China vs. USA – The Middle East goes West. The USA isolates China and Huawei

The visit of the US President to the Middle East has intensified the friendly competition between Saudi Arabia and the UAE both of whom intend to become global AI hubs.

• The President’s visit coincides with a Saudi-US Investment Forum where a slew of deals have been announced that look set to give the region all the resources it needs to execute its vision.
• The region has the advantage of having plenty of space, plenty of electricity and plenty of money to invest, and those that build data centres have informed me that the summer heat is only a minor inconvenience.
• The main headline is the formation of a new AI company called Humain that will be owned by the Public Investment Fund (PIF) of Saudi Arabia and will be responsible for creating AI technologies and infrastructure.
• Humain will also invest and I suspect that a lot of the investment that the USA is looking for will be made via Humain.
• The US corporate sector was quick to react and Nvidia, AMD, Qualcomm, Amazon, Cisco and OpenAI all made announcements where they will be working with Humain to develop AI in Saudi Arabia and, of course, supply their products.
• The UAE already has entities like Humain, but its entities exist as two government-owned companies rather than one.  
• These are G42, which creates and operates AI businesses and MGX, which is an investor in AI infrastructure and businesses.
• I suspect that there are a lot more deals to be announced as the US President will also be visiting the UAE and Qatar as part of his trip.
• Key to these announcements is the reassessment of the AI Diffusion rule (see here), which would have greatly limited the number of AI chips that can be sold into the region for fear of their re-export to China.
• Nvidia has already announced the supply of several hundred thousand advanced processors over the next 5 years, while OpenAI plans to build data centre capacity in the region which would not be possible under the AI Diffusion rule.
• I suspect that when the new rule is drafted, it will still put very strict restrictions on what can be exported to China, but will be much more lenient when it comes to other countries.
• This, of course, will require promises that the re-export of chips will cease, and in Saudi Arabia and the UAE’s case, I don’t think that this will be a problem.
• This is because almost all of the AI investment in the region is being made by sovereign-controlled entities, meaning that the promises will be backed by the personal guarantee of the region’s leaders.
• Furthermore, Microsoft’s investment in G42, while still being frowned upon by some in Washington, has lent the UAE much greater credibility in its stated intentions of pivoting towards the USA and away from China.
• The chip controls have failed to prevent China from developing leading edge AI models and so the policy of limiting allied countries from accessing chips to stop China from getting them has far less value with this realisation than before.
• However, we have also long argued that the chip controls are effective in terms of ensuring that the leading-edge AI that China does come up with is uncompetitive in terms of cost.
• DeepSeek’s techniques have already spread widely in China and Meta Platforms was the first in the West to publicly adopt its techniques in Llama 4.
• It won’t be the last, and Google has already claimed that it runs more cheaply than DeepSeek does.
• Consequently, I think that the main impact of chip controls on the technology struggle will be to render Chinese technology uncompetitive when it comes to cost making the choice of the Western variants much easier to make for those where cost is the most important issue.
• Hence, rethinking the “AI Diffusion” rule makes a lot of sense, especially as it impacts US allies, some of which are willing to make big commitments to invest in the USA.
• While the UAE and Saudi Arabia are laying the groundwork to become global centres of technology and AI, what they both really need is the private sector.
• Virtually all of the investments being made are being done so with government money, which will get development started but it is the private sector that will build the ecosystem and allow the strategy succeed.
• There are already early signs of this in UAE which has gone out of its way to create the right environment and already, a significant number of financial investors are setting up in the region.
• China has also recently recognised that it needs the private sector and has switched to helping the private sector and lending it a new image of acceptance but without advanced semiconductors, it is going to struggle with economic viability.
• I suspect that has been a factor in the Middle East’s clear pivot towards the USA and away from China when it comes to technology standards.
• This still leaves the private sector in the Middle East in need of development but there are some positive signs.
• There are also some examples of technology entrepreneurs coming to the region to start companies (eg analog.io) but much more is needed if the region is to earn a place on the technology landscape.
• The biggest problem to date has been finding talent, but a combination of liberalisation in the region as well more citizens looking to relocate from Europe, China and Russia are steadily rectifying this problem.
• Consequently, the outlook for the Middle East (UAE and Saudi Arabia in particular) is steadily improving but it is going to take time.
• I think that the region most at risk of losing momentum to the Middle East is Europe, where AI is already languishing and where the EU is attempting to regulate an industry before it exists.
• Many companies are already deciding not to launch their AI products in Europe, which is a sign to any entrepreneur that you are better off founding your AI company elsewhere.
• The Middle East is flinging its doors wide, and I suspect that these entrepreneurs will increasingly decide to base themselves in the region as opposed to Europe, China or Russia.

