There was a lot of big news in the semiconductor industry during the last week. Taiwan-based TSMC announced plans to build an advanced $12 billion semiconductor fab in Arizona. The U.S. stepped up its effort to cut off advanced chip supply to China-based Huawei, saying that any chips produced using U.S. technology anywhere in the world would need a license. The same day of TSMC’s announcement, rival China-based foundry SMIC announced a $2.2 billion infusion from various Chinese government backed funds. Following these announcements, TSMC reportedly said it would stop producing chips for Huawei after those currently under contract and in production were completed (as outlined in the U.S. directive).
“Think about TSMC from a U.S. perspective,“ said Robert Maire, president of Semiconductor Advisors in his SemiWatch newsletter in April. “They have blown past beloved Intel in terms of technology dominance and clearly enabling AMD and others. They are building chips for the U.S.’s enemies both military and commercial. They have in essence put U.S. foundries out of business, GloFo, Intel’s foundry effort among others, and forced the U.S. to buy all advanced chips from them with no alternate. They are getting a “bear hug” from their bigger nearby neighbor who covets them and could crush the U.S. technologically by taking them over. And last, but not least, TSMC has refused U.S. efforts to get them to either put a fab in the U.S. or help with one such that the U.S. chip supply would be protected from a hostile takeover.”
It’s universally recognized that U.S. equipment and software is absolutely essential to producing leading edge chips, and China’s efforts to develop its own internal semiconductor manufacturing capabilities have fallen far short of what’s needed. This puts U.S. equipment makers such as Applied Materials, KLA and Lam Research, and design software companies such as Mentor Graphics, Synopsys and Cadence in a very awkward position in that they are basically pawns in this global spat. It’s not clear where Europe-based ASML – the only maker of next gen EUV lithography — falls in this mix, but my understanding is that they are included in the U.S. “boat.”
“Maybe if I were in power in the U.S. government, I would want to hold something over TSMC to bring them to heel and get them to cooperate or see things my way,” Maire continued. “Maybe I could cut off, or threaten to cut off, their ‘oxygen supply’ of U.S. made or controlled semiconductor equipment which could effectively put them out of business or cripple them,” he said. “The hand of the U.S. government continues to get closer and closer to that “oxygen valve” that controls the flow of equipment. The ratcheting up of pressure and implied threat is crystal clear.” Again, these comments were made in April before the TSMC announcement.
Nelson Dong, a senior partner at the international law firm Dorsey & Whitney and a current member of the Board of Directors of the National Committee on US-China Relations (NCUSCR), provided his take on the U.S. move against Huawei and potential outcomes (sent to me in an unsolicited e-mail). “The Administration has consistently viewed Huawei and its various subsidiaries as surrogates for the Chinese government and thus sought to hobble Huawei’s growth at every turn. In 2019, the Administration placed Huawei and over 100 of its subsidiaries on the Entity List that bars any sales of goods, software or technology subject to the U.S. Export Administration Regulations without a license from the Bureau of Industry and Security. In its latest move, the Administration announced that it is amending the EAR’s “direct product” rule to state that any Huawei integrated circuit designs produced with EAR-controlled technology or software and any Huawei chipsets produced with EAR-controlled semiconductor manufacturing equipment will both be considered “subject to the EAR” and thus require a BIS export license as well. This drastic move had been rumored for some months and will now take effect after a grace period of 120 days to allow the global semiconductor industry to adjust and to avoid interruption of production cycles already under way. This new move will affect designers and producers of integrated circuits all over the world but especially in China, Taiwan, Korea and Japan, where most such microelectronics are fabricated today,” Dong says.
“Since the global semiconductor industry tends to rely very heavily upon both U.S.-origin semiconductor design software and U.S.-origin semiconductor manufacturing equipment, this amended “direct product” rule will probably lead to a number of near-term and long-term consequences. Huawei had already begun to shift away from U.S.-origin parts and software because of its 2019 Entity List designation, and so this EAR change will certainly accelerate that design-out process,” Dong says.
