When the U.S. first banned sales of certain technology products to Chinese tech company Huawei three years ago, it crippled a once-proud national champion and sent ripples through the U.S. semiconductor industry. In the quarters following the May 2019 export ban, top US chipmakers reported a median revenue decline of 4% to 9%.
The Biden administration’s latest tech controls threaten to accelerate those losses, throwing the global semiconductor sector into disarray. And Chinese companies targeted by the new rules won’t be the only ones feeling the pain.
“If China really wants to be as aggressive as the U.S. and retaliate, there could be a big impact for other companies in the U.S.,” Race Capital General Partner Edith Yeung said in an interview with Yahoo Finance Live (video above). “This is without impact on revenue for Intel (INTC) or Qualcomm (QCOM) or NVIDIA (NVDA).”
The US has long been a global leader in semiconductors, with a market share of around 45% to 50%. However, this leadership is built on global demand for its products, with China consuming around 75% of semiconductors sold globally.
Chinese device makers alone accounted for about a quarter of global demand for semiconductors in 2018, according to a study by Boston Consulting Group (BCG).
‘More than just a preventive tool’
That innovation cycle risks being pulled apart, with the Biden administration’s sweeping tech controls aimed at freezing China’s semiconductor development and dramatically limiting critical technology exports from the US
“Technology export controls can be more than just a preventive tool,” said national security adviser Jake Sullivan, ahead of the administration’s announcements. “If deployed in a way that is robust, durable and comprehensive, they can be a new strategic asset in the US and allied toolkits to impose costs on adversaries and even, over time, degrade their battlefield capabilities.”
‘A sea change’ in politics
Specifically, the new measures block the sale of semiconductors critical to the development of artificial intelligence, supercomputers and other advanced technologies unless companies receive exemptions. It also expands an existing ban on selling advanced chip-making equipment to Chinese companies.
In a broad escalation, the Biden administration’s actions also restrict American companies and citizens, including permanent residents, from supporting China’s development of advanced chips.
The restrictions announced earlier this month have already had a chilling effect.
At least 43 senior executives are US citizens working with 16 listed Chinese semiconductor companies, according to the Wall Street Journal. Western firms such as Dutch equipment maker ASML Holding NV have suspended American employees from work as a precaution while they seek further clarity. What’s more, Apple temporarily halted plans to use memory chips from China’s Yangtze Memory Technologies Co. in products, according to Nikkei Asia.
“This is truly a sea change in policy … the US is imposing a freeze strategy on China’s indigenous chip development,” said Reva Goujon, Rhodium Group Director. “[The semiconductor sector] is an interdependent, interlocking ecosystem where all the pieces must somehow be in place for things to work in order to be upgraded to more and more advanced levels. So if you cut the legs out during that production cycle, you can really cause a lot of disruption, which is exactly what America’s intent is.”
Impact on US chip makers
The disruption may not be limited to Chinese companies. A 2020 study by BCG estimated that US companies could lose 18% of their global market share and 37% of their revenue over the same period if the US completely bans semiconductor companies from selling to Chinese customers.
The measures have already prompted chip equipment maker Applied Materials to cut fourth-quarter net sales estimates by about $400 million. Q4 non-GAAP adjusted diluted EPS is expected to range from $1.54 to $1.78, compared to the prior range of $1.82 to $2.18.
While the restrictions are limited to next-generation chips now, NVIDIA, the largest U.S. chipmaker by market capitalization, warned in August that new licensing requirements on advanced chip shipments to China could cost the company as much as $400 million in quarterly sales.
“There’s certainly a chance that this could have a much bigger waterfall effect, but I think these companies have already looked at the situation, they’re assessing it,” said Daniel Newman, founding partner and principal analyst at Futurum Research. “I am not particularly worried that it will be the entire portfolio [of chips]… I think it’s about leading the arms race for the next generation of technology in areas like supercomputing, high-performance computing and artificial intelligence.”
Contains technology ‘where it needs to be’
Secretary of State Anthony Blinken has echoed the same, highlighting in a recent speech at Stanford University that only “a small number of countries” manufacture or make tools to manufacture the highest semiconductors.
“We want to make sure we keep them where they need to be,” Blinken said, without singling out China.
But Goujon argues that American firms, especially equipment makers, face the risk of losing market share and revenue to competitors in countries that have historically had friendlier relations with the United States, including Japan and South Korea. If companies there find a solution to the Biden administration’s measures, Goujon said the new controls could end up backfiring against the U.S.
“Foreign Competitors to the United States [equipment makers] obviously have an opportunity here to try to capture more market share in China if they can displace American people and American connections, which is possible in some areas,” she said.
“The US is putting strong bilateral and plurilateral pressure on partners to follow their lead, and it’s sending the signal that look: This package includes extraterritorial measures, and we will add more if necessary. But here is the window to try to basically adjust with our controls. So that’s really going to be an important question now.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita
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