Tech War

Top Japanese chip gear firm to honor U.S. blacklist of Chinese firms 

By Makiko Yamazaki

TOKYO -- Japan’s Tokyo Electron, the world’s No.3 supplier of semiconductor manufacturing equipment, will not supply to Chinese clients blacklisted by Washington, a senior company executive told Reuters.
The decision shows how Washington’s effort to bar sales of technology to Chinese firms, including Huawei Technologies, is ensnaring non-American firms that are not obliged to follow U.S. law.
China, which is locked in a crippling trade war with the United States, is pushing to build its semiconductor industry to reduce its reliance on U.S., Japanese and European suppliers for chip-making machinery.
“We would not do businesses with Chinese clients with whom Applied Materials and Lam Research are barred from doing businesses,” the executive said, referring to the top U.S. chip equipment firms.
“It’s crucial for us that the U.S. government and industry see us as a fair company,” he said, citing Tokyo Electron’s long U.S. partnership since the 1960s, when it started off as an importer of U.S. equipment.
He did not want to be named given the sensitivity of the matter. 

Applied Materials and Lam Research declined to comment.
Another major Japanese chip equipment supplier is also considering halting shipments to blacklisted Chinese firms, a person familiar with the matter said.
“The issue is beyond something we can decide on our own,” said the person, who also declined to be identified.
Executives at other equipment suppliers said they were communicating closely with the Japanese industry ministry.
“We haven’t received any specific instructions from the ministry,” one of the executives said. 

“We are aware that we could be in deep trouble if we take advantage of the U.S. export ban to expand businesses with China.”

PERFIDIOUS TAIWAN
The Tokyo Electron executive did not specify the names of the Chinese clients, but state-backed memory chipmaker Fujian Jinhua Integrated Circuit Co is currently on a list of entities that cannot buy technology goods from U.S. firms.
Fujian Jinhua did not respond to an emailed request for comment. 

A handful of other Chinese companies and research institutions are on a ‘red list’ that U.S. companies have been advised to avoid.
Huawei’s chip arm, HiSilicon, is a so-called fabless company focusing on chip design and thus is not normally a buyer of chip-manufacturing gear. 

But Huawei also faces major risks from non-U.S. suppliers adhering to the U.S. blacklist.
British chip designer ARM, owned by Japan’s SoftBank, has halted relations with Huawei, potentially crippling the Chinese company’s ability to make new chips for its future smartphones.
But Taiwan Semiconductor Manufacturing Co, global leader in chip production and maker of many Huawei chips, has said it would continue to be a supplier to Huawei.
U.S. law specifies that any product comprising 25% or more U.S. content is subject to the U.S. export control restrictions.
But the Japanese chip equipment executives did not cite that as a reason for cutting off supplies to some Chinese companies.
“It’s not impossible for Japanese companies like Tokyo Electron to replace their U.S. rivals and complete production lines for China,” an executive at a U.S. chipmaker said. 

“But in reality, that’s very difficult considering a U.S. backlash.”

CHINA CHIP TECHNOLOGY LAGS
Five Japanese companies rank among the world’s top 10 chip equipment firms. 

The highly specialized chip equipment industry is relatively small, but the gear is strategically critical for all semiconductor manufacturers.
Making chips involves numerous processes that require different types of equipment. 

Each market segment is typically dominated by just a few players.
Tokyo Electron controls nearly 90% of the market for microchip coaters and developers. 

It competes directly with Applied Materials and Lam Research in some segments.
Beijing has been investing heavily to grow domestic chip equipment suppliers as part of an effort to achieve its goal of producing 70% of the semiconductors it uses by 2025.
But industry sources say technologies at those suppliers are still far behind, leaving China dependent on imported equipment.
Today, only 16% of the semiconductors used in China are produced in-country, half of which are made by Chinese firms, according to the Center for Strategic and International Studies, a Washington-based think tank.
But aggressive investments by local chipmakers and foreign players like Samsung Electronics made China the world’s No.2 market for chip equipment last year.
Many chip equipment manufacturers are forecasting substantial profit drops this year as the China-U.S. trade war dampens demand for chips and chip equipment globally.

Huawei’s U.S. Restrictions Expose a High-Tech Achilles’ Heel for China

China is heavily reliant on imported computer chips, despite efforts to develop its own semiconductor industry.

By Raymond Zhong

A Huawei store in Beijing. The company had stockpiled computer chips for emergencies like the trade restrictions announced last week by the United States.

BEIJING — For all of China’s efforts to become a global force in high technology rivaling the United States, it has mostly failed to produce top-flight contenders in one crucial area: the industry that gave Silicon Valley its name.
Last year, China imported more than $300 billion worth of computer chips, the backbone of all digital products. 

That is more than it spent on crude oil from abroad.
Washington has now turned China’s reliance on American microchips against Huawei, the Chinese telecommunications giant that is labeled a national security threat. 

