On October 7, the United States announced a new series of export control measures for semiconductors to China. Under these new sweeping rules, U.S. chip makers will need to obtain permission from the Department of Commerce in advance prior to exporting certain high-performance chips, usually for advanced artificial intelligence (AI) computing. The exports of some advanced chips and manufacturing equipment for computer memory and data storage will also be restricted. Meanwhile, the Department of Commerce added 31 Chinese entities to the export control list on the same day. That means U.S. officials have concerns about these companies and institutions but are not ready to blacklist them yet. However, the Department of Commerce made it clear that if these entities fail to cooperate in alleviating related concerns, they may also be added to the blacklist in the future.
As a continuation of the Biden administration's efforts to crack down on China's semiconductor industry, the impact of the new round of regulations is far wider than previous measures mainly aimed at individual companies and certain technologies. While ultimately the impact of the new rules depends on multiple factors, including how strict the U.S. regulators are in issuing licenses, it is without a doubt that they are sufficient to indicate that the U.S.-China "chip war" will not only continue but intensify as well. This has caused much concern not just in China, but also among related industries around the world.
The first to be hit by the new rules is of course the Chinese local semiconductor industry. Not long ago American chip toolmaker KLA took the lead in announcing that it would stop sales and service to "advanced fabs" in China for the technology of NAND chips with 128 layers or more, DRAM chips 18nm and below, and advanced logic chips from October 12 onwards. Subsequently, there was also news in the market that the workers of the other two leading manufacturers, Lam Research and Applied Materials, have also left or are about to leave several large fabs in mainland China. Multiple foundries and two major memory fab plants will be affected as a result.
According to some industry insiders, China's fabs rely heavily on equipment from American and Japanese companies in all aspects of wafer manufacturing. In the production process, it is even more difficult for Chinese companies to completely evade American technology. Engineers at Applied Materials believe that if new parts cannot be obtained, Chinese foundries may only be able to produce chips up to 28 nanometers in the future. At the same time, chip products such as central processing units, graphics processors, and AI accelerator cards, which are urgently needed in the fields of artificial intelligence and supercomputing, may also be greatly affected.
In addition to the impact on production materials and processes, the management and technical talent resources of the Chinese semiconductor industry will feel the impact as well. In the latest export controls, for the first time, the U.S. has explicitly opposed Chinese-Americans from helping China to develop advanced semiconductors for supercomputers, artificial intelligence, and other critical technology applications. The Nikkei pointed out that over the years, hundreds of Chinese-Americans have been key figures in China's homegrown semiconductor industry, often with work and R&D backgrounds at companies such as Intel, Applied Materials, and Lam Research. These examples may include founding Chairman and CEO Gerald Yin of Advanced Micro-Fabrication Equipment Inc., David H. Wang who is the CEO and president of ACM Research, and Michael Yip who is a core technical staff of Amlogic. Theoretically, Chinese-Americans could circumvent the restrictions by giving up U.S. citizenship or changing the scope of their work area, yet in practice, this is anything but easy.
Shares of Chinese semiconductor companies generally fell on October 10 amid a series of negative news. The Global X China Semiconductor ETF, which tracks 25 Chinese companies, was down nearly 7% in the Hong Kong market by midday that day. At the same time, due to being included in the unverified list, the stock of NAURA Technology Group listed in Shenzhen fell to the limit of RMB 250.56 per share in the previous market, and the decline this year has expanded to 28%; the shares of SMIC and GigaDevice fell 3.1% and 6.4% respectively; Shanghai Fudan Microelect and Advanced Micro even fell more than 16% at one point.
According to data from ANBOUND, the world's major semiconductor-related companies account for a large proportion of their revenue in the Chinese mainland market in 2021. These are Lam Research at 37%; Broadcom 35.5%, Applied Materials 32.7%, KLA 28.9%, AMD 24.9%, ASML 14.7% and TSMC 10.4%. Obviously, the new rules imposed by the Biden administration will impact the business of semiconductor companies including the American ones in China, hurting their very own interests, and causing the related impact to gradually spread to a wider range.
Capital markets have already responded to this. Shares in Asia's major semiconductor makers fell on October 11 as investors worried that new rules would have a broad impact on the global semiconductor industry. Among them, TSMC's share price fell 8.3%, closing at the lowest price in more than two years; Samsung Electronics' share price fell 3.9% in early trading and closed down 1.4%; South Korea's SK Hynix's share price fell 3.5% at one point, closing down 1%. Since non-Chinese chipmakers often also operate chip-making facilities in China, U.S. sanctions are likely to have an impact on their production and severely disrupt the business of Japanese, South Korean, and Taiwanese chipmakers or chip-manufacturing equipment makers, analysts noted.
Under the new American rules regarding semiconductors, TSMC could be restricted from selling advanced chips to Chinese customers from its factories in other regions. At the same time, KLA, which recently announced that it will stop providing services to China, also said that it will also stop supplying Chinese chip factories under Intel and SK Hynix. In addition, the U.S. Department of Commerce announced that it will review on case-by-case basis applications for exports to China from facilities operated by non-Chinese companies. That means that for non-Chinese companies like SK Hynix, which operates factories in China, U.S. approval is required to add any equipment needed to produce more advanced chips in China.
Although SK Hynix subsequently issued an announcement saying that the U.S. has granted it an exemption, allowing it to supply equipment and components required for R&D and production of DRAM semiconductors to factories in China for one year without additional licensing requirements, market analysts still generally agree that the cost and risk of building and expanding semiconductor production facilities in China have increased significantly for foreign companies.
The results of the impact of the new rules on American businesses have become apparent as well. As of the close of U.S. stocks on October 11, the Philadelphia Semiconductor ETF index continued to tumble, down as much as 3%, and has fallen 12% since Thursday's close, hitting a record low. Among them, Qualcomm closed down 3.99%, and Nvidia closed down 0.72%. The shares of Lam Research, KLA, and Applied Materials even closed down 6.75%, 6.15%, and 3.65% respectively. Investors' pessimism reflects the risk of these companies leaving the Chinese market.
As things stand, whether it is for China, the rest of Asia, or the U.S. itself, the new round of semiconductor export restrictions will send waves of shocks. Under the backdrop of the global economic downturn and the slowdown of the semiconductor industry, this forceful intervention is likely to bring great uncertainty to the global semiconductor industry, and even cause a reaction in the global industry.
Final analysis conclusion:
In the context of the global economic downturn and the slowdown of the semiconductor industry, the new long-arm jurisdiction of the United States is bound to constitute a huge policy challenge for semiconductor-related companies in China, the rest of Asia, and the United States itself, thereby bringing great of uncertainties. The U.S. export control policy is a forceful intervention in the global market, a typical act of American hegemony. While the relevant regulations significantly restrict Chinese semiconductor and related industries, because the policy damages the interests of American companies, as well as businesses of other countries and regions, and seriously interferes with the market and industry, it will inevitably trigger a reaction in the global industry.