China vs. USA – The Isolation Game – The current game mode is isolation.

• On top of incentivising the Middle East to pivot West, the US Department of Commerce has warned that the use of Huawei chips is a violation of US export controls.
• This is a thinly veiled strategy aimed at further isolating China from the rest of the global technology ecosystem.
• If the majority of the planet is aligned against China when it comes to technology standards, then this will greatly help the USA and the West to win the ideological struggle that is currently being fought in the technology sector.
• The US Bureau of Industry and Security (BIS) has issued guidance “that using Huawei Ascend chips anywhere in the world violates US export controls”.
• This is not a new regulation but a warning of how the BIS interprets the rules that are currently in place.
• Huawei is present on the Entity List which means that any products or technologies deemed to be sensitive must receive a license to be exported to any company or entity present on the list.
• With the default response to applications being refusal, this effectively means that Huawei should be cut off from the technology in question.
• In 2022, the rules were tightened to include any technology that enables the manufacture of silicon chips at a process node below 20nm which means that Huawei’s 7nm chips have been made using currently restricted equipment and software.
• Huawei’s 7nm process involves using a multipatterning technique using equipment that was originally designed for processes around 14nm in size and so logically falls foul of the 2022 restriction.
• However, if Huawei is using equipment and software that was purchased before October 2022, then arguably, Huawei’s chips are not in violation of any regulations.
• China is known to have stockpiled large amounts of foreign equipment that is now restricted, and so it could easily be the case that Huawei’s chips are not technically in violation of the restrictions.
• However, as this is a very grey area, and regardless of whether this interpretation is enforceable by a court, it will serve as a strong disincentive to choose Huawei chips over the chips of Western competitors.
• In the long term, I don’t think that this kind of heavy-handed disapproval is needed as it is the economic viability of these chips that will really determine whether or not other countries use them.
• The Huawei 7nm process has many more steps and is more intricate, meaning that the yields are substantially lower than those being produced at TSMC and elsewhere.
• Furthermore, TSMC, Samsung and Intel are all quickly moving beyond 4nm, meaning that Huawei’s process is already 2 or more generations out of date.
• This means that Huawei chips will be more expensive to make and will consume more power per token of data produced, making them a poor choice for anyone looking to build AI infrastructure.
• However, China is determined to become a technology powerhouse in its own right, which it means that it needs to compete with the West in 3^rd party countries.
• I think that Huawei is unable to do this on the merits of its technology alone, and so it will require subsidization, which I am certain is being offered to anyone willing to consider the Ascend family of chips for AI.
• This will skew the market and hide how uncompetitive the chips are but I am pretty sure that the Chinese state can only keep this up for so long.
• There are already 12 fabs under construction that will use the 7nm process, implying that China has made a big commitment to this technology and that very large subsidies will be required to maintain competitiveness outside of China.
• I am far from convinced that China has the economic power to keep this up for very long, and so sooner or later, the economic reality of this process will make itself clear.
• In the meantime, the angry frown of the BIS will act as a disincentive to select Huawei chips for AI until China can no longer afford to subsidise Huawei, and economic reality shows up.
• Saudi Arabia, UAE and potentially Qatar are pivoting away from their historic technology relationships with China, which will serve as an example for other countries making these kinds of decisions.
• The net result is that the US is moving to ensure that it is US and Western standards that have the largest global adoption, leaving China with its own standards for its domestic market only.
• As the world’s second-largest economy, the domestic market is big enough to ensure that its standards are viable at home, but it is going to be much harder to win adoption overseas.
• This is critical to winning the ideological struggle and so for the moment, it looks to me as if the US and the West have the upper hand.
• In the very long term, this does mean multiple technology standards and the splintering of global networks into two incompatible parts, which has substantial and negative ramifications for the growth of the global technology sector as a whole.
• As far as the US administration is concerned, this appears to be a price worth paying.