Singapore’s George Yeo hopes China will stay out of ‘long, dark tunnel’ as Russia and the West wade into nuclear talk

• The ex-foreign minister is hopeful China will ‘have the wisdom and the statecraft to avoid entering’ the Ukraine war as it would put the world ‘in jeopardy’
• He characterised the Ukraine conflict as a ‘proxy war’ that typically occurs before world powers edge towards ‘Armageddon’

Bhavan Jaipragas

Russia and the West are walking into a “long, dark tunnel” with their rising rhetoric about a nuclear confrontation, and China should exercise wisdom and statecraft to avoid going down the same path, Singapore’s former foreign minister George Yeo has said.

Characterising the conflict in Ukraine – following Russia’s February invasion of its smaller neighbour – as a “proxy war”, Yeo said China’s entry into the fray would put the world in jeopardy.

“With the incorporation of the four [Ukrainian] oblasts to the Russian federation, the sabotage of the Nord Stream pipelines, I fear that Russia and the US and Europe are walking into a long, dark tunnel from which they cannot easily reverse,” Yeo said in an interview on Talking Post with the Post’s chief news editor Yonden Lhatoo.

Yeo comments came amid remarks by high-profile figures about the possibility of the use of nuclear weapons in Ukraine.

In the latest salvo, the European Union’s foreign policy chief Josep Borell last week said Russian forces would be “annihilated” if President Vladimir Putin used nuclear weapons in Ukraine.

Putin in September warned that he was not “bluffing” when he said he would use “all available means” to protect Russia if its territorial integrity was threatened.

“This lighthearted talk of nuclear exchange is madness,” said Yeo, who has remained one of Singapore’s most followed public intellectuals since his retirement from politics in 2011. “Once you begin that exchange, there’s no stopping point, because the side that feels itself losing will become even more desperate. And then little by little, it will ratchet upwards.”

Yeo, who has remained a prolific commentator on China affairs since his 2011 retirement from politics, said he hoped the Asian superpower would “have the wisdom and the statecraft to avoid entering that tunnel”.

He added: “Because if it does, then the whole world would be in jeopardy. But I think the Chinese will find a way to stay out of this.”

Yeo, a military general-turned-politician, said before world powers dangerously edged towards “Armageddon”, there would be proxy or hybrid wars, such as the conflict taking place in Ukraine.

In such scenarios, countries “jostle for advantage, using the threat of war as leverage but not really wanting it to be made use of ultimately”.

However, when “we act dynamically against one another, we may end up in a position which we did not intend t0 be when we first started”, Yeo said. “I think this is what has happened in Europe. All parties have ended up in a position they did not wish for originally.”

In his new three-part book series Musings, Yeo shared his views on great power rivalry and Singapore’s place in the more contested geopolitical landscape.

Asked during the interview if the ongoing US-China tensions would eventually lead to “doom”, Yeo said he was not as optimistic as Singapore’s late independence leader Lee Kuan Yew.

The elder statesman had said that both the US and China were ultimately “rational”, but Yeo said he was unsure whether this was still the case, noting that ex-US president Donald Trump was brought into power by “mass emotions”.

Current US President Joe Biden is “weak”, Yeo said, and American society at large is divided by such mass emotion. “So China may be a rational player, [but] on the US side if something happens in the South China Sea, and the ship is sunk, hundreds of sailors lose their lives, I think the domestic reaction in the US will be so great it would be difficult for the White House to contain it.”

Hong Kong ‘not safe’ in 2019

Yeo, who served as chairman of Hong Kong-based Kerry Logistics Network from 2012 to 2019, also touched on the city’s political situation during the wide-ranging interview.

On the Beijing-imposed national security law (NSL), imposed in 2020 in the aftermath of the political turmoil a year earlier, Yeo said he was “relieved” when it was introduced.

Recalling the 2019 protests, Yeo said he and his wife were splitting their time between Hong Kong and Singapore during that period, spending at least a few days a month in the city state.

