Exclusive: Top Japanese chip gear company to honor American blacklist of Chinese firms – executive

TOKYO (Reuters) – Japan's Tokyo Electron, the world's No. 3 semiconductor manufacturing equipment supplier, will not deliver to Chinese clients who are blacklisted by Washington, a senior business manager told Reuters.

The decision shows how Washington's work to carry sales of technology to Chinese Companies, including Huawei Technologies, interfere with non-US companies that are not obliged to comply with US law.

China, which is locked in a criminal war with the United States, is pushing to build its semiconductor industry to reduce its confidence in US, Japanese and European chip-making suppliers.

"We didn't want to do business with Chinese clients with whom Applied Materials and Lam Research are barred from doing business," said executive, referring to the best US chip equipment companies.

"It is crucial for us that the US government and industry see us as a fair company," he said, calling Tokyo Electron's long American partnership since the 1960s when it started as an importer of US equipment.

He would not be named given the sensitivity of the case. Applied Materials and Lam Research refused to comment.

Another major Japanese chip equipment provider also considers stopping transfers to blacklisted Chinese companies, telling a person familiar with the case.

"The problem is beyond anything we can decide for ourselves," said the person, who also refused to be identified.

Managers of other equipment suppliers said they were communicating closely with the Japanese Ministry of Industry.

"We have not received any specific instructions from the ministry," one of the leaders said. "We are aware that we can be in deep trouble if we use the US export ban to expand businesses with China."

IMPORTANT BUILDING THE USA RIVALER

The Tokyo Electron leader did not mention the names of Chinese clients, but the state-run memory chips Fujian Jinhua Integrated Circuit Co are currently on a list of devices that cannot buy technology products from US companies.

Fujian Jinhua did not respond to a sent request for comment. A handful of other Chinese companies and research institutions are on a "red list" that US firms have been advised to avoid.

Huawei's chip arm, HiSilicon, is a so-called fabless company that focuses on chip design and is therefore not normally a buyer of chip production equipment. But Huawei is also facing major risks from vendors outside the US who comply with the US blacklist.

The British chip designer ARM, owned by Japan's SoftBank, has stopped relations with Huawei and potentially detracted from the Chinese company's ability to make new chips for its future smartphones.

But Taiwan Semiconductor Manufacturing Co., the world leader in chip production and manufacturer of many Huawei chips, has said it will still be the supplier to Huawei.

US law states that a product containing 25% or more of US content is subject to US export control restrictions.

But the Japanese chip equipment managers did not mention it as a reason to cut supplies to some Chinese companies.

"It's not impossible for Japanese companies like Tokyo Electron to replace their American rivals and complete production lines for China," said a US chipmaker leader. "But in reality it is very difficult to consider an American backlash."

CHINA CHIP TECHNOLOGY LAGS

Five Japanese companies rank among the world's top 10 chip equipment companies. The highly specialized hardware industry is relatively small, but the equipment is strategically critical to all semiconductor manufacturers.

Making chips involves many processes that require different types of equipment. Each market segment is usually dominated by only a few players.

Tokyo Electron controls nearly 90% of the market for microchip coders and developers. It competes directly with Applied Materials and Lam Research in some segments.

Beijing has invested heavily to grow domestic chip equipment suppliers as part of an effort to achieve 70% of the semiconductors it uses by 2025.

But industrial sources say technologies in these vendors are still far behind, leaving China dependent on imports equipment.

Today, only 16% of the semiconductors in China are produced in the country, half of which are made by Chinese firms, according to the Center for Strategic and International Studies, a Washington-based think tank.

However, aggressive investments by local chip makers and foreign players such as Samsung Electronics made China the world's No. 2 chip equipment market last year.

Many chip equipment manufacturers foresee significant profits this year as China-US. The trade battle dampens the demand for chips and chip equipment globally.