US semiconductor companies have gradually increased their concerns with US trade and investment policies in recent months that would restrict technology business transactions with companies in China and other nations seen as national security threats.
Some US companies are concerned about losing a valuable China market for chips and chipmaking equipment, especially as US-China relations continue to sour. Very few chip CEOs have spoken publicly about their concerns, although Intel CEO Pat Gelsinger in recent months told analysts he was concerned about the potential loss of China’s market for sales of Intel chips.
Recently, the Semiconductor Industry Association, representing nearly all US chipmakers and many others globally,recently filed detailed public comments on a US Treasury Department rulemaking process regarding the agency’s creation of future outbound investment restrictions. At one point in 27 pages of comments, SIA was especially pointed in its concerns: “The reality is that these regulations will have a chilling effect much wider than its intended scope, to the detriment of U.S. companies.”
Treasury’s rulemaking process came out of an Aug. 9 executive order by President Biden noting that China and other countries of concern “are exploiting or have the ability to exploit certain US outbound investments…” In the order, Biden declared a national emergency to deal with the threat and ordered Treasury in consultation with the Department of Commerce to issue regulations that require US persons to provide notification of certain transactions and prohibitions of other transactions with foreign persons connected to countries of concern. Such transactions would be those that contribute to a US national security threat or pose an acute national security threat because of the potential to “significantly advance the military, intelligence, surveillance or cyber-enabled capabilities of countries of concern.”
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In a blog issued Tuesday, SIA said it was hopeful that the proposed Treasury rulemaking lead to restrictions in accordance with previous rules, including guardrails in the US CHIPS Act. Further, SIA raised the concern of how restrictions might lead to an uneven playing field, where some chipmakers outside the US conduct business with China while US chipmakers and equipment makers are not allowed to.
Also, SIA said existing US subsidiaries in China and other countries of concern must be allowed to make transactions to “ensure business continuity and avoid supply chain disruptions,” adding that the transactions allowed should include capital expenditures for equipment ramp-up, tool upgrades for existing semiconductor facilities and the purchase of raw materials.
In its full 27-page filing with Treasury, SIA was far more explicit about its concerns than it expressed in its blog, especially over the potential loss of the Chinese market for US chipmakers.
SIA wrote: “The China market is critical for the continued success of U.S. semiconductor firms across the industry ecosystem. It is the single largest market, accounting for more than a third of U.S. chip revenue. Such revenues are vital for research and development that is critical to supporting U.S. innovation and technological leadership. It is also the largest market for the sale of semiconductor manufacturing equipment and plays a critical role in the globally interdependent semiconductor supply chain, comprising around 20% of front-end capacity and nearly 40% of back-end capacity. We hope the final rules allow U.S. chip firms to compete on a level-playing field and access key global markets, including China, to promote the long-term strength of the U.S. semiconductor industry and its ability to out-innovate global competitors, thereby strengthening U.S. national security over the long term. “
SIA further highlighted the matter of keeping an even playing field with semiconductor companies based in countries that are allies of the US. “Companies in third countries are positioned to simply backfill investment in areas that have questionable linkages to national security,” SIA wrote.
In one example, SIA mentioned Volkswagen’s creation in late 2022 of a joint venture between its software company CARIAD with Horizon Robotics, a provider of computing solutions for smart vehicles based in China.
Also, SIA mentioned that STMicroelectronics of Geneva, Switzerland, in June created a joint venture with China-based Sanan Optoelectronics to create a 200mm silicon carbide device manufacturing facility in Chongqing, China, to support rising demand for car electrification.
Further, SIA pegged Germany’s Bertelsmann Investments’ plan to invest $700 million in Chinese startups, described in the financial press in August. SIA described the move as “apparently capitalizing on political tensions between the US and China.”
SIA worried that the “continued availability of non-US suppliers …means that US controls will be ineffectual from a national security standpoint.”
Elsewhere in its comments, SIA raised 36 specific concerns, some regarding the definition of persons engaged in business with persons in China or other countries of concern. Other comments were made about Treasury’s proposed rules on AI and quantum technologies. Elsewhere, SIA suggested a need to clarify the definition of a supercomputer, noting that using cubic or square footage is “not an effective technical parameter to use because it can be circumvented by simply adding additional racks in the supercomputer cluster with fewer nodes.”
In response to question 47 about the due diligence an investor must provide US authorities when considering conducting business with a person in a country of concern, SIA was emphatic:
“As in any venture capital investment, the investor would need to rely on company diligence replies, sales representations, warranties, and negative covenants beyond its own review/diligence to assure itself that the investee is or isn’t a covered foreign person. The reality is that these regulations will have a chilling effect much wider than its intended scope, to the detriment of U.S. companies. Most investors and investees will avoid pursuing a deal when in doubt as to whether it falls within the scope of a prohibited activity as the prospect of penalties and even divestiture is unpalatable. Furthermore, the leading start-ups in China have many financing options and can look to other non-U.S. investors for their funding, resulting in the U.S. being cut out of industry developments and revenue streams. As it is already quite competitive as a U.S. investor to be accepted to participate in a “hot” Chinese start-up, these regulations will only further complicate the situation without a discernible benefit to U.S. national security.”
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