China vs. USA – Self censorship

Semi-equipment makers remove China

• The US and European semiconductor capital equipment industries are self-censoring their business with China in a way that is much more draconian than I expected and if it becomes the norm, will do even more damage to the Chinese semiconductor industry than anyone has anticipated.
• US companies such as Applied Materials, KLA corp and LAM Research have immediately moved to comply with the new regulations while ASML has ordered its US staff to stop dealing with all of its Chinese customers.
• ASML’s action in particular looks initially to be more than expected which given that some of its core components come from USA companies, could mean a complete suspension of sales to China in all of the equipment that it sells.
• Furthermore, according to TrendForce research, the ban extends beyond 14nm, meaning that in practice, Chinese semiconductor companies may be limited to 28nm and above.
• 28nm was at the leading edge more than 10 years ago meaning that unless China can somehow find a way around these restrictions its technologies will be based on semiconductors that are 10 years behind those being used by the USA.
• Finding a way around these restrictions will be difficult considering how the semiconductor capital equipment market is structured.
• Firstly, the market is dominated by companies from the USA and Japan with the one notable exception being from The Netherlands (ASML).
• Second, each company tends to specialise in one or two types of machines used in the manufacturing process and each will typically have a high global market share in those machines.
• This means that in practice, it is very difficult to build a semiconductor fab that does not use a piece of equipment that comes from a USA company.
• I suspect that the Chinese-domiciled companies will be able to build fabs at 28nm and above as they should be able to source the USA equipment that they need on the second-hand market from sources not based in the USA.
• This is also affecting the non-Chinese semiconductor companies that have factories in China such as TSMC, SK Hynix and Samsung some of whom already appear to have a licence to import USA capital equipment into China for the nodes they have or are already building.
• The net result has been swift with Applied Materials downgrading its calendar Q4 2022 expectations while TSMC has cut its capex forecast for the year to $36bn from $40bn.
• This is a big cut as one would have expected it to have already spent a good portion of the $40bn as we are already in Q4 2022 meaning that the Q4 capex cut could be as high as 40%.
• A lot of this is due to the inflation-triggered economic weakness but some is almost certainly being caused by the inability to ship into China.
• A lot of attention is being paid to USA technology that may be being used for Chinese military hardware and applications, but I think that the real strategy is to contain China’s rise as a technological superpower.
• When it comes to semiconductors, the USA is clearly a long way ahead and I continue to think that China will never close the gap.
• However, in other areas such as AI, autonomous driving, robotics, quantum computing and the Metaverse, China is arguably already a technology leader or at least in serious contention.
• Much of this is at least in part supported by the semiconductors that China buys from overseas meaning that if this cut off then China’s development in these areas will also be slowed down.
• I view the recent limitations placed on Nvidia and AMD’s shipments of AI chips into China as the first example of this strategy in practice.
• Looking at the other areas where China is leading, I would not be surprised to see the scope of limitations in terms of chip sales into China also being expanded as has happened in capital equipment.
• Anyone who sells silicon chips, equipment or software for making chips to China needs to be thinking about contingency plans.
• I think that this represents a significant increase in aggression in the long-running technology war which had until recently, been relatively quiet for the last 15 months.
• There is every sign that there is more to come.