“However, indirectly, this move may well force the global semiconductor industry to look away from U.S. suppliers of semiconductor design tools and semiconductor production equipment and even to create new rival companies in other countries, including China itself. At one point, the United States had held a comparable dominant market share in the global communications satellite industry but then chose to impose stricter export controls by making such satellite technology subject to the International Traffic in Arms Regulators. That legal change, over time, caused customers all over the world to seek only “ITAR-free” satellite parts and components. The resulting avoidance of U.S. suppliers and the vast expansion of alternative non-U.S. suppliers had profoundly negative economic consequences on those U.S. satellite industry suppliers who lost billions in sales and whose global market share fell sharply. Ironically, the U.S. Government itself also paid higher prices for its own satellites because now those U.S. suppliers had to recoup their entire R&D costs by selling effectively only to U.S. customers but to almost no foreign customers. If that recent technological history were to repeat itself into a move to seek “EAR-free” semiconductor designs and production equipment, the Administration’s “direct product” rule change could lead to tectonic shifts within the microelectronics industry for decades to come,” Dong says.
The Semiconductor Industry Association (SIA) released the following statement from president and CEO John Neuffer in response to new export control rule changes announced. SIA represents 95 percent of the U.S. semiconductor industry: “We are concerned this rule may create uncertainty and disruption for the global semiconductor supply chain, but it seems to be less damaging to the U.S. semiconductor industry than the very broad approaches previously considered.”
I believe TSMC’s opening of an advanced U.S. fab could result in major shifts to the supply chain in favor of U.S. suppliers, since it’s always beneficial to have local suppliers close to the base of manufacturing operations. It could also mean the addition of other related manufacturing operations in the U.S., said as outsourced assembly, packaging and test companies (OSATs), which also benefit by being close to where the chips are produced.
I also question how effectively China could develop advanced manufacturing equipment companies that could compete with the likes of Applied Materials and Lam. A 2008 report from SEMI noted that, at the time, there were about 80 domestic companies (including joint ventures) in China devoted to semiconductor equipment research and manufacturing. Many of these domestic equipment manufacturers are research institutes rooted in and/or transformed from military industrial entities with sales limited to colleges and research institutions. With the emergence of the semiconductor industry, however, a strong and viable equipment industry in China is desired to support and supply the fabs based there. A few of these, such as ACM Research and AMEC, stand out as having more advanced capabilities, but advanced fabs need thousands of tools working in harmony to be successful.
“While Huawei will obviously try to shift chip production to Chinese suppliers and SMIC to fabricate the chips, SMIC is hindered in that it is several generations behind TSMC and its supply of EUV tools from ASML has also been cut off by the U.S.,” Maire said in a May edition of SemiWatch.
Maire believes the turmoil is likely to have a negative impact on U.S. companies. “Every US semiconductor company from Intel and Qualcomm down to the smallest analog maker will be negatively impacted as China will go so far out of its way to avoid “buying American”. Without doubt they will use inferior, trailing technology from inside China or other sources rather than rely on U.S. made components that could be shut off at any moment.”
Other analysts note that China is falling far short of its “Made-in-China 2025” goal. “Currently, China is putting on a brave face with regard to its future IC industry capabilities,” notes Bill McClean at IC Insights. “However, given the extremely small and undeveloped starting base of Chinese company IC production and technology today, and with increasing difficulty to purchase advanced semiconductor manufacturing equipment, IC Insights believes it is essentially impossible for China to make significant strides in becoming self-sufficient for its IC needs (memory and non-memory) within the next 5 years and probably not even within the next 10 years.”
McClean said a very clear distinction should be made between China’s IC market and indigenous IC production in China. “Although China has been the largest consuming market for ICs since 2005, it does not necessarily mean that large increases in IC production within China would immediately follow, or ever follow,” he said.
Of the $19.5 billion worth of ICs manufactured in China last year, China-headquartered companies produced only $7.6 billion (38.7%), accounting for only 6.1% of the country’s $124.6 billion IC market. TSMC, SK Hynix, Samsung, Intel, and other foreign companies that have IC wafer fabs located in China produced the rest. IC Insights estimates that of the $7.6 billion in ICs manufactured by China-based companies, about $1.8 billion was from IDMs and $5.8 billion was from foundries like SMIC.
This is much more than a chip war or a trumped-up accusation of Huawei building spyware into its electronics, of course. China has long viewed Taiwan as a wayward province, while many Taiwanese seek independence. Taiwan has many resources, but advanced chip-making skills by TSMC and smaller rival UMC are among its greatest. With China’s pending crackdown on Hong Kong through a new set of laws reported this week, many are wondering how long it will be before Taiwan (and Macau) will be put in a similar situation. The chip war got very real this week. Let’s hope it doesn’t turn into a real war.