The stage seems to be set for the next phase of the U.S.-China trade war, as the White House recently tightened restrictions on China. The new rules require semiconductor manufacturers using U.S. manufacturing equipment to obtain a special license to sell to companies blacklisted by the U.S. The most notable player listed is Huawei, simply because its size puts a large number of its suppliers in jeopardy. Beijing’s promise of repercussions means even greater uncertainty for the segment.
Commerce Secretary Wilbur Ross tweeted: “We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests.” Huawei was earlier blacklisted on national security concerns with the U.S. alleging that the company was using its equipment for spying.
Fearing that its business, which includes not just Apple (AAPL - Free Report) , NVIDIA (NVDA - Free Report) and other U.S. players but also China’s Huawei would be impacted, Taiwan Semiconductor (TSM - Free Report) agreed to set up a 5nm manufacturing unit in Arizona. While this takes care of alleged security issues, it’s unlikely to get the company off the hook, as Keith Krach, undersecretary for economic growth, energy and the environment at the State Department told Bloomberg. He said that the company wouldn’t be able to obtain a license based on the unit it was building in the U.S. “That’s not part of it at all... There’s no assurance on that and we don’t anticipate that.”
Huawei has already started moving lagging edge business to China’s SMIC, but this move will leave it hanging, because it has developed leading edge designs for manufacture in TSM’s 7nm process for incorporation in its smartphones among other things. So Huawei’s reaction was as expected. Its consumer electronics head Richard Yu wrote on WeChat, “The so-called cybersecurity reasons are merely an excuse…The key is the threat to the technology hegemony of the U.S.” That does have a ring of truth in it.
China’s Communist Party-backed Global Times carried an article saying that Beijing was ready to initiate countermeasures, including the imposition of restrictions on Apple, suspension of the purchase of Boeing airplanes and putting U.S. companies on an ‘unreliable entity list.’
The transfer of manufacturing to China has happened over a number of years and as things stand today, much of the talent and manufacturing capacity exists in the region. Until China manufactures all of its own equipment however, it remains a huge opportunity for American suppliers like Applied Materials (AMAT - Free Report) , KLA Corp. (KLAC - Free Report) and Lam Research (LRCX - Free Report) . These are the sales currently at risk. The equipment makers were all down over 4% in the last trading session and could remain under pressure today, especially in the backdrop of the pandemic.
Security concerns aren’t a trifling matter, however, and the ability to spy on personal and governmental interactions through hardware tweaks is also a concern we cant brush aside. Since Chinese companies are legally bound to share information with the Chinese government, it isn't too far-fetched an idea that Huawei with its significant reach isn't workng to further the goverment's plans.
Additionally, this falling out between the partners was bound to happen one day as the dynamics in the relationship changed. Whether having it happen sooner rather than later is better is anyone’s guess. We seem to be looking at the longer term right now.
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