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Why US technology controls on China could end up hurting US semiconductors




When the United States first banned the sale of certain technology products to Chinese technology company Huawei three years ago, it ousted its once-proud national champion and sent ripples through the American semiconductor industry. In the quarters following the May 2019 export ban, top US chipmakers reported a median revenue decline of 4% to 9%.

The Biden administration’s latest tech controls threaten to accelerate those losses, throwing the global semiconductor sector into disarray. And Chinese companies targeted by the new regulations won’t be the only ones feeling the pain.

“If China really wants to be as aggressive as the U.S. and retaliate, it could have a big impact for other companies in the U.S.,”[ads1]; Race Capital General Partner Edith Yeung said in an interview with Yahoo Finance Live (video above). “This is outside of the earnings impact for Intel (INTC) or Qualcomm (QCOM) or NVIDIA (NVDA).”

The US has long been a global leader in semiconductors, with a market share of between 45 and 50 percent. However, this leadership has been built on global demand for their products, with China consuming approximately 75% of semiconductors sold globally.

Chinese device makers alone accounted for about a quarter of global demand for semiconductors in 2018, according to a study by the Boston Consulting Group (BCG).

“More than just a preventive tool”

That innovation cycle is in danger of being picked apart, with the Biden administration’s sweeping tech controls aimed at freezing China’s semiconductor development and dramatically limiting critical technology exports from the US

“Technology export controls can be more than just a preventive tool,” said National Security Adviser Jake Sullivan, ahead of the administration’s announcements. “If implemented in a way that is robust, durable and comprehensive, they could be a new strategic asset in the US and allied toolkits to impose costs on adversaries and even, over time, degrade their battlefield capabilities.”

Why US technology controls on China could end up hurting US semiconductors

U.S. National Security Adviser Jake Sullivan is seen on a screen as he speaks during a virtual meeting with U.S. President Joe Biden, CEOs and labor leaders, not pictured, regarding the CHIPS Act, in the South Court Auditorium of the Eisenhower Executive Office Building, next to the White house, in Washington, DC, July 25, 2022. (Photo by Brendan SMIALOWSKI/AFP) (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images)

“A sea change” in politics

In particular, the new measures block the sale of semiconductors critical to the development of artificial intelligence, supercomputers and other advanced technologies, unless companies are granted exemptions. It also extends an existing ban on selling advanced chip-making equipment to Chinese firms.

In a broad escalation, the Biden administration’s actions also restrict American firms and citizens, including permanent residents, from supporting China’s development of advanced chips.

The restrictions announced earlier this month have already created a chilling effect.

At least 43 top executives are US citizens working with 16 listed Chinese semiconductor companies, according to the Wall Street Journal. Western firms such as Dutch equipment maker ASML Holding NV have suspended American employees from work as a precaution while they seek further clarity. Also, Apple temporarily halted plans to use memory chips from China’s Yangtze Memory Technologies Co. in products, according to Nikkei Asia.

“This is truly a change in policy … the US is imposing a freeze-in-place strategy against China’s indigenous chip development,” said Reva Goujon, Rhodium Group Director. “[The semiconductor sector] is an interdependent, interlocking ecosystem where all the parts somehow have to be in place for things to work in order to be upgraded to more and more advanced levels. So if you cut the legs out during that production cycle, you can really cause a lot of disruption, which is exactly what America’s intent is.”

U.S. Secretary of State Antony Blinken looks at products near Applied Materials CEO Gary Dickerson at Applied Materials, in Santa Clara, California, U.S. October 17, 2022. Josh Edelson/Pool via REUTERS

U.S. Secretary of State Antony Blinken looks at products near Applied Materials CEO Gary Dickerson at Applied Materials, in Santa Clara, California, U.S. October 17, 2022. Josh Edelson/Pool via REUTERS

Impact on US chip makers

The disruption may not be limited to Chinese firms. A 2020 BCG study estimated that US companies could lose 18% of their global market share and 37% of their revenue over the same period if the US completely bans semiconductor companies from selling to Chinese customers.

The moves have already prompted chip equipment maker Applied Materials to cut estimates for fourth-quarter net sales by roughly $400 million. Q4 non-GAAP adjusted diluted EPS is expected to range from $1.54 to $1.78, compared to the prior range of $1.82 to $2.18.

While the restrictions are limited to next-generation chips now, NVIDIA, the largest U.S. chipmaker by market capitalization, warned in August that new licensing requirements on advanced chip shipments to China could cost the firm as much as $400 million in quarterly sales.

“There’s certainly a chance that this could have a much bigger cascading effect, but I think these companies have already looked at the situation, they’re evaluating it,” said Daniel Newman, founder and principal analyst at Futurum Research. “I’m not too alarmed that it’s going to be the whole portfolio [of chips]… I think this is about leading the arms race for the next generation of technology in areas like supercomputing, high-performance computing and artificial intelligence.”

HUAI'AN, CHINA - SEPTEMBER 27: An employee works on the semiconductor wafer production line at a factory of Jiangsu Azure Corporation Cuoda Group Co., Ltd.  September 27, 2022 in Huai'an, Jiangsu Province China.  (Photo by VCG/VCG via Getty Images)

An employee works on the semiconductor wafer production line at a factory of Jiangsu Azure Corporation Cuoda Group Co., Ltd. September 27, 2022 in Huai’an, Jiangsu Province of China. (Photo by VCG/VCG via Getty Images)

Contain technology “where they need to be”

Secretary of State Anthony Blinken has reiterated as much, highlighting in a recent speech at Stanford University, that only “a small number of countries” produce or create tools to produce the highest semiconductors.

“We want to make sure we keep them where they need to be,” Blinken said, without singling out China.

But Goujon argues that American firms, especially equipment makers, face the risk of losing market share and revenue to competitors in countries that have historically had friendlier relations with the United States, including Japan and South Korea. If companies there find a solution to the Biden administration’s measures, Goujon said the new controls could end up backfiring on the U.S.

“Foreign Competitors to the United States [equipment makers] have an opportunity here, of course, to try to take more market share in China if they can displace American people and American connections, which is possible in some areas, she said.

“The US is applying heavy bilateral and plurilateral pressure on partners to follow their lead, and it sends the signal that it looks like: This package contains extraterritorial measures, and we will add more if necessary. But here is the window to try to initially adjust with our controls. So that’s really going to be an important question now.”

Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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