By Adam Levine
As export controls have mounted, Chinese chip manufacturers have made a strategic decision to dominate the low end of chipmaking. No matter how the U.S. responds, it opens up risk for Western tech companies.
With export controls cutting off equipment to make high-end chips, Chinese chip manufacturers are focusing on building capacity in older "legacy" manufacturing processes. Though these chips are much simpler to make than the advanced chips from the likes of Apple and Nvidia, they remain essential, going into everything from washing machines to cruise missiles.
The first whiff of the trend came from ASML's earnings calls in 2023. It's the most important chip equipment maker, and Chinese manufacturers lost access to its most advanced machines in 2019, with more restrictions coming in 2023. As a result they started stocking up on ASML's lower-end machines. In 2022, Chinese customers represented 14% of ASML equipment sales. It was 29% in 2023, and almost half of sales this year. In explaining the jump, then-ASML CEO Peter Wennink said Chinese manufacturers were pivoting to older equipment, shifting their attention away from advanced chipmaking.
Other Western equipment manufacturers have seen similar jumps in Chinese demand, as customers front-load shipments ahead of any potential new export controls. KLA earned 43% of its revenue from China in its last fiscal year, Lam Research got 42%, and Applied Materials 37%.
U.S. Secretary of Commerce, Gina Raimondo, commented on this phenomena in an April meeting with European allies. "We know that based on China's own reporting, about 60 percent of all new legacy chips coming to the market in the next handful of years will be produced by China," she said at a press conference in the European tech hub of Leuven, Belgium. "Over the last few years, we've seen potential signs of concerning practices from the PRC to expand their firms' legacy chip production and make it harder for U.S. companies to compete."
There are echoes of the experience with other products like solar panels. Chinese companies receive government support to build up capacity quickly, and when output inevitably exceeds domestic demand, they dump the excess on the rest of the world. Buyers get a better deal, but non-Chinese competitors see reduced sales and thinning profitability and are forced to choose whether to remain in that market.
Now, when it comes to chips, the U.S. has a decision to make and both choices are bad, with different groups of companies at risk.
If the U.S. and its allies in Europe and Asia extend export controls to low end equipment, ASML and its chip equipment peers will see a large portion of their revenue evaporate, striking at growth and profitability and likely weighing on the stocks. Moreover, they will have less money to fund research and development of future products that push chipmaking forward.
If export controls aren't expanded, it's less advanced Western chip firms that could be directly hurt, including Texas Instruments, STMicroelectronics, and GlobalFoundries. They would face stiff competition from lower cost Chinese chips, and would have difficult decisions to make. Like so many Western companies before them, they may decide that competing isn't worth it.
The U.S. export controls have also had diplomatic implications, leading to some friction with allies Japan and the Netherlands where equipment is also made.
Now, the U.S. is planning next steps. Last week, the Commerce Department announced that it would be surveying U.S. manufacturers about their usage of legacy chips to advise on new policy.
"Addressing non-market actions by foreign governments that threaten the U.S. legacy chip supply chain is a matter of national security," said Secretary Raimondo in a press release.
But time is running out for Raimondo and the Biden administration to act, with a new administration coming to power in less than a month. If approved by the Senate, Cantor Fitzgerald CEO Howard Lutnick would be the new Commerce Secretary. He hasn't commented directly on export controls, but has been an outspoken advocate of President-elect Donald Trump's policy of high tariffs on China, which would also be in his portfolio.
This may be one policy where the two administrations agree.
Write to Adam Levine at adam.levine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 26, 2024 03:30 ET (08:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments