​The US government has made it extremely difficult for Chinese semiconductor companies to develop advanced process nodes by banning the sale of such equipment if it contains any US software, components, or hardware, but it has allowed equipment used in more mature nodes to bypass those restrictions, with the idea that Chinese semiconductor fabs will only be able to produce the more ‘common’ parts that are needed around the globe, including in the US.  Without the equipment for advanced nodes, China’s semiconductor producers are unable to compete with semiconductor technology leaders such as Samsung and Taiwan Semiconductor (TSM), with ASML (ASML) the only source for the EUV tools needed for such advanced nodes, honoring the US ban.
It seems that the US Department of Commerce is evaluating the impact of even more stringent rules that would ban the sale of equipment used for the mature nodes that have previously been excepted, as a way to push China toward acknowledging sanctions against Russia for its invasion of Ukraine.  While the Chinese government has been making a concerted effort to aid the development of a homegrown semiconductor equipment industry that would not rely on the US for any parts or equipment, no matter how much money is thrown at the development of such tools, much depends on the experience and expertise of the engineers who design those tools, and it has proven to be a slow process for Chinese engineers to develop such expertise.
While we expect there would be the usual hue and cry from the Chinese government should the US expand the existing semiconductor trade restrictions, it will have a devastating effect on the Chinese semiconductor industry and stagnate China’s advancement as a global semiconductor supplier, and even a domestic one.  It would be difficult for the Chinese government to publicly censure Russia or reverse its existing stance, but if the US tightens the semiconductor noose further, China will have to find a way to satisfy the US while not seeming to acquiesce to it demands or face even slower growth from it semiconductor fabs during a period when the profitability of same should be at its peak.
If the US decides to go further with trade sanctions against China, it will also have to contend with US equipment suppliers, particularly Applied Materials (AMAT), LAM Research (LRCX), and KLA (KLAC), all of whom have significant sales in China.  While political pressure continues to push the administration toward tighter rules, US companies will bear the brunt of those restrictions, along with Japan’s Tokyo Electron (8035.JP).  Finding a path that will not penalize the US and Japanese semiconductor equipment business yet will exert additional pressure on China toward the US agenda with Russia is an almost impossible task and even if a solution is found, that does not guarantee that all countries will honor it  despite the political pressure the US might exert, and if it is successful politically will the outcome, both financially and technologically worth the price?

​42years ago a JV between IDG Communications (BX) and the Chinese Ministry of Industry & Information Technology created China Computerworld to educate the Chinese population about computer science and eventually became one of the top 10 newspapers on the Mainland, which is unusual in that it was always oriented toward the computer and information technology markets.  Due to COVID-19, the print version ended in June of 2021 but the JV maintained its website, social media accounts, and associated employees.  Unfortunately the staff has not been paid since February, with a number of employees filing labor arbitration cases against the JV, but it seems that the company has been sustaining large losses and has now declared that it will cease operations after borrowing capital to pay employee’s housing costs and medical insurance.  Whether the end of such a long-standing publication and the last ‘official’ US/China JV magazine is a function of COVID-19 or a sign of the times, it is sad to see it go after that many years of publication.

​China’s ‘zero-tolerance’ COVID-19 policy has created a situation that has caused sporadic lockdowns across the country.  In many cases those lockdowns have shuttered or limited production at semiconductor and display factories that are key to the global CE supply chain and add to the risk of device or component shortages that already plague the sector.  While there has been considerable criticism of the policy and of China’s overall COVID-19 transparency, at least on the surface, China has limited the outbreaks of the virus in most cases.  That said, there is increasing pressure from the global supply chain to rationalize these lockdowns and as they continue to affect both non-Chinese and Chinese consumers, it seems the Chinese government is making some concessions albeit without admitting to a change in policy.
The government of Shanghai, a city of ~28m (more than the entire population of Australia and a bit less than the population of Texas) with a GDP greater than that of Sweden, and home to the country’s biggest port, issued “Guidelines for the Preservation and Control of the Epidemic of Shanghai Industrial Enterprises Resuming Work & Production”.  As part of that report, 666 key enterprises were specified, including 62 IC related companies, including ASML (ASML), Applied Materials (AMAT) and Amkor (AMKR), and a number of display companies, including Merck (MRK), Toppan (7911.JP), and others.  At the same time the report specified a number of ‘responsibilities’ that enterprises must adhere to, with specific reference to the ‘owner’ of the enterprise as the party held responsible for implementation.
Many of the rules are similar to more commonplace corporate level COVID-19 education and management planning for outbreaks, but the report also called for further delineation of ‘designated areas’, meaning separating the work zones and staff dormitories, but implementing strict rules as to entry and exit in the dormitories, similar to areas on the factory floor and limit entry for all non-employees unless they have had a negative COVID test within the last 48 hours.  While these seem logical in light of the restrictions many of us have faced over the last two years, China is trying to limit exposure to those infected further as the recent outbreaks have slowed China’s growth and are beginning to eat away at the 30-day supply of raw materials that most factories have on hand.  That said, these industries and companies will remain open during subsequent lockdowns in order to keep production from stalling.
Transportation to and from suppliers has been the real issue as many factories have been able to continue production, given the on-site dormitories for workers, but without regular restocking the Chinese government is beginning to understand that companies on the Mainland will slowly abandon the county if such strict lockdowns are continually implemented.  China is already dealing with the increasing cost of worker salaries, which has pushed a number of companies to shift production to Vietnam and other Southeast Asian countries, and in the short-term will be feeling the impact of the current lockdowns if they continue into May.  While China has a similar population density to Denmark or Thailand, with 64% of the population of China living in cities (up from ~36% 20 years ago), the risk of widespread outbreaks is a serious one, but also has to be measured against the economic result of such severe lockdowns.  As the end of April approaches and raw material supplies are wearing thin, it seems China is trying to balance the COVID risk against both the short-term and long-term impact to its economy in a more realistic way, with concessions to key businesses and few, if any to the population, but transportation is based on people moving goods and that is the real issue.  If there are no raw materials being moved there will be no reason to keep the factories open. 

There are some materials that are key to the CE space, with the most visible being Copper.  It is used in hundreds of CE applications but copper laminated PCB boards are of primary importance to almost every CE device.  As we have been hearing complaints from suppliers as to the price and availability of materials, we checked on a few to see how the price of key metals has changed recently.  Copper prices continue to rise and board manufacturers have been complaining about rising prices for copper clad boards since 3Q ’20, but it seems that many more necessary metals have also been rising, with some quite a bit faster than expected.  We also checked the price of Iridium, a key heavy metal that is the basis for many phosphorescent OLED emitters, with that chart looking far more alarming than copper, almost doubling in price over the last few weeks.   After viewing those two charts we went a bit further and checked a number of other metals that are key to the CE space and created the table below.