US Export Restriction on China

To narrow down the US-China trade war from the perspective of the semiconductor industry, the US-China power struggle starts from the US export restriction on China.

There are three ways of sanction from the US, which are restricting equipment, restricting semiconductor product sales, and these two sanction lead to restricting access to high-technology of China in this semiconductor industry.

Equipment

Semiconductor chips are made in a very complicated process, and there are some important pieces of equipment that are essential in the mass production of the chips. EDA and EUV are examples. EDA is an electronic design automation device and the top 2 company in this equipment market is Synopsis and Cadence, which are both the US company. EUV is an extreme ultraviolet lithography device and it is only produced and sold by a Netherlands company called ASML. The equipment was previously sold to Chinese semiconductor companies but now it is limited to making sales to China after the US government decided to give sanctions to China on this field.

From the Biden administration, the US government controls exporting 17 kinds of semiconductor equipment, and the objects are not limited to US companies but to foreign countries to ultimately join the sanction.

Product sale

Also, there are companies that sell semiconductor products to Chinese companies. Huawei, for example, makes mobile phones and tablets with semiconductor products of DRAM and Nand flash. The US government has restricted US Companies (Micron) and South Korean Companies (Samsung, SK Hynix) to export semiconductor products to Huawei since 2020, which led to a counter effect that Micron loses sales. Since the Chinese semiconductor product market is so big, Micron needs Huawei to sell the products. With no substitute smartphone seller company that can sell its semiconductor products, Micron loses sales.

Access to high-tech

These sanctions lead to limiting the access of Chinese companies to high-technology of semiconductors. Even SMIC, China’s biggest semiconductor tech company, has its technology on Nano Chips is 10 years behind the US. 

Furthermore, US added 36 China market related companies to the blacklist of restricting high tech equipment from US in 2022.

Multilateral relations among the key player countries

Moving on from the direct sanction that the US pushes on China, it needs to be seen through the view of multilateral relations between the main player countries in the semiconductor industry. The US government is indirectly giving more sanctions to China by using international relationships with other countries like Japan, South Korea, and Taiwan. The positions of the 3 countries are so different in this industry. 

Japan

Japan was a leading company in the semiconductor industry before. However, the US-Japan Semiconductor agreement was settled in the 1980s, which turned out to be an unfair trade. With the strong bargaining power of the US, the US put retaliatory tariffs on imports from Japan, and eventually Japanese companies were driven out of global competition. Their market share fall down from 50% to 10%, and the lost portion was taken by the other US companies now.

South Korea

Unlike Japan, South Korea is one of the leading countries in the semiconductor industry now. However, the US government is leveraging Samsung and SK Hynix businesses located on US land. They are trying to build a new semiconductor factory in the US and due to legal issues and funding, the US government is giving pressure on South Korea not to sell more DRAM to Chinese companies.

Taiwan

Taiwan is also one of the leading countries in the semiconductor industry with TSMC, a big company globally which makes product lines of Apple iPhone and more. Since there are political issues between Taiwan and Mainland China, Taiwan thinks of its semiconductor industry as an economic weapon to fight back against the political pressure Mainland China is pushing on. The semiconductor industry in Taiwan is called ‘Silicon Shield’, and Taiwan joins the US sanction to prevent China from ending its semiconductor dependence upon Taiwan. 

China’s grievance

China is struggling with the US semiconductor sanction, which is leading China hard to grab the technological hegemony over this area. There are three grievances that China is facing:

1. 1. Lagging technology keeps China stay behind

Due to the direct and indirect sanctions on China, it cannot invest in leading tech, which makes China hard to seize technology hegemony.

2. Big profit decline

Huawei reported net profit for 2022 totaled 35.6 billion yuan ($5.18 billion), a 69% year-on-year decline after US sanctions. Chinese companies are dependent on US companies.

3. No allies in the semiconductor war

Compared to the US which is making semiconductor trade barriers through multilateral agreements, China has no allies.

China’s response

To fight back the US sanctions and indirect sanctions from the other countries, China is doing what they can do.

1. 1. More financial investment

China government increased funding about $150B to the semiconductor industry of their own companies to fight back US.

2. Keeping a powerful position in the low-tech semiconductor market

China has strength in legacy production, the low-tech semiconductor, and soon China will be the leading position in the big-size semiconductor DRAM Chip market. It is a powerful card that China have since in the semiconductor industry, companies both need big-size semiconductor and nano-size semiconductor to make electronic devices we use.

3. Accepting advanced labor force

An advanced labor force from the US is moving to China to get more salaries. Since the restriction on US companies is too strict, some companies lose sales and make fewer profits. In the case of a US company called High Silicon, the workers there who were restricted by the US government moved to China and created fabless companies in China to earn more money, and it can later be a potential threat to the US.