US chipmakers ask suppliers to cut China ties amid trade dispute: Explained

United States semiconductor giants Applied Materials and Lam Research are pressing their suppliers to find alternatives to Chinese-sourced components or face losing their vendor status, according to a report by The Wall Street Journal. This comes in response to increasing pressure from Washington to curb China’s role in sensitive technology sectors. As a result, the US semiconductor industry is taking significant steps to remove Chinese firms from its supply chains.

 

In addition to finding non-Chinese component sources, suppliers have been advised to avoid having Chinese investors or shareholders. Industry insiders caution that these restrictions could lead to higher operational costs, as locating alternatives at competitive prices is challenging. 

 

What are semiconductor toolmakers?

Semiconductor toolmakers are companies that design and manufacture equipment used in the production of semiconductor devices. Their tools are essential for various stages of chip fabrication, including lithography, etching, deposition, and testing. These tools enable the creation of integrated circuits found in electronic devices.

 

Who leads the market in toolmakers?

In the semiconductor manufacturing equipment sector, several companies hold significant market shares. As of 2022, US-based Applied Materials led with a 17.5 per cent share, followed by Dutch firm ASML at 16.7 per cent, and Lam Research at 14.4 per cent. However, as of February 2024, ASML holds the largest market share dethroning Applied Materials from the top position that it has held for decades.

 

Among Chinese firms, Semiconductor Manufacturing International Corp ($26.20 billion market cap), Will Semiconductor Co Ltd ($16.34 billion market cap), and Montage Technology Co Ltd ($9 billion market cap) lead the market, according to a list curated by Investment platform Disfold DeepFinance.

 

Why are countries cracking down Chinese tech firms?

Countries are imposing restrictions on Chinese technology firms due to concerns over technological dominance and national security. The United States, for instance, has implemented measures to prevent China from acquiring advanced technologies that could enhance its military capabilities or be used for surveillance. These actions aim to safeguard sensitive technologies and maintain a competitive edge in critical sectors.

 

This pivot in semiconductor toolmakers stems from US concerns that continued dependence on Chinese parts could pose risks if diplomatic or economic relations deteriorate. 

 

Biden admin crackdown on Chinese tech firms

The Biden administration has intensified efforts to limit China’s access to advanced technologies. In August 2023, President Biden signed an executive order restricting US investments in Chinese companies involved in semiconductors, quantum computing, and artificial intelligence (AI). This move is part of a broader strategy to prevent US capital and expertise from aiding China’s technological advancements, particularly in areas with potential military applications.

 

Previously, US lawmakers had also limited China’s access to advanced chips and the specialised equipment required for their production.

 

Now the administration is steadily ramping up controls on semiconductor-related trade with China, with both US presidential candidates pledging to intensify trade restrictions.

 

This comes alongside similar efforts in Japan and Europe, as the US and its allies invest billions to bolster domestic chip production.

 

The ongoing pressure also highlights the strategic importance of the semiconductor industry and its potential leverage in geopolitical crises.

 

US-China trade relations

US-China trade relations have become increasingly strained, especially in the technology sector. The US has imposed export controls and investment restrictions targeting Chinese tech firms, citing national security concerns.

 

In response, China has implemented its own measures, such as restricting exports of critical minerals essential for semiconductor manufacturing. This tit-for-tat dynamic has led to a complex and tense trade environment between the two nations.

 

While the shift aims to safeguard the semiconductor supply chain from potential vulnerabilities linked to Beijing, it risks escalating trade friction with China, a major customer of American semiconductor-manufacturing equipment. Additionally, these measures are likely to increase production costs as firms seek alternative, often more expensive, sources outside of China.

 

China’s response to curbs

The new stance from US companies has spurred Chinese suppliers to explore alternative approaches to maintain ties with the American market. Some firms are pursuing joint ventures or holding companies in third countries, such as Singapore and Malaysia, to circumvent the restrictions. One Chinese semiconductor supplier reportedly established a holding company in Singapore and is now considering a Malaysian joint venture to continue supplying US clients without direct Chinese involvement, the report said.

 

In April, Chinese leader Xi Jinping informed President Biden that US’ ban on microchip exports “to suppress China’s trade and technology development” were ‘creating risks’ and that the country was “not going to sit back and watch”. However, Biden was adamant that the bans were crucial to ensure national security.

 

China has responded to other US restrictions by accelerating efforts to achieve self-sufficiency in critical technologies. The Chinese government has increased investments in domestic semiconductor manufacturing and other high-tech industries to reduce reliance on foreign technology.

 

Additionally, China has imposed its own export controls on materials vital to global tech supply chains, signaling its capacity to influence the market in retaliation to US measures.