“In 2019, we no longer felt safe [in Hong Kong] and we were relieved when we came back to Singapore to be able to talk freely and to be able to eat in a restaurant late into the night”, Yeo said, adding that “Hong Kong was becoming strange to us” during that period.

“I was frankly quite disgusted by the way the Western media were lionising the violence, which they will never give allowance for in their own societies,” he said.

Yeo acknowledged that many Hong Kong residents, including his friends, were “still sullen” about the imposition of the NSL and were waiting to see what the longer term situation would be like.

His assessment was that the law had removed “one important question mark” about Hong Kong’s retention of the “one country, two systems” model beyond 2047.

“Now that the National Security Law is in place, which is entirely reasonable, because all countries have that … this has now ensured that beyond 2047, there will still be one country, two systems [and it’s] likely to continue indefinitely because it’s in China’s interest.”

The American chip industry’s US$1.5t meltdown

Thank the boom-and-bust cycle – and America’s government

In licking County, Ohio, fleets of dump trucks and bulldozers are shifting earth on the future site of chip factories. Intel is building two “fabs” there at a cost of around US$20 billion. In March, President Joe Biden called this expanse of dirt a “field of dreams” in his State of the Union speech. It was “the ground on which America’s future will be built”, he intoned.

In the spring, it was easy to be dreamy about America’s chip industry. The pandemic-induced semiconductor crunch had proved just how crucial chips were to modern life. Demand was still rising for all sorts of chip-powered technology, which these days, is most of it. Investors were less gloomy on chips than on other tech, which were taking a stock market beating. The Chips Act was making its way through Congress, promising to plough subsidies worth US$52 billion into the domestic industry, in order to reduce America’s reliance on foreign fabs and support projects like Intel’s Ohio factory.

Half a year later, the dreams look nightmarish. Demand for silicon appears to be falling as quickly as it had risen during the pandemic. In late September, Micron, an Idaho-based maker of memory chips, reported a 20 per cent year-on-year fall in quarterly sales. A week later, AMD, a Californian chip designer, slashed its sales estimate for the third quarter by 16 per cent. Within days, Bloomberg reported that Intel plans to lay off thousands of staff, following a string of poor results that are likely to continue when it presents its latest quarterly report on Oct 27. Since July, a basket of America’s 30 or so biggest chip firms have cut revenue forecasts for the third quarter from US$99 billion to US$88 billion. So far this year, more than US$1.5 trillion has been wiped from the combined market value of American-listed semiconductor companies.

The chip industry is notoriously cyclical at the best of times: The new capacity built in response to rising demand takes several years to materialise, by which time the demand is no longer white-hot. In America, this cycle is now being turbocharged by the government. The Chips Act, which became law in August to cheers from chip bosses, is stimulating the supply side of the semiconductor business just as the Biden administration is stepping up efforts to stop American-made chips and chipmaking equipment from going to China, dampening demand for American products in the world’s biggest semiconductor market.

Whether or not it makes strategic sense for America to bring more chip production home and to hamstring its geopolitical rival with export bans, the combination of more supply and less demand is a recipe for trouble. And if the American policies speed up China’s efforts to “resolutely win the battle in key core technologies”, as President Xi Jinping affirmed in a speech to the Communist Party congress on Oct 16, they could give rise to powerful Chinese competitors. Field of dreams? It is enough to keep you awake in terror at night.

The cyclical slump has so far been felt most acutely in consumer goods. PCs and smartphones account for almost half the US$600 billion-worth of chips sold annually. Having splurged during the pandemic, inflation-weary shoppers are buying fewer gadgets. Gartner, a research firm, expects smartphone sales to drop by 6 per cent this year, and those of PCs by 10 per cent. Firms like Intel, which in February was telling investors it expected PC demand to grow steadily for the next five years, are revising their outlooks as it becomes clear that many Covid-era purchases were simply brought forward.

