323: Nvidia's China Ban, TSMC on Chip Shortage, iPhone Market Share, German Automakers + Canada, Diablo Canyon, Heat-Pumps, and AI Wins Art Contest

"a minimalist, purely legalistic approach to rights"

Brian Eno: artists are either cowboys or farmers.

Tend your plot of land, tend your crops and grow them over time. Or explore and try to find something new.

—Brian Eno (paraphrased by me a bit)

🛀 If you look at a typical week or month’s waking hours, what are the top 10-15 main things that you spend your time & energy doing and thinking about?

Don’t be too broad about it like “work” and “family”, because that encompasses too much. Zoom a few levels in, like “exercising”, “playing with my kids”, “playing video games”, “attending business meetings”, “reading books”, and “reading stuff about businesses”.

Hypothetical:

What if you had to give 1 of these things up, and re-allocate all this freed-up time & energy into another one?

Which one would you give up, and which one would you double down on? Would doing that make your life better? Why don’t you do it?

What I’m trying to do is not just finding my #1 priority and #15th, so that I can cut the less important thing in favor of the most. I also think many of us have things that are very valuable to us in theory, but we don’t allocate time & energy to them in proportion to that value (it’s like a market mispricing — price vs intrinsic value).

📜 Ben Thompson (💚 🥃 🎩) had a very important piece about rights recently, and while I probably can’t bump up his readership much by linking, I still want to highlight it because it touches on something fundamental about society.

But first, here’s the piece:

• Rights, Laws, and Google

I see too many people taking a minimalist, purely legalistic approach to rights, as if the human rights that we too-often take for granted in the freer countries are purely based on legal documents and not on deeper principles and culture. I bet that those living in less free parts of the world, or at risk of losing theirs, no doubt understand rights pretty deeply through their absence.

💚 🥃 If you are not a paid supporter yet, I hope this is the edition that makes you go:

“Hey, I think I want to support what he’s doing here.”

Thank you for that!

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Nvidia’s China Ban 🇨🇳🚫⛔️🙅🏻‍♀️✋

Back in edition #317 I wrote about Nvidia’s wheel falling off, and in edition #320 I took a closer look at Nvidia’s Q2 results and management’s commentary…

But since then, another wheel fell off, and I guess we’re about to find out where the company fits in the continuum between a motorcycle and an 18-wheeler.

The 8-K:

On August 26, 2022, the U.S. government, or USG, informed NVIDIA Corporation, or the Company, that the USG has imposed a new license requirement, effective immediately, for any future export to China (including Hong Kong) and Russia of the Company’s A100 and forthcoming H100 integrated circuits. DGX or any other systems which incorporate A100 or H100 integrated circuits and the A100X are also covered by the new license requirement. The license requirement also includes any future NVIDIA integrated circuit achieving both peak performance and chipto-chip I/O performance equal to or greater than thresholds that are roughly equivalent to the A100, as well as any system that includes those circuits. A license is required to export technology to support or develop covered products. The USG indicated that the new license requirement will address the risk that the covered products may be used in, or diverted to, a ‘military end use’ or ‘military end user’ in China and Russia. The Company does not sell products to customers in Russia.

This is part of the tightening chokehold on China’s capabilities to manufacture and use the most advanced chips.

It makes me wonder how far the US will go, and if Intel, AMD, and maybe even ARM could face similar restrictions.

Plenty of their chips can be used for advanced AI and various military uses (while GPUs are best for certain parts of ML training and inference, CPUs are useful in the pipeline before and after the GPU slice of work).

It reminds me of the export ban on strong encryption in the 1990s, where outside of the US you only could download web browsers with weak encryption (40 bits or something like that) because strong encryption fell under some “munition export” restriction.

There was even a story about US intelligence looking into the sale of PlayStation 2s to Iraq in the early 2000s because of potential military use…

The new license requirement may impact the Company's ability to complete its development of H100 in a timely manner or support existing customers of A100 and may require the Company to transition certain operations out of China. The Company is engaged with the USG and is seeking exemptions for the Company’s internal development and support activities.

This is the big ❓🤨❓ to me.

How big will the supply chain impact be for existing products, and on development efforts of new products? How many other companies are looking at this and getting that sinking feeling in the pit of their stomach that this may happen to them at some point?

We’re really in the era of decoupling and de-globalization, which is too bad because trade can be so win-win and bring so many people out of poverty. I know it’s Wishful Thinking 101™️, but imagine how much better the world would be if every country was decently free and democratic and world cooperation was easier? If Earth could pull together in the same direction to improve everybody’s lot rather than constantly fighting among ourselves..? But I digress.

