Editor's note: The decline of the U.S. semiconductor industry has as much to do with decades of American inaction as with China’s aggressive industrial policy. As a result, few chips are 'made in America.' This Aspencore Media special project examines how the U.S. has fallen into a new kind of cold war: a technology cold war.
Semiconductor equipment manufacturers have largely remained silent as the U.S. and China escalate a technology cold war that could disrupt the IC chip market and further decouple the nations’ economies.
In May, the U.S. tightened trade restrictions on China, requiring semiconductor manufacturers using U.S. equipment to obtain a special license to sell to companies, or “entities,” blacklisted by the United States. Chinese networking giant Huawei tops the U.S. entities list.
“The new controls are specific to Huawei and its affiliates and seek to impose a license requirement on the transfer to Huawei and its affiliates certain semiconductor designs and devices that are the direct products of U.S.-origin design software or U.S.-derived manufacturing tools,” according to a spokesperson for industry association SEMI. “They do not impose any new license requirements on U.S. software or manufacturing tools themselves.”
There are broader implications, though, for the equipment industry writ large. U.S. companies are already prohibited from selling sensitive technology to entities associated with the Chinese military (People’s Liberation Army) and/or government, and the new rules expand the scope of “military end-uses.”
All told, the U.S. export restrictions could dampen production-equipment sales to chip makers in China.
“[The export controls] may create a disincentive for the purchase of U.S.-origin equipment by placing a unique license requirement on the direct products of U.S.-origin equipment which does not apply to the direct products of equivalent equipment from other major trading partners,” added SEMI.
Leading equipment makers contacted for this article initially indicated they would weigh in on the new measures but have since reversed course or not responded to follow-up requests. Some are in pre-earnings quiet periods, but the topic is politically charged. The U.S. appears intent on blocking China’s access to technology that would advance the nation’s semiconductor aspirations.
The impact so far
Equipment makers have so far weathered the trade storm, said Risto Puhakka, president of chip-market analyst VLSI Research. “The industry by and large is doing well in spite of the coronavirus and what has largely become a supply chain hassle,” he said.
The application process for U.S. export control licenses is onerous, he explained, but so far, no licenses have been denied. “At this point, the government is in the information-gathering phase and the equipment makers say they are adjusting to accommodate the new rules. The general feeling is: it’s a hassle.”
The penalties for willful violations of U.S. export regulations can be severe, SEMI said. Enforcement is overseen by the Commerce Department’s Bureau of Industry and Security.
VLSI has revised its production equipment forecast for 2020 to account for the coronavirus. Total revenue for 2020 was forecast at $82.7 billion, up 7.3 percent from the prior year.
For the second half of the year, VLSI now expects Q3 and Q4 equipment sales to decline 9 percent and 20 percent, respectively. For the year, the global equipment market is forecast to reach $71.2 billion, down 7.6 percent from the prior year.
SEMI has forecast global sales of semiconductor manufacturing equipment will increase 6 percent this year to $63.2 billion and log a record high in 2021 of $70 billion.
Industry experts concur the new restrictions aim to hobble China’s IC technology advancement. Although the export controls specifically mention Huawei, the end-use provision could impact indigenous Chinese chip makers and foundries such as SMIC and TSMC, which conduct business with Huawei.
“Huawei is already on the U.S. entity list and this expands the limitations derived from being on the entity list,” said SEMI.
The export rules pertaining to IC equipment sales, Puhakka said, are complex. “There are three objectives to the new controls. The first is for the government to get more information on [equipment] customers and the OEMs’ sales processes. The next is to stop the Chinese military — which essentially is the Chinese government — from acquiring advanced equipment. The third to limit Huawei’s access to advanced semiconductors.”
For example, if TSMC processes a wafer that’s shipped to Huawei, then the export rules apply. If the wafer is shipped elsewhere for packaging, there are “work arounds” to the system. In June, there were rumors that TSMC would push out its 2020 capital expenditures. That hasn’t occurred, and TSMC has since announced plans to build a fab in Arizona.
Will restrictions work?
Conventional wisdom is China will have a hard time enhancing its chip technology minus U.S. equipment. Puhakka doesn’t think the task is impossible. “For most fab equipment, there are EU or Japanese suppliers. In process control, there are fewer vendors, where KLA-Tencor is the leader.”
IP is another skirmish in the technology cold war with the added complexity of licensing agreements. “There are so many sources of IP,” said Puhakka. “You have Arm and memory IP and there are IP libraries compiled by companies such as TSMC. Then there are your own work products. For this discussion, they are treating IP the same as [hardware] — it is defined as a key technology that may fall into the hands of an entity.”
Politically, there is widespread support for hindering China’s progress on ICs. China’s dominance in the solar panel and LCD display sectors have driven prices so low that many foreign competitors have opted out. Government-subsidized Chinese companies have “trashed” those markets, experts say.
“That’s something that needs to be considered if you view [investment] from the perspective that the money comes from China,” said Puhakka. “The only other way Chinese companies can get money is something like SMIC’s IPO.”
Made in America
The United States, of course, has its own vested interest in semiconductor production — it wants chip manufacturing to return to America. One of the biggest stakeholders is the U.S. Department of Defense (DoD), which wants first dibs on new technology backed by security protocols developed in the United States. On Capitol Hill, Congress is wooing IC makers with the CHIPS for America Act, which would provide funding and tax breaks to manufacturing companies.
Equipment makers have remained mum on this issue as well. “Most companies in the semiconductor production space are used to operating globally,” Puhakka explained. “They have Chinese customers, Korean customers, Japanese customers and EU customers, and they’re used to deriving about 80 percent of their revenue outside of the U.S. They are agnostic [about the U.S.] — they don’t care where demand is coming from. As long as the ducks are quacking they are generally not concerned where the end market resides.”
The IC industry in general doesn’t base its decisions on favoring the United States, he added. “It’s about their product portfolios and how they are going to expand their business.”
Policies don’t change overnight, he added, and the U.S. has been losing the battle of incentives. Although there may be trade advantages for TSMC, it’s also looking at South Korea, Taiwan and China so facilities are not concentrated in a single country.
“Corporations are not nationalistic — they decide where it makes most sense for them to invest,” Puhakka concluded. “It’s less about whether the government hands over money, it’s about what the right decision is for them.”
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