TDaly
Moderator
Beneath the understandable exclusive focus on COVID-19, a policy time bomb continues to tick. Should the US embargo Huawei’s access to US semiconductor technology? The United States views Huawei as a national security threat and is working to convince allies to join a US boycott on deploying Huawei 5G networks. A Commerce Department proposal to implement the "foreign direct product rule" would require that semiconductor manufacturers worldwide secure a license for use of equipment from US companies when used to manufacture chips for Huawei.
Implementation of this rule would diminish the global competitiveness of the US semiconductor equipment industry, reduce critical R&D supporting emerging technologies such as 5G and Artificial Intelligence, force a wedge between allies and hand share to Japanese and South Korean competitors. It will accelerate Huawei’s push to design-out all US semiconductor devices and achieve self-sufficiency.
As those in the industry know well, semiconductor equipment companies are at the core of US technology leadership. They supply the equipment to manufacturers such as Intel, Micron, TSMC and Samsung for use in the production of chips. They enable chip manufacturing at near atomic levels, delivering the high performance, low power, miniaturization and low cost essential to emerging technology applications. These companies must have access to the full global revenue opportunity in order to invest at competitive R&D levels and sustain innovation leadership.
The three leading US companies in this segment are Applied Materials, Lam Research and KLA. Together they invested $16.8 billion in R&D over the past five years, 13.6% of revenue. Their combined revenues comprise roughly 50% share of the entire global semiconductor equipment market. If the US moves forward with the proposed rule, upstream semiconductor manufacturers will be forced to favor non-US alternatives to avoid constraints on their ability to meet customer demand. The trade association SEMI (pre-COVID-19) forecasted equipment sales of $128 billion spanning 2020 and 2021, 89% of which is outside the US. China is projected to comprise 25%. The loss of a substantial portion of that future off-shore revenue opportunity due to real or perceived constraints on the use of US-origin equipment will cripple US equipment suppliers’ ability to compete.
When this policy decision comes back on the table, the President needs proper counsel. Semiconductor manufacturing is not a plug-and-play assembly process. Equipment and materials suppliers work closely with manufacturers on the development of the process technology on which products are designed and manufactured. The new rule would force chip manufacturers to either re-qualify their process on existing or new non-US equipment or forfeit Huawei as a customer. They will wonder what customer is next on the US embargo list. And there are very capable non-US firms competing for every equipment purchase, including TEL and Screen from Japan and Wonik and SEMES from South Korea. US actions must be aligned with allies or risk handing hard-earned share to non-US competitors.
The foreign direct product rule is ill-conceived policy for this segment of the semiconductor industry.
The Administration has an effective defensive strategy for Huawei and China, including the expansion of restricted technologies under the 42 nation Wassenaar Arrangement, adding Huawei to the denied parties "Entity List" and enforcing a 25% "percentage of US content" rule on shipments to Huawei. It signed the Foreign Investment Risk Review Modernization Act, expanding the mandate of the Committee on Foreign Investment in the United States (CFIUS) to cover minority-position investments and overseas joint ventures. It aborted Chinese attempts to acquire Micron and denied the Chinese-owned investment firm Canyon Bridge Capital from acquiring Lattice Semiconductor. Even the acquisition of Cypress Semiconductor by German stalwart Infineon came under close CFIUS scrutiny for back-door Chinese access to US technology. These are effective rear-guard actions to diminish Chinese access to US technology while allowing US companies to compete.
But the US needs stronger offense. First, it must provide a more compelling story to convince allies against the deployment of Huawei in 5G network rollouts. Next, the US should re-invest revenue from the FCC 5G spectrum auction into US firms to accelerate 5G capability, potentially including partnerships with Ericsson and Nokia. US government funding of emerging technologies must be dramatically increased, a standing recommendation from experts under Presidents Obama (Presidential Commission on Semiconductor Competitiveness, January 2017) and Trump (National Security Commission on Artificial Intelligence, November 2019). The White House Office of Science and Technology Policy recently announced an initiative to advance semiconductor R&D. The US needs leadership action and funding, not another report, most especially in the aftermath of COVID-19.