The Commerce Department last week restricted American firms from selling components and technology to the company, essentially cutting Huawei off from Google software, Qualcomm chips and more.
The department said Monday that it would allow Huawei to continue doing business with American suppliers for 90 days to prevent disruption to mobile networks that use the company’s equipment. 

Yet Washington’s move still strikes at a national soft spot for China that has weighed on the minds of the country’s leaders for decades.
Desperate to reduce the dependence on imports, the authorities in China have pledged tens of billions of dollars to help foster homegrown chip champions. 

The country’s dreams of semiconductor hegemony have added to the trade tensions with the United States, which wants Beijing to scale back what it considers unfair government support for Chinese firms.
Washington has found reason to directly punish one state-backed chip maker, Fujian Jinhua Integrated Circuit Company. 

After Micron Technology, an American rival, accused the Chinese company of pilfering chip designs, the Commerce Department blocked it from buying American components.

Last year, China imported more than $300 billion worth of computer chips, the backbone of all digital products. That is more than it spent on crude oil from abroad.

The fruits of China’s chip drive have been mixed at best. 

Chinese firms’ market share remains modest in most areas of semiconductor production. 

Nearly all of the most complex chips must still be imported. 

Several Chinese state-backed makers of memory chips, which store data, have announced big production plans. 

But the global market for such chips is currently saturated, suggesting grim prospects for turning a profit.
On the whole, government support has helped the Chinese industry, said Gu Wenjun, chief analyst at ICwise, a semiconductor market research firm in Shanghai. 

“But now that the market has become overheated and fickle, the negative effects are increasingly apparent,” he said.
Local governments in China “don’t understand the industry,” Mr. Gu said. 

They are merely using up resources that private companies know how to spend more effectively, he added.
China’s role as the world’s leading assembler of electronics, and its vast consumer market for electronics, has convinced some observers that given enough time, the country would inevitably attract or foster the knowledge for producing advanced chips. 

If China could catch up in making toys and then in producing cellphones, the thinking goes, then why not in semiconductors someday?
For now, surviving without American chips promises to be the ultimate test for Huawei, despite the company’s recent strides in developing its own processors.
In an interview with Chinese media on Tuesday, Huawei’s founder and chief executive, Ren Zhengfei, said that in “peaceful times,” half of Huawei’s chips came from American companies, and the other half it developed itself. 

Huawei has stockpiled chips for emergencies like this, Mr. Ren said.
But the company could never entirely reject American technology, he said. 

Even members of his own family, he said, are iPhone users.
“We will not recklessly get rid of American chips,” Mr. Ren said. 

“We need to grow together.”
Beijing’s angst over foreign semiconductors has a long pedigree.
As Japan, South Korea and Taiwan emerged with formidable chip industries in the 1980s and ’90s, China experimented with various forms of state planning to develop its own abilities. 

In 2014, Beijing set a goal of becoming a global leader in all segments of the chip industry by 2030, and national and local government semiconductor investment funds began springing up across the country.
The results of those efforts are hard to spot, however, in the innards of leading Chinese tech companies’ products.
To crack open one of Huawei’s smartphones or cellular base stations is to see the extent to which advanced technology is a truly globalized endeavor, even as Beijing and Washington have come to distrust each other’s tech providers.
In Huawei’s new P30 Pro flagship phone, for example, American firms supply a number of key components, including parts that help process the radio signals that carry calls and data through the air, according to an analysis by System Plus Consulting, a research firm in France.
The P30 Pro’s memory chips are from Micron and the Japanese company Toshiba. 

The camera technology is from Sony of Japan. 

The processor, the brains of the phone, was developed by Huawei itself.
Huawei’s semiconductor division, HiSilicon, has surprised industry observers with the progress it has made in developing processors and baseband chips, which connect phones to data networks. 

Yet even HiSilicon may be affected by the Commerce Department’s restriction. 

Many of the leading providers of chip design software are American.
For other kinds of components, Huawei should not have much trouble finding non-American substitutes if it is fully cut off from American suppliers. 

In memory chips, for instance, Micron is a leading global supplier, but so are Samsung and SK Hynix of South Korea.
In general, the more advanced the silicon, the more likely it is that Huawei will have to compromise on quality to avoid American providers like Broadcom, which supplies specialized chips for Huawei’s data centers, and Nvidia, which makes high-end graphics processors for Huawei’s laptops.
The company’s options may also be limited when it comes to the critical components that help smartphones process radio signals. 

American companies, including Skyworks and Qorvo, lead the market for these “radio frequency” parts, which are technologically demanding to produce.
“It’s just very difficult unless this is your bread and butter,” Liam K. Griffin, Skyworks’s president and chief executive, said on a conference call this month with analysts. 

“We have years and years of experience here working with this.”