From The Editor | January 18, 2023

U.S. Pressuring Japan, The Netherlands To Cut China Out Of Semiconductor Loop

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By John Oncea, Editor

Semiconductor Technology for Implantable Medical Devices

The U.S., Japan, and the Netherlands – three of the world’s leaders in semiconductor technologies – are meeting to discuss cutting off China’s supply of the valuable technology.

Word came out Tuesday morning – I heard via NPR’s Morning Edition – that the U.S. is pressuring the Netherlands to keep Dutch companies from supplying China with semiconductors. Host A Martinez, in an interview with Jon Bateman, senior fellow at the Carnegie Endowment for International Peace, noted that Dutch Prime Minister Mark Rutte is at the White House to discuss the supply of semiconductors  (along with the war in Ukraine) which is “part of a wider strategy by the Biden administration to curb tech exports to China.”

Bateman says there’s much concern with China’s rise and use of advanced technology, noting that semiconductors could be used for military purposes. “They could be used for surveillance and human rights violations,” Bateman went on to say. “But at the same time, if the U.S. moves too fast and too far to cut off the technological relationship with China – and I see that as an example of what's been done with these sweeping new export controls on semiconductors – there's a lot of damage that we could do to American interests as well.”

Among the problems which could be created by asking the Netherlands not to do business with China are creating competitive disadvantages for U.S. companies, alienating our allies and partners, and further damaging already strained U.S.-China relations.

Those are just problems in the short term. Bateman says long-term consequences include “the gradual disconnection of the two major economies in the world” and “a partial rollback of some of the most important links that we've seen in decades of globalization.”

The meeting with the Dutch comes on the heels of a similar meeting between President Joe Biden and Japanese Prime Minister Fumio Kishida. Japan is reluctant to commit to sweeping U.S. restrictions because the country “is a top producer of the specialized tooling equipment needed to manufacture advanced chips and its companies hold 27% of the global market share, according to the Semiconductor Industry Association. Tokyo Electron (8035.T), Japan's leading chip manufacturing equipment maker, relies on China for about a quarter of its revenue.”

The U.S. remains optimistic that a deal with Japan will be done but Daniel Russel, a former top U.S. diplomat for Asia, says a gap remains between the two country’s positions. “Kishida wants the U.S. to take a Goldilocks approach that is tough enough to deter Chinese assertiveness, but cautious enough to allow Japan's business interests to thrive.”

“There have been some reports in the press that ASML and Tokyo Electron are not entirely happy with the U.S. proposal,” writes Japan Forward. “They might want to sell semiconductor production equipment to China despite the United States’ request not to do so.”

Japan Forward posits such an approach makes sense when agreeing to cut off China would cost suppliers a great deal of short-term profit. “The answer is exactly that,” opines Japan Forward. “It is short-term profit to be followed almost surely by long-term loss.

“China has sworn to make this equipment domestically by 2025. Does anyone think the Chinese Communist Party is suddenly going to change its mind? Or that it will become a long-term client of ASML or Tokyo Electron? Surely no serious business leader could be so stupid.”

And once China has the technology to produce semiconductors itself, it will sell both the technology and semiconductors in the global market at prices to be far below those of Tokyo Electron and ASML. “China will be able to do that because the state-owned enterprises do not need to make a profit. Furthermore, so-called private Chinese corporations are often heavily subsidized so that foreign makers cannot compete,” notes Japan Forward.

If the U.S. succeeds in forming a successful coalition China’s ability to advance its domestic chipmaking would be slowed by a large number of roadblocks argues Chris Miller, author of “Chip War” and an associate professor at Tufts University. That would hamper China’s other tech ambitions, including in artificial intelligence.

For its part, China “is seeking alternative strategies to the massive investment that would be required to advance China's semiconductor industry to the level where it could compete with that of the U.S.,” writes The Register. Among those alternatives is finding ways to lower the costs of semiconductor materials but, without access to Western technologies, China may have to forego its plans completely.

“Leading-edge chip fabrication is incredibly difficult,” said Andrew Buss, IDC Research Director for European Enterprise Infrastructure. “Even before the latest restrictions, China was struggling to build a competitive semiconductor industry.”

Richard Gordon, practice vice president for semiconductors and electronics at Gartner, adds, “The chilling effect of U.S. sanctions is already leading to an undoing of the distributed global supply chain infrastructure that has built over the past few decades which may lead to a world divided into China-centric and U.S.-Europe-centric networks of supply chains and a greater self-reliance within individual theaters.”

Steven Rattner, chairman and chief executive officer of Willett Advisors LLC, writes that this is a “Must-Win Semiconductor War” in an editorial for The New York Times. Rattner’s reason for this claim is that “companies in Asia, particularly in Taiwan, entered the industry, and America began to lose to cheaper labor, strong local governmental support, and better corporate management. Worse, today the United States does not manufacture any of the highest-performing chips; 92 percent of those are produced by the Taiwan Semiconductor Manufacturing Company, 100 miles from mainland China.

“This presents enormous economic and national security risks for the United States and the rest of the world. If China took control of Taiwan and cut off our chip supply, that would be economically devastating, akin to (or worse than) the loss of oil exports from a major Middle Eastern producer.”