The share price of the world's largest chipmaker, TSMC, dropped 6 per cent in early Taiwanese trading today (October 11) following last week's release of the Biden administration's latest and much broader restrictions on semiconductor exports to China, as markets reflected mounting concern over their potential impact on Sino-US technology trade.
The new rules set sweeping prohibitions on the sale of both devices and fab tools for logic processes below 14nm, DRAM below 18nm and NAND memories with 128 or more layers. They specifically target military research, supercomputing, and artificial intelligence but export licences for other uses will be subject to a "presumption of denial." That may make them almost impossible to get.
One short-term exception – from now until April 2023 – covers fab and other supplies to the Chinese semiconductor subsidiaries of US companies and those from allied countries for products intended for export outside the mainland, reflecting China's continued importance as a manufacturing base. Another exempts items in transit.
What matters most now is how Beijing decides to respond. Little has been heard yet beyond some predictable rhetoric, with a spokesperson for its Ministry of Foreign Affairs describing the rules as the politicisation and weaponisation of technology.
Western markets offered more direct reactions late on Friday and continued to do so on Monday (many Asian markets were closed on Monday for public holidays).
US investors first marked down several Chinese semiconductor companies – notably its largest chip manufacturer SMIC - before moving on to equipment suppliers such as Applied Materials, LAM Research, KLA and ASML. All saw declines in their share prices in line with a broader at-worst 4.5 per cent fall in the Philadelphia Stock Exchange Semiconductor Index. That fall followed a 6.1 per cent drop in the same index on Friday.
Two of the three leading chip design tool vendors, Synopsys and Cadence Design Systems, were also down, by 4.1 and 2.6 per cent respectively (the third major EDA player is part of the broader-based Siemens conglomerate). Although not as directly cited in the new rules, all three are assumed to be covered by them because the restrictions apply to the activities of any "US person" – under US law that definition usually extends to companies in this context.
Major chip companies supplying the GPUs, memories and other devices that fall under the measures were also down, including Nvidia, AMD, and Micron Technologies. They did begin to recover towards the end of the day.
Asian markets were also generally down in early trading on Tuesday, alongside the fall at TSMC. The main Taiwanese index was initially down 3 per cent, Japan's Nikkei 225 opened down 2 per cent and South Korea's Kospi index started 2.2 per cent down.
Not all the falls were the result of the Biden rules. There are also wider concerns over the general health of the US economy, with leading Wall Street banker Jamie Dimon, CEO of Chase, warning yesterday that it could tip into recession within 6-9 months even if it is "still doing well" for now.
While market reaction around tech stocks does not appear to be offset by the US government's commitment to a $52bn (£47bn) investment in semiconductors through the CHIPS and Science Act, analysts note that the likely benefit to various companies was priced in when the legislation was signed in August.
Unease now circles more around the future of the $22bn China was expected to spend on fab equipment this year, as originally forecast by the main sector trade association SEMI, and previous expectations of a recovery during 2023 as the country exits its Zero-Covid crackdown.
However, while many analysts described the Biden rules as bad news for the sector, concern has not yet advanced to the stage where a wide decoupling between China and the West is seen as certain.
One further issue is that indications of an aggressive Chinese response, should one come, could well be harder to detect quickly compared with those seen in the past. These mostly concentrated on mobilising boycotts and online protests against retailers such as Korean giant Lotte and, more recently, Swedish clothing giant H&M over its decision to boycott cotton from Xinjiang. The semiconductor business operates overwhelmingly at the business-to-business level.
Apple and Tesla have been cited as potential targets. Both operate large mainland retail chains (Apple had 44 stores at the last count, for example) and are heavily dependent on local manufacturers. But hitting either of these companies would also present Beijing with a quandary.
Apple is a critical part of the Shenzhen economy through its partnerships with contract manufacturer Foxconn and others; Tesla's Shanghai 'giga-factory' is ramping up for potential output of one million vehicles a year. Nobody would rule out President Xi Jinping being prepared to take an economic hit – but it would be a big one.
(Tesla CEO Elon Musk offered more of his diplomatic wisdom over the weekend by suggesting that Taiwan should be made a special administrative zone of the PRC – it went down elsewhere as well as his proposals for ending the war in Ukraine.)
Another mitigating factor against a short-term Chinese response is the government's wish to avoid 'instability' in the immediate run-up to the National Congress of the Chinese Communist Party. It opens this Sunday (October 16) and is expected to see Xi installed as President for a third term.
Biden's prohibitions – and strong suggestions from his administration that there are more to come – will however almost certainly feature somewhere on the agenda. Xi's first step though may be to increase further the billions China is investing in sectors the rules cover.
What certainly is not going to happen – whatever the Chinese response, whatever the markets think and whatever US and non-US tech companies think – is any kind of Washington U-turn.
The Department of Commerce (DoC) has decided to enact these latest measures before going through its usual public consultation because of what is sees as the urgency of the need to respond to Chinese civil-military competition around AI, supercomputing, and chip manufacturing.
In the preamble to the new rules, the DoC cites existing Chinese advances and innovations that have leveraged US technology around applications as nuclear test modelling, military strategy and logistics, and surveillance of the public square.
"My north star [at the DoC's Bureau of Industry and Security] is to ensure that we are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People's Republic of China's military, intelligence, and security services," said Under Secretary of Commerce for Industry and Security Alan Estevez.
"The threat environment is always changing, and we are updating our policies today to make sure we're addressing the challenges posed by the PRC while we continue our outreach and coordination with allies and partners."
On that last point, however, the rules also make clear that such "outreach and coordination" with allies will carry a large dollop of, "My way or the highway." Other countries that continue to do business in China around the prohibited technologies will find their companies subject to the US Unverified List and Entity List, both of which progressively block access to US digital hardware and software and effectively shut companies out of the North American market (as seen from the earlier additions of, notably, Huawei and SMIC to the Entity List).