In addition, the Company is engaging with customers in China and is seeking to satisfy their planned or future purchases of the Company’s Data Center products with products not subject to the new license requirement. To the extent that a customer requires products covered by the new license requirement, the Company may seek a license for the customer but has no assurance that the USG will grant any exemptions or licenses for any customer, or that the USG will act on them in a timely manner.

The Company’s outlook for its third fiscal quarter provided on August 24, 2022 included approximately $400 million in potential sales to China which may be subject to the new license requirement if customers do not want to purchase the Company’s alternative product offerings or if the USG does not grant licenses in a timely manner or denies licenses to significant customers.

Clearly the data-center segment is going to follow gaming with sequential declines, though maybe not by quite as much as if China had already been doing well (during Q2, Nvidia management mentioned that DC sales to China were way down).

But over the long-term, this could be a pretty big hit for the company. NVDA 0.00%↑

Interesting Company List (FCF/share 📈, Leverage 📉)

Friend-of-the-show WTCM had an interesting screen, inspired by another friend-of-the-show and supporter (💚 🥃), John Huber:

inspired by @JohnHuber72, list of >$10B mkt cap businesses globally (33 in total) with ≥ 9 periods of positive FCF/share growth over last decade, an FCF/sh CAGR >10%, and average net debt/EBITDA <3.0x

Thermo Fisher is one that I’ve been meaning to take a closer look at for a while. My priors on it are pretty positive, but I’ve never dug deep on it (thanks to friend-of-the-show C.J. for passing along some reading materials! It’s on the ‘to read’ list).

Ecolab is just reminding me of Bluegrass. I wonder if he still likes ‘em 🤔

iPhone Market Share in U.S. Reaches 50% 🇺🇸📱📈

The 50 per cent landmark — the iPhone’s highest share since it launched in 2007 — was first passed in the quarter ending in June, according to data from Counterpoint Research. Some 150 devices using Google’s Android operating system, led by Samsung and Lenovo, accounted for the rest.

That last bit is worth reminding. It’s not really 1 vs 1, it’s Apple vs lots of others (who have been cycling in popularity over time).

In a world where pretty much everybody that wants one has a smartphone, these market share gains mostly mean that there are more people switching from Android to iOS than vice versa. It’ll be interesting to see if that’s a long-term trend, and how high iPhone market share can get in the US. AAPL 0.00%↑ GOOG 0.00%↑

‘Shortage of 50-Cent Chips Holds Up $50,000 Cars, TSMC Chief Says’ 🛑 🚙 🏭

An endemic shortage of chips costing anywhere from 50 cents to $10 is slowing down swathes of the $600 billion semiconductor industry, Taiwan Semiconductor Manufacturing Co.’s top executive warned

The persistent deficit of such low-end chips is holding up production in key segments of the supply chain, Chief Executive Officer C. C. Wei told attendees at a tech symposium. ASML Holding NV of the Netherlands is struggling to obtain $10 chips for its extreme ultraviolet lithography systems, or EUVs, he said. TSMC has dozens of the machines, which are critical for packing more power onto smaller slivers of silicon. Elsewhere, a 50-cent radio chip has been holding up the production of $50,000 cars, Wei said, without elaborating.

Even ASML can’t get enough of these chips!

Isn’t that something? Some of the most complex machines known to humanity can’t get out the door because some legacy node $10 chip can’t be found for it… 😬

The world’s largest contract chipmaker can no longer meet demand for low-end chips at legacy factories, and it is building new plants, Wei said, suggesting that even mature chips may cost more in the months ahead. These include a new 28-nanometer factory in China that will begin production in the fourth quarter, according to TSMC Vice President Y. L. Wang. Shortages are showing up as a result of automakers adding more features to cars and increasing the silicon used by 15% every year, while smartphones now require two to three times the number of power management chips they did five years ago, Wei said. (Source)

I’m sure Texas Instruments is happy it kept so much of its fabbing in-house… But they can only do so much.

We’ll definitely need a bunch more trailing-edge fabbs to be built at the rate at which things are going, but that’s a tall order since it’s all happening at the same time as huge efforts are underway to increase leading edge (there are only so many engineers who can work on all this), and I suspect the chip shortage may affect the very equipment that goes into these chip foundries… 🔁 TSM 0.00%↑

🇩🇪 German automakers coming to Canada for EV battery raw materials 🔋🪫

Volkswagen Group and Mercedes-Benz Group have sealed agreements with Canada to secure access to raw materials such as nickel, cobalt and lithium for battery production [...]

VW's agreement is designed to shorten supply chains for its facilities in the U.S. and avoid difficulties linked to tariffs and tax regulations [...]

A VW spokesperson said the automaker and its dedicated unit for its battery business, called PowerCo, are working on ramping up their battery activities (Source)

For more context, I covered VW’s PowerCo back in edition #307, and the battery gigafactories they intend to build.

