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U.S., Japan & Dutch versus China Chips & Memory looks to be in a long downturn

U.S., Japan & Dutch versus China Chips & Memory looks to be in a long downturn
by Robert Maire on 02-01-2023 at 2:00 pm

US Japan China

-US, Japan & Dutch agree to embargo some China chip equip
-Goes beyond just leading edge & will increase negative impact
-China might catch up in decades or invade Taiwan tomorrow
-Why the memory downturn could be longer than expected

Ganging up on China

It appears that the US has put together a coalition of the US, Japan and the Netherlands all of which will agree to stop selling certain semiconductor equipment to China.

This unified front against China is an obvious slap in the face but most importantly is likely a very effective way to shut China out of advanced semiconductor manufacturing.

Those three countries taken together make the vast majority of semiconductor equipment and more critically an even higher percentage of the leading edge equipment.

China would be unable to make even the most rudimentary semiconductors if it couldn’t buy any equipment from all three. Chinese semiconductor equipment makers are still in early stages and fundamentally rely on copying other manufacturers basic designs with little home grown R&D.

It will take decades to copy US, Japanese & Dutch tools

While China may be able to physically copy some dep and etch tools, it does not have the very deep and complex supply chain to source the amazingly complex lenses made by Zeiss or Nikon. Nor does China have the millions of lines of code in a KLA tool for defect analysis.

Copying will be much more difficult than the blatant rip off of US military plane designs as semiconductors and the tools that make them are way more complex.

Also missing is the decades of human capital and infrastructure such as there is in Silicon Valley where the expertise varies from the artisan welders of stainless steel piping to the decades of experience with plasma process.
EUV has been over 35 years in the making having started in Japan and the US then moving to the Netherlands.

No matter how much money is thrown at the technology issues, it will take a very, very long time. As the saying “nine women can’t make a baby in one month” goes (pardon the analogy) so goes semiconductor technology advancement.

By the time China is able to copy existing technology, the rest of the world will be decades further along. This is not to suggest they can never catch up, but likely not in most of our lifetimes.

Beyond restricting EUV

It appears from news reports that restrictions are now even broader than what was talked about in October in the US with 193 “immersion” litho systems mentioned. Restricting 193 immersion would push the Chinese back even further to a point where they couldn’t reasonably do multiple patterning or quadruple patterning or other tricks to try to get EUV like dimensions even at ridiculously low yields. It would push back to 28NM type technology.

Even more impact than the October embargo

If ASML and Nikon are not allowed to sell immersion scanners then it would make sense that KLA would be prohibited from selling a matching generation of reticle and wafer inspection tools and not just EUV capable tools. This could suggest that Metrology sales from the likes of KLA & AMAT etc will be further restricted in China.

TEL will likely not be able to sell EUV track tools or even immersion track tools. No dry resist for Lam nor high aspect ratio etch tools.

ASMI would likely not be able to sell ALD tools….the list goes on and on about much deeper impact if we go back to immersion technology.

It may be that from a political perspective going back to embargoing immersion is likely not only more punitive and effective but also more evenly shares the economic pain of those doing the embargoing by not just restricting the most advanced scanners.

We have yet to see the details, but the few points of information point to a deeper embargo.

A very serious escalation with no response (so far)

We are surprised about the seriousness and level of effort the current administration has put in versus prior efforts to contain China through tax policy. Forming a coalition is a significant escalation of tensions and effectiveness.

We are also surprised that China has so far not responded to the October embargo by cutting off rare earth elements or pharmaceuticals or some other critical export.

All we can imagine is that it just makes Taiwan that much more attractive to China….

Taiwan the “hollow” prize

While China may have dreams about taking over Taiwan and along with it the semiconductor industry, the real reality is that TSMCs fabs would quickly become unusable without support from equipment makers and would cease to function in a relatively short time as we saw when Jin Hua was abandoned overnight.

But it would be a really neat way of depriving the rest of the world the semiconductors they need. Perhaps with the thought “that if I can’t have them you won’t have them either”.

Don’t be surprised if China puts one very small missile into each fab in Taiwan thereby taking them all off line.

Memory – Deeper and longer downturn than expected

Also in the news media (Wall Street Journal) is the realization that the memory downturn is going to be longer and deeper than previously thought…..DUH!.

As we have pointed out numerous times, capacity keeps increasing through technology shrinks even without significant capital investment. Memory companies may slow the purchase of new equipment or new fabs but they will keep up R&D to get to more layers of NAND or the next generation of DRAM which gets the industry more bits without more (significant) bucks.

Technology marches on even in a down turn.

Although its clear that Micron and even Samsung cutting back on production there is still a lot of excess capacity, and getting worse, and pricing is not recovering and buyers likely know that.

The profitability of Samsung and Micron is already suffering and will get worse.
This all suggests a longer, deeper memory downturn than many people were expecting.

This means that capital spending by memory makers will be very significantly delayed and new fab construction will be even further delayed. We would guess that projects that Samsung had outside of Korea, especially those in China will be delayed or canceled.

Micron will without doubt push back its new Boise fab and New York even further behind that. It may be that most of the bit growth needed in slow times can be handled with existing fabs with tweaks in technology rather than new incremental capacity…at least for the next few years.

The stocks

The escalation of the embargo with China is negative for every equipment company as it may increase the amount of equipment covered under the ban.

The coalition is positive in that US companies such as AMAT and LRCX don’t have to worry about TEL or ASMI or other Japanese or Dutch companies eating their lunch in China.

The escalation is bad in that it begs a retaliation from China which will likely not be good for those involved.

As we have said many times, the equipment industry in the long run is a zero sum game. Especially for ASML, as equipment not sold to China will be sold elsewhere as someone, somewhere will make the chips if there is demand for them (even though right now demand is down….)

Overall this just potentially adds to the woes the equipment industry already has, the triple whammy of China, weak economy and horrible memory. There is not likely a good resolution to this all as we very, very highly doubt that the administration will loosen the sanctions as it has shown that it is so far unwilling to unwind sanctions in other situations. This means that chip equipment sales to China might not ever recover and most likely could worsen.

It will take time for others to displace China’s huge spending spree, but we could see India, Vietnam, Singapore and of course the re-shoring to the US and Europe to start to make up for a loss of China. Those investors hoping for a quick snap back in the chip industry may be disappointed.

We would try to minimize China exposure in our Chip portfolio, in both directions, either as a supplier or customer. We would be aware of those who could be in the way of a retaliatory strike by China such as those dependent upon rare earth elements.

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

Also Read:

Lam chops guidance, outlook, headcount- an ugly, long downturn- memory plunges

ASML – Powering through weakness – Almost untouchable – Lead times exceed downturn

Where there’s Smoke there’s Fire: UCTT ICHR LRCX AMAT KLAC Memory

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