“What’s Good for the Goose…”
The US ban on semiconductor equipment being sold to Chinese fabs has a significant political component, as there are few public figures who would take the stance that China does not pose a threat to the US way of life, and while that does not justify the bans in themselves, China’s generous funding climate for the semiconductor space gives fuel to the idea that “…if we don’t stop them, they will take over the semiconductor market”, despite the fact that until recently the US government has woefully underfunded the US semiconductor production effort, giving rise to the current semiconductor issues with China.
There is some justification for the semiconductor industry’s progressive move to China over the last decade, but primarily for the semiconductor packaging segment, which is far more labor intensive than chip production, but the real driving force is that China is a huge market that needs to be fed and years ago did not have the capacity to produce what it needed. In fact China is still (2022) a net importer of semiconductors, and saw its semiconductor trade gap increase last year to $261.7b, increasing 46.7% y/y, so despite all the hoopla over China’s potential takeover of the semiconductor space, they remain a large net importer.
That said, the downside to the US semiconductor equipment bans to China have both an obvious financial downside for those US companies that have supplied such tools to Chinese fabs in the past, and for companies that do so, but are not situated in the US, which brings up the point that the US stance must be adopted by many countries and companies that do business with Chinese semiconductor fabs and design houses, as to violate the US rules could cause political or diplomatic friction and potentially cause unwanted repercussions for same.
But in the case of semiconductor trade rules, the rules are not always the rules for everyone, and companies like Samsung Electronics (005930.KS) and SK Hynix (000660.KS), that are major semiconductor manufacturers and have fabs in China, are looking for ways around the US rules in order to stay competitive. According to sources in Korea, the US Department of Commerce has been in discussion with the South Korean government concerning the aforementioned restrictions, in order to come up with a ‘separate’ solution for Korean companies that have fabs on the mainland. The US has already given Samsung and Hynix a one-year moratorium on the ban, which would have applied to both company’s fabs in China, but that agreement runs out in September, which would mean that both companies would be unable to upgrade facilities in China, which would have serious implications for both.
As the restrictions specify tools capable of producing at 16um or lower, DRAM at 18um or less, and NAND at 128 layers or more, this would put the South Korean companies at a major disadvantage as Chinese NAND players move up to 200 layers, as would be the case with DRAM, where China is already producing at 17um, and at 14um on a more general basis. Without the equipment necessary to stay ahead of Chinese fabs, both companies would have spent billions on capacity that will eventually far behind local producers.
The separate rules are being discussed because South Korean companies are a large part of the semiconductor market, and tacitly to maintain and develop the semiconductor production in the US by those same companies, so exceptions are being developed to potentially allow the Korean companies to import US developed tools that are able to produce a level above what is being produced in China. While this seems necessary in terms of the potential political and financial chaos it would cause if relations between the US and South Korea were to sour, it does open the door to others, particularly Taiwan Semiconductor (TSM), asking for the same or similar exceptions for its China fabs. The US has already convinced the Dutch to join the ban, as Netherland-based ASML (ASML) is the world’s largest supplier of DUV and EUV lithography tools, although those restrictions are still pending, and little is known as to what the US might have promised to come to an understanding with the Dutch. How fast can the US tap dance?
There is some justification for the semiconductor industry’s progressive move to China over the last decade, but primarily for the semiconductor packaging segment, which is far more labor intensive than chip production, but the real driving force is that China is a huge market that needs to be fed and years ago did not have the capacity to produce what it needed. In fact China is still (2022) a net importer of semiconductors, and saw its semiconductor trade gap increase last year to $261.7b, increasing 46.7% y/y, so despite all the hoopla over China’s potential takeover of the semiconductor space, they remain a large net importer.
That said, the downside to the US semiconductor equipment bans to China have both an obvious financial downside for those US companies that have supplied such tools to Chinese fabs in the past, and for companies that do so, but are not situated in the US, which brings up the point that the US stance must be adopted by many countries and companies that do business with Chinese semiconductor fabs and design houses, as to violate the US rules could cause political or diplomatic friction and potentially cause unwanted repercussions for same.
But in the case of semiconductor trade rules, the rules are not always the rules for everyone, and companies like Samsung Electronics (005930.KS) and SK Hynix (000660.KS), that are major semiconductor manufacturers and have fabs in China, are looking for ways around the US rules in order to stay competitive. According to sources in Korea, the US Department of Commerce has been in discussion with the South Korean government concerning the aforementioned restrictions, in order to come up with a ‘separate’ solution for Korean companies that have fabs on the mainland. The US has already given Samsung and Hynix a one-year moratorium on the ban, which would have applied to both company’s fabs in China, but that agreement runs out in September, which would mean that both companies would be unable to upgrade facilities in China, which would have serious implications for both.
As the restrictions specify tools capable of producing at 16um or lower, DRAM at 18um or less, and NAND at 128 layers or more, this would put the South Korean companies at a major disadvantage as Chinese NAND players move up to 200 layers, as would be the case with DRAM, where China is already producing at 17um, and at 14um on a more general basis. Without the equipment necessary to stay ahead of Chinese fabs, both companies would have spent billions on capacity that will eventually far behind local producers.
The separate rules are being discussed because South Korean companies are a large part of the semiconductor market, and tacitly to maintain and develop the semiconductor production in the US by those same companies, so exceptions are being developed to potentially allow the Korean companies to import US developed tools that are able to produce a level above what is being produced in China. While this seems necessary in terms of the potential political and financial chaos it would cause if relations between the US and South Korea were to sour, it does open the door to others, particularly Taiwan Semiconductor (TSM), asking for the same or similar exceptions for its China fabs. The US has already convinced the Dutch to join the ban, as Netherland-based ASML (ASML) is the world’s largest supplier of DUV and EUV lithography tools, although those restrictions are still pending, and little is known as to what the US might have promised to come to an understanding with the Dutch. How fast can the US tap dance?
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