Computer chips are the quintessential high-tech industry and a symbol of American scientific ingenuity. Chip makers have also found themselves at the heart of the U.S.-China rivalry: both nations want to dominate the industry of the future—and exclude the other.
Ironically, that urge to separate may prove to be the biggest threat to the ambitions of both.
For China, its long-running goal of developing its own semiconductor industry has become more urgent as the Huawei saga has exposed its own vulnerabilities. Excluding the output of Chinese factories for foreign firms, Chinese companies account for nearly a quarter of global semiconductor demand, according to Boston Consulting Group. Yet China’s domestic semiconductor industry covers only 14% of that amount.
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That means the U.S. is able to kneecap China’s semiconductor ambitions by leveraging its technology dominance. The Commerce Department, for example, recently added new restrictions that would require even foreign chip makers such as Taiwan Semiconductor Manufacturing TSM 2.02% —better known as TSMC—to apply for an export license for chips shipped to Huawei if they are produced using U.S.-designed chip-making tools.
The center of gravity for chip making is shifting to Asia: TSMC and Korea’s Samsung are two of the most advanced producers. But U.S. companies such as Applied Materials, KLA and Lam Research still have a stranglehold upstream in producing the equipment needed to manufacture the chips themselves. Roland Shu of Citi notes that “no one can totally stop using U.S. equipment for semiconductor production.” Krish Sankar of Cowen predicts Chinese chip makers will have to rely on at least some U.S. equipment suppliers for the foreseeable future.
Leveraging that upstream dominance to completely crush China’s chip-making ambitions would be a risky gamble for the U.S., however—even if it is possible to close all loopholes. Shutting out Huawei means billions of dollars of lost revenue for American chip makers and the companies that supply them. Chinese companies are increasingly end buyers of chips. Huawei alone accounted for about 5% of global semiconductor consumption last year, according to Goldman Sachs. Chinese companies such as Lenovo and Xiaomi are also major chip buyers.
The recent deal between the U.S. government and TSMC suggests the end goal may not even be Huawei’s demise. TSMC announced plans last month to build a chip-fabrication facility in Arizona—just hours before the Commerce Department announced its new restrictions on chips sold to Huawei. TSMC is a major supplier to Huawei, which reportedly accounts for about 15%-20% of the Taiwanese chipmaker’s revenue. Many believe TSMC wouldn’t have made such a move without a deal that would allow it to keep doing at least some business with such an important customer. That move has also sparked American chip makers acting through the Semiconductor Industry Association to lobby for federal money to fund fabs of their own.
Chip makers have found themselves at the heart of the U.S.-China rivalry.
Photo: ReutersHowever, the escalating U.S. campaign against Huawei could still result in unintended consequences. Foreign companies based in markets such as Japan and Europe could start seeking more supplies from non-American companies so as not to get caught in the long arm of U.S. restrictions. Foreign companies may also reconsider having R&D centers in the U.S., if they fear that could subject them to restrictions.
And even American companies may rethink domestic operations. Chip-equipment maker KLA is based in California, where it has a major manufacturing operation. But during a May 5 earnings call, KLA Chief Executive Officer Rick Wallace described the company’s manufacturing facilities in Singapore and Israel as “a lever and an option that we have as we look out and think about where the best place to be positioned is.”
China and the U.S. both want to dominate chips, and are pouring massive resources into their respective industries. But if both sides insist on viewing the competition in zero-sum terms, the real winners may be third parties: Asian or European countries and companies who benefit from R&D fleeing the U.S., and higher sales revenue from Huawei and other Chinese buyers looking to hedge against future U.S. export restrictions. Wars—even paper-based trade ones—tend to leave both sides hurting.
Write to Jacky Wong at JACKY.WONG@wsj.com and Dan Gallagher at dan.gallagher@wsj.com
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