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Kinda crazy that almost 1/12th of the electricity of a big state like California can come out of this building. It’s also almost 1/5th of their carbon-free electricity.

☢️ ‘California lawmakers vote to extend Diablo Canyon nuclear plant operations’ ☢️

Once in a while, common sense prevails. Too bad it took an energy emergency and some blackouts to focus the minds on what should’ve been fairly obvious even without all this, but here we are.

California’s state legislature voted in the early hours of the morning on the last day of the legislative session to give the state the option to keep Diablo Canyon, its last remaining operating nuclear power plant, open for another five years. [...]

Diablo Canyon nuclear power plant provides 8.6 percent of the state’s total electricity and 17 percent of the state’s zero-carbon electricity.

Your move, Germany.

An extensive extreme drought has decreased the amount of energy California can get from hydroelectricity, Newsom said.

And since the rolling blackouts California experienced in August 2020, the state has worked to speed up the “ridiculous and unacceptable” permitting process for standing up renewable wind and solar energy projects, Newsom said. (Source)

Regulations and permitting processes should be revised much more widely in the West. It’s almost impossible to build anything or fix anything of any scale.

It’s very simple: For the world to get better, it has to change. For change to happen, new things have to be built and old things have to be fixed.

🏡 🏘 🏡 New housing projects should include ground-source heat-pumps with other utilities 🥶↔🥵

The easiest and cheapest time to install pipes underground is when you’re already digging to install other pipes anyway…

Air-source heat pumps are pretty great (they’ve really improved in the past couple decades — don’t let your experience of them a long time ago discourage you), but ground-source is even better if you can do it cost-effectively because nothing is exposed to the elements and it’s entirely silent.

Well, when building a new housing project, you’re already putting in utilities (water, electricity, sewage), so *why not* also put what’s necessary to connect the whole neighborhood to very very efficient electric heating and cooling.

I wrote about the magic of heat pumps in edition #286. In short, they are extremely efficient because they displace heat rather than generating it. Every A/C or fridge is a heat pump, but not bidirectional.

Here’s an example of this in a 2,000-acre new housing development just outside Austin, Texas:

The geothermal grid will heat and cool every home in the community, which, when completed over the next decade, will have more than 7,500 homes. Home construction is still in the beginning phases, with the first homes about two years old, but before any foundations were laid or framing begun, bore holes were drilled in front of every single lot and piping laid to complete the grid. [...]

While the system is powered by electricity, it uses far less than a traditional HVAC system, and with the solar package, total energy consumption in the homes is reduced by about 80% [...]

Jennifer Abbamonty was one of the first buyers at Whisper Valley. [...] “We essentially have no power bills at this point,” said Abbamonty. (Source)

I kind of wish building codes encouraged this for all new constructions where it makes sense… If we’re going to get off fossil fuels, heating and cooling will have to go electric, and heat pumps (air and ground) are the most efficient way to do this in most cases.

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‘An AI-Generated Artwork Won First Place at a State Fair Fine Arts Competition’ 🖼 🎨 🤖

Every day more dominoes fall:

Sincarnate’s name is Jason Allen, who is president of Colorado-based tabletop gaming company Incarnate Games. According to the state fair’s website, he won in the digital art category with a work called “Théâtre D'opéra Spatial.” The image, which Allen printed on canvas for submission, is gorgeous. It depicts a strange scene that looks like it could be from a space opera, and it looks like a masterfully done painting. Classical figures in a Baroque hall stare through a circular viewport into a sun-drenched and radiant landscape.

But Allen did not paint “Théâtre D'opéra Spatial,” AI software called Midjourney did.

Of course, artists are not enjoying this:

“We’re watching the death of artistry unfold before our eyes,” a Twitter user going by OmniMorpho said in a reply that gained over 2,000 likes. “If creative jobs aren’t safe from machines, then even high-skilled jobs are in danger of becoming obsolete. What will we have then?”

While it’s not possible to close pandora’s box, I think rules should be updated to take into account the existence of these tools.

AI-generated digital painting like have a large part of human creation and curation:

According to Allen, his input was instrumental to the shaping of the award winning painting. “I have been exploring a special prompt that I will be publishing at a later date, I have created 100s of images using it, and after many weeks of fine tuning and curating my gens, I chose my top 3 and had them printed on canvas after unshackling with Gigapixel AI,” he wrote in a post before the winners were announced. [...]

Allen said he had clearly labeled his submission to the state fair as “Jason Allen via Midjourney,” and once again noted the human element required to produce the work. “I generate images with MJ, do passes with photoshop, and upscale with Gigapixel.” (Source)

But it feels like we’ll soon need art competitions with “humans-only” rules and others with “AI tools welcome”, kind of like chess competitions