures. Examples of existing levers being pulled include:

• US export restrictions on H-20 chips potentially impacting $4.5 billion in Nvidia sales.
• China restricting magnet exports, affecting electric vehicles and smartphones.
• US efforts to block Leap One C engines used by Comac jets.

The idea is that by navigating sensitive areas and avoiding acute pain to either economy, progress can be made.

2. Balancing Access to China's Alpha with National Security

The core values Alpha family, particularly the Greater China Growth ETF, aims to access China's alpha without compromising American national security or values. This raises the question of how to achieve this balance. The speaker identifies specific verticals where direct competition and threats to American superiority exist:

• Chips
• Aerospace and defense
• Critical minerals supply chains
• Telecommunications

These are considered "industries of the future." Conversely, sectors like Chinese e-commerce selling into developing markets or entertainment businesses are seen as less directly conflicting with American interests.

3. Negotiation and Diplomacy: The Art of Walking the Line

The discussion acknowledges the difficulty in drawing the line between acceptable and unacceptable engagement with Chinese companies. Even seemingly innocuous sectors like entertainment and e-commerce (e.g., Tencent) can be perceived as national security threats.

4. China's Response: Divestiture and Antitrust Efforts

China has recognized that large companies like Alibaba, Tencent, and ByteDance have become too broad, encompassing business lines ranging from grocery delivery to military applications. China is starting to require divestiture or spin-offs of certain business lines, leaving core assets intact. This is seen as beneficial for both domestic antitrust efforts and US-China trade negotiations, as it allows for more targeted sanctions.

5. Portfolio Strategy: Accessing Non-Competitive Verticals

The speaker suggests focusing on verticals where the US and China are not directly competitive. For example, the US struggles to compete with low-cost handset manufacturers like Xiaomi, which cater to consumers in developing markets. These are areas where China can continue to grow without directly challenging American national security.

6. Reinforcing American Supply Chains and Leadership

The US maintains leadership in aerospace, chipsets, and aerospace and defense. These verticals should remain within the American camp, and their supply chains need to be reinforced to reduce dependence on Chinese inputs like magnets.

7. Reshoring and the Role of Government Policy

The discussion emphasizes the need to reshore manufacturing and secure American supply chains. The speaker credits the Trump administration with tearing down barriers that impeded the growth of American industry, leading to a resurgence in aerospace and defense. Silicon Valley's alignment with the Trump administration is attributed to the removal of barriers like EPA regulations, stimulus support, and efficient procurement processes. The speaker argues for unlocking domestic natural resources to ensure American national security.

8. Conclusion

The main takeaways are that the US-China relationship in technology is complex and requires a nuanced approach. Moving away from broad sanctions towards targeted measures, carefully balancing access to China's economic growth with national security concerns, and reinforcing American supply chains are crucial. Government policy plays a significant role in supporting American industry and ensuring its competitiveness.