Who Holds the Royal Flush Hand?

The leader who can choke the global economy's supply chain is not Donald Trump. It's rather Xi Jinping, the President of the People's Republic of China. He's the one who holds the Royal Flush hand.

The Royal Flush consists of 3 powerful levers:

1. China's control over the production and distribution of rare earth minerals, which are are vital to the emerging electric economy and military equipment;

2. China's powerful technology stack, with no Western like governance and ethics strings attached to it;

3. China's ability to take over Taiwan (politically - more likely, and militarily - less likely) and nationalize TSMC to completely choke Western economies.

Rare Earth Minerals

From the Economist: The rare earths are a group of 17 metallic elements that find their way into products and industries from smartphones to fighter jets. Powerful, compact motors sporting magnets made from rare-earth elements are vital to the emerging electric economy, used in everything from wind turbines to electric cars. Recently, they have also become a catalyst for geopolitical tensions.

China's control over the production of rare earth minerals is mind boggling.

China’s domination of the industry is hard to challenge. Although alternative suppliers are starting to master a few links in the chain, they “are always missing something”, says Wang Yue of Wood Mackenzie, a consultancy. The Chinese authorities are determined to keep it that way. In 2023 they restricted the export of equipment used to process rare earths. Some people with special expertise in the field are barred from travelling abroad.

 Weaponizing Interdependence

From Foreign Affairs:

China realized that in a world of weaponized interdependence, power comes not from possessing substitutable commodities but from controlling the technological stack.

Economic weapons are proliferating just as nuclear weapons did, creating new dilemmas for the United States and other powers. China has adapted to this new world with remarkable speed; other powers, such as European countries, have struggled [and other countries like Canada 🇨🇦 have not seen it coming at all]. 

China also realized that in a world of weaponized interdependence, power comes not from possessing substitutable commodities but from controlling the technological stack. Just as the United States restricted the export of chip manufacturing equipment and software, China forbade the export of equipment necessary to process rare earths. These complex regulatory systems provide China not only with greater control but also with crucial information about who is buying what, allowing it to target other countries’ pain points with greater finesse.

All will have to update their strategic thinking about how their own doctrines and capabilities intersect with the doctrines and capabilities of other powers, and how businesses, which have their own interests and capabilities, will respond.

TSMC

From the Economist: In terms of revenue, TSMC produces two-thirds of all chips made by foundries—firms that manufacture semiconductors designed by others. In the most advanced segment, including processors for smartphones, laptops and data centers, the company’s share exceeds 90%. The artificial-intelligence boom is powered by the AI accelerator, a type of chip designed to train and run large language models. Almost all of them are made by TSMC. Nvidia, the world’s most valuable company, relies entirely on the Taiwanese firm. So does its closest rival, amd, another chip designer. Big tech firms like Alphabet, Amazon, Apple and Microsoft, each designing their own bespoke silicon, also turn to TSMC.

To understand why TSMC is so dominant, peer inside the fabs. Moore’s law, the idea that computing power doubles roughly every two years, relies on shrinking the transistor, a microscopic electrical switch. In 1971 a typical processor held 200 transistors per square millimetre. Nvidia’s b200 ai chip, released in 2024, squeezes in about 130m—making for smaller, more energy-efficient computing. Manufacturing such devices, with features measured in nanometres (nm, millionths of a millimetre), requires factories that cost $20bn apiece and are capable of producing around 25,000 silicon wafers, each containing many chips, per month.

tsmc’s fabs are enormous. In Taiwan, it operates four “gigafabs”, each with at least four times the capacity of a typical factory. Fab 18 in Tainan alone spans 950,000 square metres. Its cleanroom, the sterilised factory floor where chips are etched layer by layer, occupies one-sixth of that area and is cleaner than an operating theatre. Few other firms can match tsmc’s scale or precision. Its yields, the share of chips on a wafer that meet quality standards, are exceptionally high.

Its employees are even more formidable. Sassine Ghazi, chief executive of Synopsys, a maker of chip-design tools, says that tsmc’s manufacturing discipline is “unbelievable”. That discipline is shaped by how the firm sees itself: as a manufacturer first and a technology company second. Insiders describe a culture where employees are pushed to find efficiency gains even when systems are running smoothly. Any improvement in one fab is swiftly replicated across all others. Failures are hunted down obsessively.

The company’s finances reflect its rigour. In 2024 tsmc’s net profit margin was 40%, more than three times the average for rival foundries. Given its dominance, could it charge more? Mr Huang of tsmc says the firm is often asked that. His reply is that it succeeds only when its customers do. What he does not say, but is true, is that the firm is paranoid about losing ground to rivals. Pushing too hard risks driving clients away eventually.

What if the real risk for TSMC was not about losing customers but rather about a takeover by a new unwanted and unscrupulous owner?

I have been told many times that President Xi will never use it's Royal Flush Hand. Wouldn't he kill his economy by doing so? But what if the Chinese economy was more resilient than we thought. What if this was the bold move China needs to make to remodel the world order. 

If Western economies continue to push China in a corner like it did with Japan before WWII, then President Xi might well surprise unsuspected markets at the poker table.

There is a great Chinese slogan that the West needs to be aware of - one that a very underestimated Chinese's army used during the 1950s Korean war: 

Hide and Bide. 

Hide your strength, bide your time (Traditional Chinese: 韜光養晦; Simplified Chinese: 韬光养晦) is a political slogan of the People's Republic of China, typically used to describe a tenet of China's foreign policy. It is commonly attributed to Deng Xiaoping, although the phrase was in fact coined by his successor, Jiang Zemin.

We've discussed in another article why we believe China is preparing to take over Taiwan and the TSMC's fabs.