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US-China Chip Rivalry: The Latest Escalation and Its Implications

AInvestMonday, Dec 2, 2024 12:08 am ET
5min read


The US-China semiconductor rivalry has taken another turn with the latest US export controls targeting Chinese chipmakers. These new restrictions, announced on November 28, 2024, have struck at the heart of China's chip manufacturing capabilities, aiming to hinder its progress in the industry. The new rules restrict the sale of semiconductor manufacturing equipment and AI memory chips to China, targeting over 100 Chinese companies making such equipment and two chip factories owned by Semiconductor Manufacturing International Corp. (SMIC), Huawei's partner. China has warned of "necessary actions" to protect its firms, stating that the US actions "severely disrupt the international economic and trade order, destabilize global industrial security, and harm the cooperative efforts between China and the US."

The restriction of semiconductor manufacturing equipment will significantly hinder China's ability to produce advanced microchips in the near future. The restrictions target critical components such as high bandwidth memory (HBM) and semiconductor manufacturing equipment, affecting over 100 Chinese companies. This will disrupt China's plans to develop its domestic semiconductor industry and may push back its target of achieving self-sufficiency in advanced chip production by several years. The restriction of access to these tools will also hamper China's efforts to develop generative AI and high-performance computing, as reported by the Semiconductor Industry Association.

As U.S. export controls on Chinese chipmakers tighten, Beijing is escalating its efforts to develop indigenous alternatives. China's Semiconductor Industry Association warned insiders to avoid disclosing technical information, indicating a shift towards greater secrecy and self-reliance. The country is already investing heavily in domestic manufacturing, targeting 70% self-sufficiency in chips by 2025. However, China's progress is likely to be gradual, with a three-year gap in advanced semiconductor development persisting.

The U.S. export controls, including those on AI memory chips, could significantly impact China's advancements in AI and supercomputing technologies. According to the Semiconductor Industry Association, China is the world's largest market for semiconductors, importing over $300 billion annually. Restricting access to advanced technology could hinder China's progress in developing generative AI models and high-performance computing, as these rely heavily on cutting-edge chips. The U.S. aims to contain China's technological development, but the retaliation from China, such as the Unreliable Entity List and export restrictions on critical minerals, may disrupt global supply chains.

China can explore collaborations with allies such as Japan, South Korea, and Europe to mitigate US restrictions. Japan's Tokyo Electron and the Netherlands' ASML are key chipmaking equipment suppliers affected by US pressure. By working with these countries, China can diversify its supply chain and reduce dependence on US technology. Moreover, China can invest in domestic manufacturing and R&D to develop indigenous alternatives, as seen in its successful development of self-developed processors in response to previous US restrictions.

As the US-China chip rivalry escalates, investors must stay informed about the implications for the global semiconductor industry. The geopolitical tensions between the two countries are reshaping the landscape, with potential disruptions to supply chains and market uncertainty. Companies like Morgan Stanley, known for their steady performance, may offer a safer investment option in these volatile times. However, investors should also consider the potential long-term growth opportunities in under-owned sectors, such as energy stocks, and strategic acquisitions for organic growth, as demonstrated by Salesforce.

In conclusion, the latest US strike on China's chips has targeted semiconductor toolmakers, aiming to hinder China's progress in the industry. While these restrictions may have immediate impacts, they could also prompt China to accelerate its efforts to develop indigenous alternatives. Investors should closely monitor the situation and consider the broader implications for the global semiconductor industry, as geopolitical tensions shape the competitive landscape.


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