The Strong Arm of U.S. Chip Rules
Semiconductors are the backbone of the global economy. You’d be hard-pressed to find a business in America today that doesn’t make use of some system or device that relies on semiconductors to operate. And that’s true for just about every other country in the world.
So, a couple days ago, officials from the Netherlands and Japan came to Washington to talk about semiconductors and the equipment used to make them.
This wasn’t a social call. What was discussed, and apparently agreed upon, has much bigger implications.
If you aren’t aware of the Biden administration’s actions regarding China’s semiconductor industry, it’s pretty simple: American companies have been banned from selling advanced semiconductors to China. The ban also covers the equipment needed to make and test semiconductors.
And to top it off Americans working in China’s chip sector were given a choice: leave China or lose your American citizenship.
They packed up and left.
Now, there’s been a fair amount of criticism over Biden’s new semiconductor rules. Investors have griped about it because of the obvious effect on American chip companies revenue and share price.
Before the ban, major American chip companies did a lot of business in China. Teradyne (NYSE: TER) and Micron (NYSE: MU) get between 17%-18% of their revenue from China. A few other notable examples: Advanced Micro Devices (NASDAQ: AMD) gets 39% of its revenue from China, Qualcomm (NASDAQ: QCOM) clocks in at 35%, and Wolfspeed (NASDAQ: WOLF) stands at 34%. 45% of Nvidia (NASDAQ: NVDA) revenue comes from China.
I’ve heard other people gripe that the China semiconductor ban is a violation of the philosophy of free-trade, and also opens the door for chip companies from other countries to take market share away from U.S. companies.
Free Trade with China isn’t Free
The notion that the U.S. somehow going back on its commitment to free trade is absurd. It takes two to tango, and China has been dancing to its own tune for pretty much all of its time in the World Trade Organization.
China steals US technology, they lied about COVID and it cost the U.S. and the world hundreds of thousands of lives, they’ve embedded spyware in all manner of electronics products bound for the U.S., Chinese companies have used phony accounting to get listed on U.S. stock markets and stolen directly from American investors, the Chinese yuan is by far the most manipulated currency in the world, they’ve used “dumping” practices to undermine and undercut American companies.
What coach wouldn’t pull his players off the field and refuse to play a game that was rigged from the start?
Yes, sales of personal computers, laptops and smartphones have weakened as inflation-wary consumers have cut spending a little. And that’s part of the reason the iShares Semiconductor ETF (SOXX) was down as much as 40% over the last year. But the anticipated loss of revenue from China is another big factor weighing on the chip stocks.
But at least U.S. chip companies are not standing alone while their counterparts from other countries scoop up the lost revenue from China. Japan and the Netherlands have joined the U.S. semiconductor ban on China.
For Japan, the tradeoff was probably easy to make. China seems to have no problem with the lunatic NORK Kim Jong-Un lobbing missiles over Japan. And so the U.S. rare gift of Tomahawk missiles is a pretty solid quid pro quo for Japan cooperation in chips.
If you’re wondering about why the U.S. wanted the Dutch onboard, it comes down to one company, really – ASML (NASDAQ:ASML). I don’t know what the “ASM” name means, but the “L” is for lithography. ASML machines are lithography machines that use lasers to etch circuits onto semiconductors. These machines are among the most complicated mankind has ever produced. The cheapest ones run around $150 million. Each one consists of 100,000 parts, and it takes 4 jumbo jets carrying 40 cargo containers to deliver them.
ASML’s newest machines will run you $400 million or so. They are the only company in the world with the engineering know-how to make the most advanced ones (Japan’s Nikon and Canon also make lithography machines.).
ASML stopped selling its most advanced machines to China in 2019, in accordance with the Trump administration export bans to China. Now, China will be cut off from all of AMSLs machines.
I can’t tell you exactly what the Dutch are getting in return. There’s been no report of Tomahawk missiles or anything like that. But, the war in Ukraine is almost certainly a factor. The U.S. is a pretty good friend to have…
The Last Pieces of the Puzzle
Taiwan and South Korea are the other semiconductor powerhouses in the world. Neither has officially joined the American semiconductor ban on China, at least formally..
Taiwan has said that it will comply with the U.S. semiconductor rules on China. And the U.S. is Taiwan’s biggest arms supplier. Still, it’s a tricky situation given China’s aspirations for Taiwan.
The situation with South Korea is also tricky. With Samsung and Hynix, South Korea dominates the memory chip market, making 56% of the world’s memory chips. It sells half of those memory chips to China. And 40% of those companies’ chips are made in China. Complying with the Biden administration’s new chip rules won’t be easy…
But in response to those rules, in October 2022, Hynix said “”As a contingency plan, we are considering selling the fab, selling the equipment or transferring the equipment to South Korea…”
And just this Tuesday, South Korea and the U.S. announced that they would “expand military drills and boost nuclear deterrence planning to counter North Korea’s weapons development and prevent a war.”
Now, I can read between the lines. That statement doesn’t specifically mention China, but the threat is there. The U.S. is flexing the strong arm of its new chip rules. You can bet South Korea will choose to endorse U.S. policy.
That’s it for me today, take care and I’ll talk to you on Friday,
Briton L. Ryle
Chief Editor and Strategist
Pro Trade Today