Semiconductors are the literal heart of the digital economy, powering applications across virtually every segment. Proposals such as the foreign direct product rule should be put back on the shelf. The US must play a stronger game of offense in balancing national security and competitiveness with China and limit harmful defensive actions. Do not kill the golden goose of our digital economy.
Terry Daly is a retired semiconductor industry executive
Implementation of this rule would diminish the global competitiveness of the US semiconductor equipment industry, reduce critical R&D supporting emerging technologies such as 5G and Artificial Intelligence, force a wedge between allies and hand share to Japanese and South Korean competitors. It will accelerate Huawei’s push to design-out all US semiconductor devices and achieve self-sufficiency.
As those in the industry know well, semiconductor equipment companies are at the core of US technology leadership. They supply the equipment to manufacturers such as Intel, Micron, TSMC and Samsung for use in the production of chips. They enable chip manufacturing at near atomic levels, delivering the high performance, low power, miniaturization and low cost essential to emerging technology applications. These companies must have access to the full global revenue opportunity in order to invest at competitive R&D levels and sustain innovation leadership.
The three leading US companies in this segment are Applied Materials, Lam Research and KLA. Together they invested $16.8 billion in R&D over the past five years, 13.6% of revenue. Their combined revenues comprise roughly 50% share of the entire global semiconductor equipment market. If the US moves forward with the proposed rule, upstream semiconductor manufacturers will be forced to favor non-US alternatives to avoid constraints on their ability to meet customer demand. The trade association SEMI (pre-COVID-19) forecasted equipment sales of $128 billion spanning 2020 and 2021, 89% of which is outside the US. China is projected to comprise 25%. The loss of a substantial portion of that future off-shore revenue opportunity due to real or perceived constraints on the use of US-origin equipment will cripple US equipment suppliers’ ability to compete.
When this policy decision comes back on the table, the President needs proper counsel. Semiconductor manufacturing is not a plug-and-play assembly process. Equipment and materials suppliers work closely with manufacturers on the development of the process technology on which products are designed and manufactured. The new rule would force chip manufacturers to either re-qualify their process on existing or new non-US equipment or forfeit Huawei as a customer. They will wonder what customer is next on the US embargo list. And there are very capable non-US firms competing for every equipment purchase, including TEL and Screen from Japan and Wonik and SEMES from South Korea. US actions must be aligned with allies or risk handing hard-earned share to non-US competitors.
The foreign direct product rule is ill-conceived policy for this segment of the semiconductor industry.
The Administration has an effective defensive strategy for Huawei and China, including the expansion of restricted technologies under the 42 nation Wassenaar Arrangement, adding Huawei to the denied parties "Entity List" and enforcing a 25% "percentage of US content" rule on shipments to Huawei. It signed the Foreign Investment Risk Review Modernization Act, expanding the mandate of the Committee on Foreign Investment in the United States (CFIUS) to cover minority-position investments and overseas joint ventures. It aborted Chinese attempts to acquire Micron and denied the Chinese-owned investment firm Canyon Bridge Capital from acquiring Lattice Semiconductor. Even the acquisition of Cypress Semiconductor by German stalwart Infineon came under close CFIUS scrutiny for back-door Chinese access to US technology. These are effective rear-guard actions to diminish Chinese access to US technology while allowing US companies to compete.
But the US needs stronger offense. First, it must provide a more compelling story to convince allies against the deployment of Huawei in 5G network rollouts. Next, the US should re-invest revenue from the FCC 5G spectrum auction into US firms to accelerate 5G capability, potentially including partnerships with Ericsson and Nokia. US government funding of emerging technologies must be dramatically increased, a standing recommendation from experts under Presidents Obama (Presidential Commission on Semiconductor Competitiveness, January 2017) and Trump (National Security Commission on Artificial Intelligence, November 2019). The White House Office of Science and Technology Policy recently announced an initiative to advance semiconductor R&D. The US needs leadership action and funding, not another report, most especially in the aftermath of COVID-19.
Semiconductors are the literal heart of the digital economy, powering applications across virtually every segment. Proposals such as the foreign direct product rule should be put back on the shelf. The US must play a stronger game of offense in balancing national security and competitiveness with China and limit harmful defensive actions. Do not kill the golden goose of our digital economy.
Terry Daly is a retired semiconductor industry executive