Last October, the Biden administration launched a microchip cold war against China, slapping export controls on the most advanced semiconductors. That effort gets high marks from both national security and market types. “I never thought the U.S. would have the gumption to defend this gem of an industry,” says C.J. Muse, semiconductor analyst at Evercore ISI. “I applaud it.”
There’s a problem, though. U.S. companies like
Intel
(ticker, INTC),
Qualcomm
(QCOM) and
Nvidia
(NVDA) rule global chip design. Through them Washington can control foreign chip manufacturers like
Taiwan Semiconductor Manufacturing
(TSM) and
Samsung Electronics
(005930.Korea).
Semiconductor equipment is a different story. The leading lights are domiciled in the Netherlands and Japan. If China keeps freely importing their machinery, its own chipmakers can catch up sooner or later. Maybe sooner, says Dylan Patel, chief analyst at industry watcher SemiAnalysis. “Chip restrictions are a two-to-three-year hammer at best,” he says. “So equipment restrictions are very necessary.”
Parity in chips would boost China in the strategic battle for artificial intelligence, supercomputers and weapons of the future. Or so the logic of technological containment runs.
While spy balloons and the specter of Chinese arms for Russia grab headlines, the U.S. has quietly been pressing its allies to join the chip fight. The Dutch and Japanese governments agreed to some equipment export curbs in late January, according to press leaks. Details are so far scarce, and the parties are officially silent.
Japan, with an increasingly aggressive China more-or-less on its doorstep, is expected to be the more cooperative partner. “The Japanese have changed their view on the Chinese threat. They are leaning forward on this,” says Mira Ricardel, a former U.S. national security official now a principal at the Chertoff Group. Japanese semiconductor equipment heavy hitters include
Tokyo Electron
(8035. Japan),
Nikon
(7731. Japan) and
Canon
(CAJ). (Yes, they don’t just make cameras.)
The equipment squeeze won’t be very effective without
ASML Holding
(ASML), however. The Veldhoven-based company is to chipmaking machinery roughly what Taiwan Semiconductor is to foundries. It holds a monopoly on the most advanced “extreme ultraviolet light,” or EUV, lithography machines and the lead in deep ultraviolet light, or DUV.
Peter Wennink, the chief executive who has guided ASML’s ascendancy since 2013, is a vocal opponent of China export restrictions. “If they cannot get those machines, they will develop them themselves,” he said last month. “The laws of physics are the same in China as here.” He projected ASML’s China sales will hold steady this year. The 2022 figure was 2.16 billion euros ($2.29 billion), or 14% of total revenue.
U.S. chip equipment makers have a dog in the fight, too.
Applied Materials
(AMAT) and
Lam Research
(LRCX) both said they could lose up to $2.5 billion in China sales after Biden unrolled his curbs last October, and they’ve lobbied Washington to level the playing field abroad.
Investors suspect the companies are protesting too much to judge by the stocks, which have soared along with the rest of the semiconductor sector since October. “Stocks across the board are up because people are playing the bottoming game,” says Stacy Rasgon, senior U.S. semiconductor analyst at Bernstein Research.
The Dutch government already banned the sale of EUV machines to China in 2019, in deference to Trump Administration concerns. Current diplomatic jostling is likely to focus on how many generations of DUV machines to keep out of Chinese hands.
A pragmatic solution, Evercore’s Muse suggests, would ban the 2100 and 2050 models, which hit markets over the past two years, and permit 1980 series machines, which were unveiled in 2015. These are suitable to semiconductors down to 28 nanometers. The goal of sanctions is to keep China’s premier chip foundry,
Semiconductor Manufacturing International
(0981.Hong Kong) above 16 nm.
Things probably won’t be quite so simple. China has workarounds for making more advanced chips, and end products like supercomputers, with less advanced equipment, SemiAnalysis’ Patel says. “Working with domestic technology may cost a few billion more, but they’re allocating tens of billions in subsidies,” he says.
On the other hand, the U.S. could pressure ASML directly through its California-based R&D subsidiary Cymer, or other suppliers. “The U.S. could twist the arms of other countries if it wanted to,” says Scott Kennedy, senior advisor in Chinese economics at the Center for Strategic and International Studies. “The administration realizes the benefits of a diplomatic process.”
Japan dominates production of chemicals used for semiconductors, a weapon that so far lies dormant in the China sanctions quiver. Then there’s the so-called Chip 4 Alliance, which Washington floated last summer. It floundered as Taiwan and South Korea, which control most of the foundries, proved lukewarm about banding together with the U.S. and Japan, and risking sales to China.
The group finally achieved a video meeting last week. Taiwan’s foreign ministry trod carefully in a subsequent statement. “The focus of discussions was on how to maintain resilience of the semiconductor supply chain,” official Taipei explained.
Biden and his lieutenants seem to have done well so far controlling the most advanced technology without wrecking a Chinese chip import trade worth at least $300 billion annually. “The sanctions have threaded the needle pretty well,” Bernstein’s Rasgon says. “China can invest all it wants in trailing semiconductor nodes.”
But unscrambling the omelet of globalization in favor of superpower confrontation only gets tougher from here.
Read the full article here