Biden Administration Proposal
U.S. chipmakers including Intel, Qualcomm, and Nvidia have reacted to U.S. President Joe Biden’s anti-China semiconductor export control policy. They have begun to speak about the news that the Biden administration is preparing additional semiconductor export control measures amid the escalating conflict between the United States and China. This is a change from October of 2022, when the Biden administration introduced the measures. At the time, the U.S. Semiconductor Industry Association (SIA) said that it understood the importance of national security and expressed its willingness to work with the U.S. government.
The SIA represents 99 percent of U.S. semiconductor companies. It issued a statement on July 17 to clarify its position about the news. On the same day, the CEOs of Intel, Qualcomm, Nvidia, and other U.S. companies met with U.S. Secretary of Commerce Gina Raimondo, who is the Biden administration’s director of semiconductor policies, National Security Council (NSC) Director Jake Sullivan, and U.S. Secretary of State Tony Blinken.
The main reason for U.S. semiconductor companies to take collective action at this point is that the U.S.-China conflict shows no signs of being resolved and is expected to escalate within the semiconductor industry in particular.
After the United States introduced measures to control semiconductors with regard to China in October 2022, China retaliated by sanctioning U.S. chipmaker Micron in May and then imposing restrictions on exports of gallium, a rare metal for semiconductors, in June. Blinken and U.S. Treasury Secretary Janet Yellen traveled to China in June and July, but said they would continue to take measures to protect national security, raising the possibility of taking further action.
Then, in late June, the Wall Street Journal (WSJ) and others reported, citing sources, that the Biden administration was preparing additional anti-China semiconductor export control measures, which are expected to be announced in early July. The measures will target Nvidia’s low-end artificial intelligence (AI) semiconductors and cloud computing chips, some analysts forecast. The news of additional measures will come more than 10 months after the semiconductor export control measures against China.
The SIA released a statement regarding potential additional government restrictions on semiconductors on July 17. “Recognizing that strong economic and national security require a strong U.S. semiconductor industry, leaders in Washington took bold and historic action last year to enact the CHIPS and Science Act to strengthen our industry’s global competitiveness and de-risk supply chains,” the SIA said in the statement. “Allowing the industry to have continued access to the China market, the world’s largest commercial market for commodity semiconductors, is important to avoid undermining the positive impact of this effort. Repeated steps, however, to impose overly broad, ambiguous, and at times unilateral restrictions risk diminishing the U.S. semiconductor industry’s competitiveness, disrupting supply chains, causing significant market uncertainty, and prompting continued escalating retaliation by China.”
The longer the U.S.-China conflict drags on like this, the more it hurts companies’ earnings. For U.S. companies, China is the world’s largest market that cannot be abandoned before national security. SIA’s emphasis in its statement on the importance of allowing the industry to have continued access to the China market is closely connected to the consideration of U.S. semiconductor companies’ profitability, analysts say.
China is the biggest spender in the global semiconductor market. According to foreign media outlets, China’s semiconductor purchases in 2022 totaled US$180 billion, or one-third of global demand. Looking at U.S. companies individually, Intel generated 27 percent of its total sales by selling its chips to China in 2022. Nvidia, which produces AI semiconductors for China, posts more than 20 percent of its annual sales in China, including Hong Kong. Qualcomm, which is the only company allowed to provide Huawei with semiconductors for its smartphones, generates about half of its sales in China.
Intel CEO Pat Gelsinger has focused on the Chinese market, traveling to China twice this year in April and July. “China is one of the largest markets in the world and one of Intel’s most important markets,” he said in Beijing in April. Three months later, in early July, he made a trip to China again, calling China the largest market for Intel’s latest AI semiconductors. Intel is expected to have difficulty in selling its chips in China if U.S. government controls are expanded.
The same goes for Nvidia. Nvidia is not delivering its most advanced AI chips to China as required by the U.S. government. Instead, Nvidia is making low-end AI semiconductors in consideration of the needs of the Chinese market and exporting them to China. If even low-end AI semiconductors are blocked from being shipped to China, Nvidia will suffer. “China is a very important market for the technology industry,” Nvidia CEO Jensen Huang said.
“We have become unable to sell more advanced semiconductor chips to one of our largest markets,” Huang added, expressing his concern that a semiconductor war could be devastating for the U.S. tech industry.
U.S. semiconductor manufacturing equipment companies have also been hit hard by the Biden administration’s control measures against China. China has been the top investor in semiconductor equipment for three consecutive years. China’s semiconductor equipment investment in 2022 reached US$28.3 billion, surpassing Taiwan (US$26.8 billion) and South Korea (US$21.5 billion), according to the Semiconductor Equipment and Materials Institute (SEMI). The figure eclipses the combined investment (US$25.1 billion) of North America, Japan, and Europe. China is still a big buyer in the semiconductor equipment market, although its investment shrank by 5 percent year over year in the wake of the U.S. government’s regulatory actions.
What’s more concerning for U.S. semiconductor companies is that the U.S. government’s restrictions can expand and hold over a long period, helping China set up its own supply chain. While China’s semiconductor equipment technology is still relatively inferior to those of world semiconductor equipment superpowers, the fear is that the Chinese government’s aggressive investment in the technology will drive Chinese semiconductor companies to look for and use Chinese-made equipment.
According to a report by the Korea Institute for International Economic Policy citing SEMI, China’s semiconductor equipment market grew at a compound annual growth rate of 27 percent from 2012 to 2022, and the country’s semiconductor equipment localization rate stood at 35 percent in 2022, up 14 percentage points year on year.
In fact, sales and profits of Chinese semiconductor equipment companies are expected to climb in the first half of this year. Naura Technology which makes semiconductor etching equipment said in a public disclosure on July 15 that it expects its first-half profit to be between 1.67 billion yuan and 1.93 billion yuan, up 121.3 percent to 155.8 percent year on year, according to SCMP. Its sales during the same period are expected to rise 64.4 percent year on year.
Another Chinese semiconductor equipment maker, AMEC, also forecast that it will post a year-on-year increase of 109.5 to 120.2 percent in net profits and a 28 percent increase in sales in the first half of this year. AMEC attributed the strong business performances to market share gains and said its etching equipment continues to be recognized by more domestic and international customers.
Such concerns have already been voiced several times by semiconductor industry leaders. Huang once said that U.S. export controls will force China to develop its own GPUs. “If U.S. tech companies get to have one-third less capacity than before as a result of abandoning the Chinese market, no one will need U.S. factories,” he said.
Peter Bennink, CEO of Dutch semiconductor equipment maker ASML, which has been effectively blocked from exporting its extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithography equipment to China, said that the U.S. control on the export of semiconductor equipment to China is a mistake. “China’s self-sufficiency in semiconductor equipment will take time, but it is a goal that will eventually be attained by China,” he said, emphasizing that the tighter the regulations become, the more efforts China makes.