US chip firms try to keep China business afloat amid sinking relations

US chip companies are concerned about losing market share as they try to balance business interests in China with strict export controls on advanced semiconductors, an issue highlighted by experts at a webinar on Tuesday.

So-called strategic decoupling between the US and China does not mean chip firms are walking away from the world’s second largest economy, Bain & Co partner Jue Wang said at the event hosted by advisory firm Mavek and German enterprise software company SAP.

“[The] No 1 question many people have is how do I walk the tightrope so I get access to that 20 per cent to 40 per cent of my … China market, for as long as I can, while at the same time complying with the US and China rules,” she said.

The webinar was about the impact of the US Chips and Science Act, a law passed last summer that provides US$53 billion in funding to domestic semiconductor manufacturing and bars recipients from building advanced chip-making capacity in China or other “foreign countries of concern”.

In October, the US also significantly ramped up its export control rules with the aim of further curtailing China’s access to advanced semiconductors, certain chip-making tools and design software. The rules bar US citizens supporting China’s development of advanced chips, as well.

The US has put more than 600 Chinese companies on its trade blacklist, which has been expanded to target specific “choke points” for semiconductor technologies, according to Wang.

“The most pronounced ones would be semiconductor equipment tools and electronic design automation tools, because those are the categories that are most heavily concentrated towards the US and allies,” she said.

The sweeping new export rules have left chip firms grappling with how they will affect earnings and plans for the China market.

Lam Research estimated the trade restrictions could reduce its 2023 revenue by up to US$2.5 billion. Applied Materials, the largest US chip equipment maker, said the export curbs would lead to US$250 million to US$550 million in lost net sales for the quarter ending October.

To keep their footing in the world’s largest semiconductor market, US companies are considering a “China-for-China indigenous mandate”, Wang said, referring to a localised strategy not subject to US rules.

Senior executives at Intel China, the US chip giant’s local subsidiary, told the audience of a closed-door meeting in Shanghai on Friday that it hoped to be “rooted in China, serving China, developing together”.

However, Intel is poised to be one of the biggest beneficiaries of the Chips Act, which would limit its options for expansion in China.

The US-China tech war, particularly in the area of semiconductors, has become part of a broader story about deteriorating relations between the two countries, which have hit their lowest point in decades amid high-pitched quarrels that include a recent Chinese surveillance balloon, relations with Taiwan, and the war in Ukraine.

Clyde Prestowitz, a former White House adviser, said during the webinar that US sanctions on China are intended to defend the “free world” against “threats” posed by China’s current regime.

Recent US moves are aimed at “slowing down the Chinese military threat and enabling the Western, free-world countries to maintain a technological lead over China”, Prestowitz said.

He added that although the Netherlands decided to cooperate with the US, the decision is not ideal for ASML. The Netherlands and Japan have reportedly agreed to work with the US on tightening export controls on China.

China is ASML’s third-largest market. CEO Peter Wennink said the company has suffered from the US ban on exports of its extreme ultraviolet lithography systems to China and that more chip controls will push the country to create its own technology.

Neither Tokyo nor The Hague has made details of the agreement public. Uncertainties over how this might affect supply chains have prompted some Chinese semiconductor equipment makers to stockpile spare parts and materials, the Post previously reported.

China still depends on imported software, tools and other technologies for the domestic production and design of both mature and advanced chip-making processes. That dependence will be hard to reduce in the short run.

“Some segments just took many decades of learning curves from building billions of chips, and those are the areas [in which it] will be the hardest to catch up,” Wang said.

These areas include semiconductor equipment, electronic design automation software, and chip architecture, according to Wang. South China Morning Post