While anticipation that the US would step up sanctions moved the market, weighty factors favor going easy
https://asiatimes.com-by David P. Goldman
Share prices of China’s largest chipmaker Semiconductor Manufacturing International Corp (SMIC) declined on fears of US sanctions intensification. Credit: Handout.
China’s largest chip foundry, Semiconductor Manufacturing International Corp, dropped 6.2% in overnight trading in Hong Kong, after news media reported that Washington might impose tighter controls on US exports of chip-making equipment to the world’s fifth-largest chip fabricator. The Hong Kong China Enterprises Index followed SMIC down, despite a modest rally among the stronger China property names.
It’s not at all clear what the Biden Administration has in mind, or why.
SMIC mainly produces workhorse chips within the older-generation 14-nanometer node and up, not the more advanced 7-nanometer and smaller nodes that only Taiwan and South Korea have mastered. Although SMIC is a big customer of US equipment makers, it can buy what it requires from Japan, South Korea and other providers if the United States cuts off shipments, industry experts say.
China, moreover, now accounts for about a third of the total revenues of the top US semiconductor equipment makers, as it strives to build up domestic chip manufacturing. If the Biden Administration stops them from selling to China, revenues will drop sharply along with R&D, and the US will lose its competitive edge in the field.
The Biden Administration is well aware of the dilemma. Commerce Secretary Gina Raimondo told Bloomberg editors last week, “If America puts export controls vis-a-vis China on a certain part of our semiconductor equipment – but our allies don’t do the same thing, and China can therefore get that equipment from our ally – that’s not effective.”
Semiconductor industry sources told Asia Times that SMIC can buy most of the equipment it needs from non-US suppliers.
Washington may ask Japan and South Korea to join sanctions against Chinese semiconductor equipment makers, but it is unlikely that the Koreans would agree.
SK Hynix, one of South Korea’s largest fabricators, wants to expand memory chip production in China using state-of-the-art extreme ultraviolet lithography machines made exclusively by Holland’s ASML. Washington intervened to delay the investment, and the South Koreans are in negotiations with the US.
It is doubtful that South Korea or Japan would agree to stop investing in so-called mature nodes, the older-generation chips that SMIC manufactures.
Semiconductor equipment manufacturing is migrating away from the United States, partly in response to sanctions imposed by the Trump Administration in 2020.
Scott Foster noted on December 15 that Entegris, a major US supplier of semiconductor fabricating technology, will invest $500 million in a new Taiwan plant.
And in early December, Taiwan’s government and industry leaders announced a plan to build an independent chip equipment industry on the island. The fastest-growing sector in China’s semiconductor industry is driven by Taiwanese and South Korean firms.
Biden’s Defense Department, reportedly the main proponent of tighter sanctions against SMIC, may have reacted to a report on China’s tech prowess published last week by former Google CEO Eric Schmidt and Harvard Professor Graham Allison. They wrote:
China’s national champion in semiconductor fabrication, Semiconductor Manufacturing International Corporation (SMIC), has consistently ranked among the top five foundries over the past decade, and its breakthrough N+1 7-nanometer process last year means that its advanced fabrication capabilities now rival Intel’s …. Although not yet commercialized, SMIC’s newly developed N+1 process is similar to TSMC’s 7nm process without requiring EUV lithography machines, while Intel’s current 10nm process is similar to TSMC’s 7nm.
The Schmidt-Allison paper cited reports in Asia Times.
Electoral politics may play a role in the Biden Administration’s stance. Senate Republicans claim that the Biden Administration is soft on China. Commerce Secretary Raimondo, reportedly a skeptic about additional sanctions on SMIC, was attacked in the conservative Washington Free Beacon on December 14 over alleged personal connections to a Chinese-backed venture capital firm.
“Danhua Capital, based in California but established with the financial backing of the Chinese Communist Party, is one of the main funders of PathAI, an artificial intelligence firm that employs Raimondo’s husband, Andy Moffit, as its chief people officer,” Free Beacon reporter Matthew Foldi wrote.
One possibility is that the Biden Administration will impose largely symbolic sanctions on SMIC for political reasons, without impacting US business in a significant way.
In a December 15 report, Citigroup analysts wrote that new restrictions might aggravate the global semiconductor shortage, and are unlikely “at least until the semiconductor supply chain shortages normalize.” The shortage “is a national security issue in itself.” Citi predicted that “the impact will be low even if new rules are implemented.”