Many analysts think that other segments could be next. Panic buying amid last year’s global chip shortage has left many carmakers and manufacturers of business hardware with inventories overflowing with silicon. New Street Research, a firm of analysts, estimates that between April and June, industrial firms’ stocks of chips were about 40 per cent above the historic level relative to sales. Inventories for PC makers and car companies are similarly full. Intel and Micron blamed their recent weak results in part on high inventories.

The supply glut and sputtering demand is already hitting prices. The cost of memory chips is down by two-fifths in the past year, according to Future Horizons, a research firm. The price of logic chips, which process data and are less commoditised than memory chips, is down by 3 per cent in the same period.

Chip buyers will work through their inventories eventually. But after they do, they may buy less than in the past. In August, Hewlett Packard Enterprise and Dell, two big hardware makers, hinted that demand from business customers was beginning to soften. Sales of both PCs and smartphones had started to plateau before the pandemic, and this trend will probably resume in the coming years. Phonemakers cannot stuff ever more chips onto their devices forever. For companies such as Qualcomm, which derives half its sales from smartphone chips, and Intel, which gets a similar share from those for PCs, that is a headache.

The chipmakers’ response has been to bet on fast-growing new markets. AMD, Intel and Nvidia, another big chip designer, are battling over the cloud-computing data centres, where chip demand is still increasing. Qualcomm is diversifying into cars. In September, the firm’s bosses boasted it already had US$30 billion-worth of orders from carmakers. Intel, meanwhile, is expanding into semiconductors for networking gear and devices for the hyperconnected future of the Internet of Things. It is also getting into the contract manufacturing business, hoping to win market share from TSMC of Taiwan, the world’s biggest chipmaker and contract manufacturer of choice for fabless chip designers such as AMD and Nvidia.

These efforts, however, are now running into geopolitics. Like their counterparts in China and Europe, politicians in America want to lessen their countries’ dependence on foreign chipmakers, in particular TSMC, which manufactures 90 per cent of the world’s leading-edge chips. In response, America, China, the EU, Japan, South Korea and Taiwan together plan to subsidise domestic chipmaking to the tune of US$85 billion annually over the next three years, calculates Mark Lipacis of Jefferies, an investment bank. That would buy a fair bit of extra capacity globally.

At the same time, prospects for offloading the resulting chips are darkening, especially for American firms, as a result of America’s tightening controls on exports to China. Many American firms count the Asian giant, which imported US$400 billion-worth of semiconductors last year, as their biggest market. Intel’s Chinese sales made up US$21 billion of its overall revenues of US$79 billion last year. Nvidia said that an earlier round of restrictions, which limited sales of advanced data centre chips to Chinese customers and to Russia after its invasion of Ukraine, would cost it US$400 million in third-quarter sales, equivalent to 6 per cent of its total revenues.

The latest restrictions, which target Chinese supercomputing and artificial intelligence efforts, are a particular concern for the companies which manufacture chipmaking tools. Three of the world’s five biggest such firms – Applied Materials, KLA and Lam Research – are American. The share of the trio’s sales that go to China has risen fast in the past few years, to about a third. Toshiya Hari of Goldman Sachs said that the controls are likely to cost the world’s toolmakers US$6 billion in lost revenues this year, equivalent to 9 per cent of their projected sales. After the new American export controls were unveiled, Applied Materials lowered its expected fourth-quarter revenue by 4 per cent to US$6.4 billion. Its share price has fallen by 13 per cent in the past two weeks. Those of KLA and Lam Research have tumbled by a fifth.

American chip bosses now fear that China could retaliate, further restricting their firms’ access to its vast market. It is already redoubling efforts to nurture domestic champions such as SMIC (in logic chips) and YMTC (in memory), as well as domestic toolmakers, that could one day challenge America’s historic silicon supremacy. The result could be a diminished American industry with less global clout and more capacity than it knows what to do with. That is a shaky foundation on which to build America’s future.

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