Technology export restrictions to China to tighten even further
It was back in October 2021 when in one of our weekly publications, we addressed what we called the “elephant in the room” and the growing risks of tighter US technology export restriction to China which we felt the market was somewhat oblivious to given the rising geopolitical tensions and growing prospects of another cold war. We continue to sense this complacency among companies involved and investors alike, especially in our market in Japan.
Although tighter export laws have indeed come into effect since then, we have cautioned investors that they seem not to have gone nearly far enough in halting China’s more advanced chip fabrication which can use older lithography equipments which have yet to be banned to prevent them from achieving their objectives. Moreover, we have seen Chinese chip makers front-loading their capex more recently by increasing their bookings of such older tools ahead of these existing restrictions potentially becoming more broader in their scope.
Thus, not only we have warned that these restrictions are likely to get tighter still but we suspect they are likely to lead to more notable cancellations of existing Chinese orders for semiconductor manufacturing equipment which we think could severely impact sales and profits of all major tools and material suppliers. Although the Japanese government has yet to set its own exports bans, following the Dutch government which has just toed the line of US directives in applying these restrictions to ASML, we think Japan will need to fully comply and soon.
Last Friday, news emerged that the Biden Administration is now working to further broaden its exports bans of semiconductor manufacturing tools to China to prevent the nation from advancing its chip industry. The new rules are reportedly expected to be published before the summer, according to a letter sent by the government’s minister of foreign trade to US lawmakers.
To be sure, there is strong bipartisan support among US lawmakers for more hawkish China policies. As we have also noted more recently, under a new Republican majority, the US Congress had quickly established a select committee on “Strategic Competition Between US and China”.
In its first hearing, the head of the panel, Mr Mike Gallagher stated that there is far more at stake than just strategic competition with China and considers this is “an existential struggle” and the committee will strive to “selectively decouple” the US from Chinese economy with technology taking centre stage. He went on to say, “if China wants to develop high-tech semiconductors in the future, it’s going to have to try to do it indigenously, without the United States or our allies handing over the keys”.
With TikTok social media platform looking highly likely to be outlawed altogether in the US and US government having added many more Chinese firms to its black list including the country’s largest server manufacturer, Inspur which provides its equipment for cloud storage, enterprise data centres and AI applications, this growing geopolitical rift is also starting to engulf much of the technology sector. The committee is also looking to go as far as recommending congress to ban all investments in Chinese technology firms.
As noted, we continue to feel that the market has yet to fully embrace the prospect of this so-called selective decoupling and with Chinese orders accounting for over 20% of sales of many of these key tool makers, we also think this is yet to be reflected on analysts’ forward earnings projections of related firms. In Japan, one important tool supplier which has sounded surprisingly defiant in servicing Chinese chip makers is Tokyo Electron which we believe looks highly vulnerable to this ongoing development.
