Digest: Why the U.S. Is About to Waste $50 Billion

Plus, Retirees Are Rebelling in China

Welcome to your weekly digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world.

First up this week, Morris Chang…

I understand if that name doesn’t mean anything to you. Few people have heard of him.

But he’s one of the most powerful industrialists in the world. In fact, he could well be the most powerful. And recently, he had some very choice words for Nancy Pelosi…

Chang is the 91-year-old Taiwanese engineer who founded Taiwan Semiconductor Manufacturing Company. TSMC, as it’s better known, is the world’s biggest and most important manufacturer of computer chips.

When most of us think of computer chips, we imagine companies like Apple, AMD, and Nvidia. However, these companies design computer chips… they don’t build them. Instead, the vastly complex task of actually manufacturing the chips is outsourced to a few select companies.

TSMC is the best of the best in this field, responsible for producing most of the world’s most advanced chips. For this, it is paid handsomely. Last year, the company’s revenues exceeded $75 billion.

Chang retired from TSMC a few years ago, but he still holds enormous sway. In fact, in Asia, he has the stature of a head of state.

Every year, the leaders of the 21 major economies in the Asia-Pacific region meet at the Asia-Pacific Economic Cooperation summit. Taiwan’s president is not allowed to attend, since China does not recognize Taiwan. As a compromise, the island’s leader is allowed to pick someone to represent them and stand on stage with the heads of government of the U.S., China, Japan, Canada, et al. For the last number of years, it has been Chang.

The reason I bring up Chang is that he was in the news this week over remarks he made to Nancy Pelosi during her controversial trip to Taiwan last year.

During the visit, which sparked outrage in Beijing, Pelosi attended a luncheon hosted by Taiwan’s president, Tsai Ing-wen. Chang was seated at the top table with Pelosi and Tsai… and he had something he wanted to get off his chest.

Chang began pressing Pelosi about President Biden’s new CHIPS and Science Act.

The $50 billion program, which got a prominent place in Biden’s recent state of the union speech, is aimed at kick-starting a chip manufacturing industry in the U.S.

Chang warned Pelosi that it was hugely naïve of the U.S. to think it could dive into one of the most complex manufacturing businesses on the planet with a one-time investment of $50 billion in subsidies. (After all, that’s only 66% of TSMC’s revenues last year.)

As Chang explained, the chip-making business evolves so fast that by the time the U.S. industry was up-and-running, companies like TSMC would have already moved on to even more advanced forms of manufacturing.

Apparently, Chang went on so long about this topic (reportedly for several courses) that his wife, Sophie, had to cut in and tell him he was talking too much.

Now, you may think that Chang’s analysis is self-serving, and maybe it was, but that doesn’t mean he was wrong. In fact, I think he’s spot-on.

TSMC’s budget in 2022 was $44 billion. Consider: That’s four times the total government budget of Ireland—a country of over 5 million people. And it’s using that money to build on the significant lead it already has.

At present, no companies can hope to compete with that level of annual investment. Which means Chang is likely right when he says the U.S. is just wasting $50 billion.

If the U.S. is truly committed to relocating this industry to American shores, it will take an investment an order of magnitude higher than $50 billion. We’ll see whether Congress has the financial resources and political will for that kind of fight…

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Next up… Siemens issues debt on the blockchain for the first time.

German industrial and financial giant Siemens recently issued its first-ever digital bond on the Polygon blockchain network. (Blockchain is the ultra-secure digital ledger technology behind bitcoin and all other cryptos.)

If you’re thinking this was a small test, think again. The bond was worth 60 billion euros ($64 billion).

Siemens is turning to blockchain since it offers numerous advantages over traditional methods of issuing bonds.

Using blockchain “makes paper-based global certificates and central clearing unnecessary,” the company said. “What’s more, the bond can be sold directly to investors without needing a bank to function as an intermediary.”

This is a big deal.

For years, I’ve been arguing that blockchain would reshape global finance. This is a major sign of things to come… meaning a financial world without middlemen.

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Finally this week, retirees are protesting in China.

The Chinese cities of Wuhan and Dalian saw large-scale protests this week over cuts to the monthly allowances paid to retirees under China’s public health insurance system. The cuts come amid reports that local governments in China are struggling financially after years of costly zero-COVID policies.

These new demonstrations come on the back of the largely youth-inspired protests that led to the end of zero-COVID.

While protests are not uncommon in China, they are usually local affairs. The protests against zero-COVID were notable since they occurred in multiple cities across China at the same time.

Now, these protests by retirees are also following this pattern. (Wuhan and Dalian are 750 miles apart.) This is likely to spark concerns among China’s notoriously sensitive rulers.

I speculated at the time that China’s acquiescence to the zero-COVID protests might inspire more dissent. It seems that’s come to pass. We’ll see whether the Communist Party also gives in to the retirees’ demands.

Irrespective, this is a sign of huge demographic challenges ahead…

Last year, China’s population fell for the first time since the 1960s (and that was a time of chaos and violent national upheaval in China).

Moreover, the country’s dependency ratio—the proportion of the population made up of children and elderly relative to 15- to 64-year-olds—reached 46% in 2021, up from only 35% in 2010.

Even though China has a relatively meager public welfare system, it’s still struggling to afford this given these immense demographic challenges.

Which means I doubt this will be the last protest we see by the elderly in China…

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website.

Enjoy the rest of your Sunday.