High-tech rivalry and the US-China chip conflict
American export controls on semiconductor technology reflect the cut-throat competition in the global market
Export controls on semiconductor technology were expanded after Washington’s bilateral talks with Japan and the Netherlands last month.
But this is only the beginning as the United States tightens chip restrictions as recommended in the National Security Commission on Artificial Intelligence’s final report.
Last year, the US Department of Commerce’s Bureau of Industry and Security issued new regulations, which were expected to trigger protests from semiconductor equipment makers and foundries.
While Washington insists that the measures are designed to protect American intellectual property and defend national security, they reflect the heavy competition in the global chip equipment business.
According to 2019 figures, the US had a 17% share of overall semiconductor manufacturing equipment exports, trailing behind Japan at 28% and closely followed by the Netherlands at 17%, Singapore at 10%, and South Korea at 10%.
The US is dominant in the upstream integrated circuit design process, but it faces competition from the Netherlands and Japan in the midstream integrated circuit manufacturing procedure.
It also does not have a substantial market share in the downstream integrated circuit packaging and testing process.
The competitive nature of the global chip industry is particularly salient in lithography equipment, known as scanners or steppers.
Dutch company ASML dominates this market, which was valued at US$11.8 billion last year and is expected to grow at a compound annual rate of 10%, reaching $18 billion by 2025.
The latest moves to deter the Netherlands and Japan from exporting semiconductor equipment to China aim to undercut the country’s access to high-end chip manufacturing equipment.
But these efforts might also lead to a shift in market share, depending on how export controls are implemented.
After months of deliberation amid negotiations with the US, ASML announced it would prevent the sales of specific models of semiconductor equipment to an unnamed country.
The affected models were the TWINSCAN NXT:2000i, the NXT:2050i, and the NXT:2100i. They are immersion deep ultraviolet machinery used for lithographic processes in the most advanced logic and memory chips.
ASML has announced that the measures will not affect its revenue, as it is operating at capacity.
But given that the US Department of Commerce’s Bureau of Industry and Security has already prohibited the sale of extreme ultraviolet machinery to China, ASML must plan its next steps wisely and diversify.
The additional measures are pending implementation until the Netherlands enacts new laws and ASML fulfills existing contracts.
Japan has expressed its intent to participate in export controls, announcing its own regulations last month. But Japanese Foreign Minister Yoshimasa Hayashi subsequently paid a visit to his counterpart in Beijing, Qin Gang, given the possible backlash from China.
As expected, China has contemplated placing export controls on rare earth materials in retaliation. There is speculation on which Japanese companies would be subject to the ban on semiconductor equipment sales to China, with the most likely being Tokyo Electron.
Depending on how Japan implements the export curbs, domestic companies such as Canon and Nikon may seek to revive their lithography businesses. It was a sector in which they once flourished before losing market share and switching their focus to camera lenses.
The Bureau of Industry and Security measures announced last year have led to a plunge in semiconductor equipment sales to China, demonstrating the immediate impact of the measures on US companies such as Applied Materials, KLA, and Lam Research.
The implementation of American export controls may reset the competition for market share and create uncertainty for major players. Other countries, such as Singapore, Germany, and South Korea, are likely to be subject to additional measures in the near future.
As access to the Chinese market shrinks under US export restrictions, it is bound to spur heightened competition and economic conflict between Beijing and Washington.
June Park is a Political Economist and an inaugural Asia Fellow of the International Strategy Forum at Schmidt Futures.
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