Chipmakers caught in the crossfire of rising geopolitical tensions between the US and China

Last December, South Korean semiconductor company Magnachip reluctantly announced the end of its proposed $1.4 billion merger with Chinese private equity firm Wise Road Capital.

Other than its listing on the New York Stock Exchange and a nominal corporate presence in Delaware, Magnachip has no substantial operations — in manufacturing, research and development, or sales — in the United States.

But that didn’t stop the Committee on Foreign Investment in the United States, a body originally created in the 1970s to screen the purchase of strategic U.S. assets by OPEC countries, from intervening in the merger.

In a move that took the global semiconductor industry by surprise, Cfius deemed the deal posed a potential national security risk to the United States, effectively killing the deal and casting a chill over the industry.

“Cfius has traditionally been involved in traditional security issues like ports and infrastructure, yet it blocked the takeover of this relatively small chip company that had virtually no American presence,” said Chris Miller, assistant professor at Tufts University and author of Chip War: the fight for the most critical technology in the world. “It was a very important signal for the whole industry.”

The Magnachip affair is an example of how growing US-China tensions are affecting chipmakers, who are increasingly pressured to align themselves with Washington as it seeks to counter China’s rise as a than technological power.

Companies are vying for billions of dollars in US subsidies through the $280 billion Chip and Science Act and don’t want to be caught off guard by the restrictions of an increasingly hawkish White House.

The Financial Times reported this month that Korean semiconductor titans Samsung Electronics and SK Hynix were reassessing their investments in China in response to “guardrails” in legislation barring recipients of US federal funding from expanding or upgrade their advanced chip capability in China for 10 years.

Competitors such as Taiwan’s TSMC and US chipmakers Intel and Micron, all of which have manufacturing operations in China, are also under pressure to boost US domestic production while making it harder for Beijing to secure a advanced semiconductor technology.

The pressure is likely to mount as the United States tries to rally allies Korea, Taiwan and Japan behind a “Fab 4 chip alliance” designed to coordinate research and development policy, grants and supply chains. ‘supply.

Korean chipmakers, historically reluctant to take sides in the technology rivalry between the United States and China, have acted as an indicator of the direction of the global semiconductor industry.

Samsung and SK Hynix have increased their investments in US production facilities although they remain heavily exposed to the Chinese market. South Korea exported $50 billion worth of chips to China last year, up 26% from 2020 and accounting for nearly 40% of the country’s total chip exports, according to the Korea Trade Association. international.

But they share near total dependence on a small number of American, Japanese and European chip designers and equipment manufacturers for the technology required to produce advanced chips, giving Washington a leverage on what Miller described as the “major choke points in the semiconductor production process”.”.

These companies include US chip designers Cadence and Synopsis, Siemens-owned Mentor Graphics, US equipment makers Applied Materials and Lam Research and ASML in the Netherlands, which makes the extreme ultraviolet lithography tools needed to produce chips. of state-of-the-art Dram memory.

“China has the market, but the United States has the technology,” said Yeo Han-koo, who served as South Korea’s commerce minister until May. “Without technology, you don’t have a product. Without a market, you can at least find a way to diversify and identify alternatives.

Neither Samsung nor SK Hynix, both of which specialize in producing memory chips, manufacture their most advanced semiconductors in China.

China’s largest chipmaker, Semiconductor Manufacturing International Corp, announced last month that it had started shipping advanced 7-nanometer semiconductors. However, analysts said that without access to the most advanced equipment in the world, SMIC would struggle to close the gap with Samsung and TSMC, which are the world’s leading suppliers of 5nm and 4nm chips.

A person close to TSMC, which dominates the global foundry chip market, said the US bill is unlikely to have a dramatic effect because the Taiwanese government has already imposed restrictions on the production of advanced chips in China. continental.

But Dylan Patel, chief analyst at SemiAnalysis, said U.S. safeguards on upgrading or expanding the companies’ Chinese operations would still have an impact.

SK Hynix and Samsung would likely only maintain their existing investments, Patel said. “As a result, the share of their production in China is expected to decline significantly over time,” he said.

The dilemma for Korean and other chipmakers is how to execute their pivot away from China and into the United States without provoking a backlash from Beijing, which has been increasingly vocal in its opposition to what US officials call it “friendshoring”.

“Decoupling from such a large market is no different from commercial suicide,” read an op-ed last month in the Global Times, a Chinese state-owned nationalist tabloid. “The United States is now holding a knife to South Korea and forcing it to do so.”

Still, Patel said China’s continued reliance on chips and technology from foreign groups meant its influence was limited. “Beijing needs these chip imports for its own manufacturing industries. What are they going to do, stop making electronics in China? »

He said Washington could further increase the pressure by banning the export of chipmaking equipment used to manufacture advanced Nand memory chips to Chinese factories, including those owned by foreign companies. Both Samsung and SK Hynix have Nand memory chip factories in China.

David Hanke, a partner at Washington law firm ArentFox Schiff, which advises multinationals on competition issues in China, said chipmakers would be wise to abide by the spirit of the Chips Act and not just the letter of the Act. legislation itself.

“A company’s contribution to China’s technological development will be reviewed,” Hanke said, noting that subsidies to chipmakers would be reviewed every two years by the US Department of Commerce.

“There will be a big optical problem for companies that play too close to what this legislation allows.”

He added that companies should also consider the possibility of Washington taking an even more hawkish turn in the near future. Republicans are expected to retake the House and possibly the Senate in November’s midterm elections.

“When it comes to circumventing US regulations, China moves like water around rocks. So it shouldn’t be surprising that people on Capitol Hill start saying in a year or two that the current guardrails were too weak.

Additional reporting by Kathrin Hille in Taipei

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