When the U.S. first banned sales of some tech products to Chinese tech firm Huawei three years ago, it crippled the once-proud national champion and sent ripples through the U.S. semiconductor industry. In the quarters following the May 2019 export ban, America’s top chipmakers reported average revenue declines of 4% to 9%.
The latest technology crackdown by the Biden administration to accelerate these losses is throwing the global semiconductor sector into turmoil. And Chinese companies targeted by the new rules won’t be the ones to feel the pain.
In an interview with Yahoo Finance Live, Race Capital Senior Partner Edith Yeung said, “If China really wants to be as aggressive as the U.S. and retaliate, it could have a lot of implications for other companies in the U.S. (video above). “It cannot affect Intel’s earnings (INTC) or Qualcomm (QCOM) or NVIDIA (NVDA).”
The US has long been the global leader in semiconductors, with about 45% to 50% market share. However, this leadership is built on global demand for its products, with China consuming about 75% of semiconductors sold globally.
Chinese device makers accounted for nearly a quarter of global semiconductor demand in 2018. according to one study by Boston Consulting Group (BCG).
“More than just a preventative measure”
This era of innovation is at risk of being eclipsed by the Biden administration’s sweeping technology controls aimed at freezing China’s semiconductor development and sharply limiting exports of critical technology from the United States.
“Technology export controls can be more than just a preventative measure,” National Security Adviser Jake Sullivan said before the administration’s announcement. “If implemented robustly, sustainably, and comprehensively, they can become a new strategic asset in the United States and its allies to impose costs on adversaries and even degrade their battlefield capabilities over time.”
“Sea Change” in Politics
In particular, the new measures block the sale of semiconductors essential to the development of artificial intelligence, supercomputers and other advanced technologies, unless the companies obtain exemptions. It also expands an existing ban on selling advanced chip-making equipment to Chinese firms.
In a broader escalation, the Biden administration’s actions restrict US firms and citizens, including permanent residents, from supporting China’s development of advanced chips.
The restrictions announced earlier this month have already had a chilling effect.
At least 43 senior executives are American citizens working with 16 publicly listed Chinese semiconductor companies. According to the Wall Street Journal. Western firms such as Dutch equipment maker ASML Holding NV have furloughed American workers as a precaution while seeking further clarification. Moreover, Apple has temporarily suspended plans to use memory chips from China’s Yangtze Memory Technologies Co. in products, According to Nikkei Asia.
“This is truly a sea change in policy… the US is implementing a frozen strategy towards China’s domestic chip development,” said Rhodium Group Director Reva Goujon. “[The semiconductor sector] it’s an interdependent, interconnected ecosystem where all the pieces need to be in place for things to evolve to ever more advanced levels. So if you cut your legs out of that production cycle, you can really cause a lot of disruption, which is the intention of the United States.”
Impact on US chip makers
The threat may not be limited to Chinese firms. A 2020 study by BCG predicted this US companies could lose out If the US completely banned semiconductor companies from selling to Chinese customers, 18% of their global market share and 37% of their revenue over the same period.
The measures already prompted chip equipment maker Applied Materials to cut estimates for fourth-quarter net sales by about $400 million. Q4 non-GAAP adjusted EPS accruals are expected to be between $1.54 and $1.78, compared to a prior range of $1.82 to $2.18.
Although the restrictions are now limited to new-generation chips, NVIDIA, the largest US chipmaker by market value, warned in August that a new licensing requirement to ship advanced chips to China could cost the firm $400 million in quarterly sales.
“Obviously there’s a chance it could create a bigger cascade effect, but I think these companies have already looked at the situation, they’re evaluating it,” said Daniel Newman, Founding Partner and Principal Analyst at Futurum Research. “I’m not too worried about having the whole portfolio [of chips]… I think it’s about leading the arms race for the next generation of technology in areas like supercomputing, high-performance computing and artificial intelligence.”
Contains technology ‘where it needs to be’
Secretary of State Anthony Blinken echoed the same sentiment in a recent address at Stanford University, stressing that only “a small number of countries” have or are making the tools to produce top-notch semiconductors.
“We want to make sure we keep them where they need to be,” Blinken said, without citing China.
But Goujon argues that U.S. firms, especially equipment makers, risk losing market share and revenue to competitors in countries historically friendly to the U.S., including Japan and South Korea. If companies there find a solution to the Biden administration’s measures, Goujon said the new controls could backfire on the U.S.
“Foreign competitors to the United States [equipment makers] Here, of course, there is an opportunity to try to capture more market share in China if they can squeeze out US persons and US connections, which are possible in some areas.”
“The U.S. is putting heavy bilateral and multilateral pressure on its partners to follow its lead, and it is sending a signal that this package includes extraterritorial measures, and we will add to them if necessary. But here is basically a window to try to match with our control. So that’s really going to be an important question now.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow him on Twitter @AkikoFujita
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