Cost Realization
A recently proposed amendment to the US National Defense Authorization Act, that would have prohibited Federal agencies from purchasing semiconductors from three Chinese companies, has been scaled back after protests from trade groups and the US Chamber of Commerce shed light on the difficulties and costs associated with the increased restrictions. The bill would have implemented almost immediate prohibitions of agencies purchasing semiconductors from Semiconductor Manufacturing International, aka SMIC (688981.CH), Changxin Memory Technologies (pvt), and Yangtze Memory Technologies, aka YMTC (state), with two of the three having been named by US officials as linked to the Chinese military.
The trade groups indicated that the cost of dissecting every device purchased by US government agencies to see if they contained semiconductors from the three target companies, would be enormous and incredibly time-consuming, while being virtually impossible within the timeframes originally suggested in the amendment. This seems to have helped to change the legislation from almost immediate implementation to a 5 year phase-in plan, in keeping with the funding plan of the CHIPS & Science Act. Th revised bill also calls for an initiative with the private sector to identify and replace Chinese semiconductors across the federal supply chain, rather than leaving that burden solely on federal agencies, with the goal of replacing all Chinese-made semiconductor products with American made semiconductors to avoid global chip shortages.
All in, we have never been fans of trying to eliminate a competitor through trade sanctions that are politically based, but there is certainly some merit to using those sanctions to avoid funding adversaries that are producing devices or electronics for an aggressive military power. That said, it is a very fine line to walk without hurting the overall global effort toward developing more sophisticated semiconductors, of which China is a part, so there is a balance to be found on a global scale. On a country-wide basis, the US is certainly capable of building the infrastructure needed to become independent of China’s manufacturing prowess, but it does have a cost, as became apparent when the US government began forcing carriers to remove telecom equipment made by Huawei (pvt), which has yet to be completed and is considerably over original cost expectations.
The bill promotes the idea that US jobs will be created by the expanded semiconductor ban, which is likely correct, but those gains must be balanced against the cost of implementation, the higher price of non-Chinese semiconductors, and the risk that the US and its allies will take on more of the cost burdens during the nadir of such a cyclical industry. Its easy for politicians to use anti-China sentiment to stir up potential voters but such actions have deeper and longer lasting implications than can be expressed in a two page bill summary, and we expect that the political world will quickly move on to another issue and leave the global semiconductor industry to deal with this new disruption.
The trade groups indicated that the cost of dissecting every device purchased by US government agencies to see if they contained semiconductors from the three target companies, would be enormous and incredibly time-consuming, while being virtually impossible within the timeframes originally suggested in the amendment. This seems to have helped to change the legislation from almost immediate implementation to a 5 year phase-in plan, in keeping with the funding plan of the CHIPS & Science Act. Th revised bill also calls for an initiative with the private sector to identify and replace Chinese semiconductors across the federal supply chain, rather than leaving that burden solely on federal agencies, with the goal of replacing all Chinese-made semiconductor products with American made semiconductors to avoid global chip shortages.
All in, we have never been fans of trying to eliminate a competitor through trade sanctions that are politically based, but there is certainly some merit to using those sanctions to avoid funding adversaries that are producing devices or electronics for an aggressive military power. That said, it is a very fine line to walk without hurting the overall global effort toward developing more sophisticated semiconductors, of which China is a part, so there is a balance to be found on a global scale. On a country-wide basis, the US is certainly capable of building the infrastructure needed to become independent of China’s manufacturing prowess, but it does have a cost, as became apparent when the US government began forcing carriers to remove telecom equipment made by Huawei (pvt), which has yet to be completed and is considerably over original cost expectations.
The bill promotes the idea that US jobs will be created by the expanded semiconductor ban, which is likely correct, but those gains must be balanced against the cost of implementation, the higher price of non-Chinese semiconductors, and the risk that the US and its allies will take on more of the cost burdens during the nadir of such a cyclical industry. Its easy for politicians to use anti-China sentiment to stir up potential voters but such actions have deeper and longer lasting implications than can be expressed in a two page bill summary, and we expect that the political world will quickly move on to another issue and leave the global semiconductor industry to deal with this new disruption.
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