China vs. USA – Japan and Micron

Japan: the samurai strikes.

• Japan has entered the fray and put in place restrictions on semiconductor exports that are more draconian than the USA and where the Japanese state has effectively taken control of its semiconductor capital equipment market.
• Japan is imposing export restrictions on 23 types of equipment used to make semiconductors but instead of limiting it just to China, it has flipped the entire industry on its head.
• Instead of being able to ship to anyone unless told not to, now the Japanese companies can’t ship to anyone unless they are allowed to.
• This effectively gives the Japanese Trade Ministry life and death power over semiconductor equipment which I suspect in the long run will be detrimental to its health.
• Unlike the Department of Commerce, where the presumption is denial of a license, I assume the Japanese Ministry of Trade will operate under the presumption of granting licenses.
• Any other mode of operation would be highly detrimental to its own industry.
• This represents a bigger step than RFM and Alavan Independent were expecting from Japan and will really hinder China’s ability to manufacture chips at non-leading edge nodes below 20nm.
• This was the weakness of the new measures announced by the USA last October, as at 20nm – 10nm, it is possible to build a fab using non-USA equipment.
• However, when you add Japan into the mix, this then becomes virtually impossible and there will be no point in buying machines from ASML meaning that the combination of the USA and Japan represents an effective embargo.
• This means that China will now have to rely on domestically produced capital equipment which is going to be a real problem.
• Although Huawei claims to be able to manufacture at 14nm, it did not say whether it could do so at volume with good yields which is what is required for Huawei to be able to use these chips economically in its products.
• The net result is that Japan’s actions make the USA’s actions far more effective and deal a blow to any workarounds that the Chinese may have found to build fabs without USA equipment.
• This reinforces RFM’s and Alavan Independent’s view that China is in real trouble when it comes to semiconductors which will hamper and slow its rise as a technological superpower.
• That being said, I still think that there will be a bounce in the Chinese economy in H2 2023 although the lack of action on stimulating the economy leads me to be somewhat concerned.
• If it comes, the rising tide will lift all boats and especially the beleaguered technology sector.
• Here, Alibaba offers the best return in my opinion, but the stock is likely to drift until there is hard evidence of a recovery.

Micron: a display of weakness.

• China’s review of Micron on “national security“ grounds is a tit-for-tat retaliation that in my opinion, shows just how weak its hand is in the game of semiconductor brinksmanship.
• The Cyberspace Administration of China (CAC) has said it would review Micron’s imports into China in order to ensure that using its products would not compromise the security of its information infrastructure.
• In my opinion, this has nothing to do with national security but is instead an attempt to damage US interests in China without compromising its own technological ambitions.
• If it was really concerned about “national security” it would be reviewing Qualcomm, Cadence, Synopsis, Intel, Mediatek, Arm and many others but a blockade on the import of products from these companies would hurt China just as much as the USA, if not more.
• In the case of Micron, China can still buy the same products from South Korea or Japan with no ill effects on its development of technology.
• I think that this is precisely why Micron has been targeted and I would not expect this to spread to other companies that export chips to China as it would do more harm than good.
• It is also unlikely to give China much in the way of negotiating leverage and so I think that this will prove to be an isolated incident that is pretty irrelevant to the overall technological and ideological struggle.