Expertise about technology, markets, economics and politics

Another Win for Chairman Xi and His American Allies

When Chairman Xi announced his “Made in China 2025” program, even he must have had a moment of doubt whether the date was too optimistic for some of China’s fledgling industries to replace Western imports.

If so, he under-estimated his greatest benefactors, American China Hawks, who are doing their utmost to boost not only the Chairman’s economic goals, but his political dominance.

We hope they send him a bill. Or maybe the Chinese could buy a couple million copies of Newt Gingrich’s book claiming China’s miraculous capitalist sector is just a front for a Commie conspiracy. Apparently, the Newt believes Alibaba (NYSE: BABA), Tencent (OTCMKTS: TCEHY), Baidu (NASDAQ: BIDU), (NASDAQ: JD), Ping An (OTCMKTS: PNGAY) and Huawei are but so many Potemkin Villages, mocked up by party members scrambling to please the Chairman.

Or maybe the CCP leadership could do more in the way of elevating Hunter’s art career after all his father has done for them.

From the Assyrian empire through the present, benighted pols have sought to boost their nation’s infant industries by imposing punishing tariffs on foreign competitors even while impoverishing their own citizens.

Now the China hawks have decided to spare the Chairman the trouble. The Biden administration is going to flat out forbid a widening swath of our and our allies’ most important companies from selling to China, chopping their current revenues by up to 30%, divorcing them from their fastest-growing customers and kicking them off the learning curve, the most powerful and benign force in business.

Last week, we mentioned ASML Holding N.V. (NASDAQ: ASML), the only company in the world capable of producing the Extreme Ultraviolet (EUV) lithography machines needed to manufacture the most advanced microchips in the so-called 7nm, 5nm and 3nm families. Under pressure from the Biden administration, ASML was barred from selling those machines to China. Only months later, China-based Huawei, the best telecom equipment manufacturer in the world, announced a patent on a graphene transistor that could eventually reduce ASML to an afterthought, though much work remains to be done.

Now the Biden administration has done Chairman Xi an even bigger solid. The ban on ASML’s machines, while bad enough, might have had less impact than the hawks hoped. Most Chinese chipmakers are not ready to make chips in the elite categories for which ASML’s top machines are needed.

The newest set of prohibitions will fix that. The Biden administration is forbidding American—and it hopes allied—companies from exporting to China even when those companies have Chinese competitors with comparable capabilities.

Consider Lam Research (NASDAQ: LRCX), a $17 billion (by revenue) American company with six factories in the United States and five abroad. Lam, like ASML, is a wafer fab equipment (WFE) company, making equipment used to manufacture microchips. In lithography, Lam is not ASML’s peer; ASML has no peers. But Lam does a big, profitable business in lithography for earlier-generation chips that have still-growing markets, especially for memory devices, including America’s Micron (NASDAQ: MU). Other customers include Intel (NASDAQ: INTC), as well as Taiwan Semiconductor (NYSE: TSM) and Samsung, for which Lam opened factories in Taiwan and Korea, respectively.

Lam factory in Hwaseong-si, South Korea. Source: Lam

Lam also makes machines performing several other crucial processes, including vapor deposition, which layers materials with varying electrical characteristics onto silicon wafers, and wafer polishing and cleaning. Notably, Lam produces some of the world’s best wafer inspection devices, capable of detecting defects as small as 10 nanometers from 240 wafers an hour.

Great though it is, Lam has several Chinese competitors. In 2022, China Micro (etching, cleaning and vapor deposition) revenues grew 52%, Shengmei Shanghai (wafer cleaning) grew 77% and Toujing Technology (vapor deposition) grew 125%.

These astounding growth rates come because China is the fastest-growing market in the world for wafer fabrication equipment, because it is the fastest-growing chip manufacturing nation.

Lam Research, admittedly from a larger base than its Chinese rivals, grew 12.9% overall last year; 29% of its revenues coming from China. Deprived of the China market, Lam’s growth will slow. As growth slows and volume shrinks, it will fall behind on the Learning Curve, which dictates a 20-30% drop in costs (improvements in process) with each cumulative doubling of units produced. Deprived of cash, its R&D budget will shrink, while its growing Chinese rivals pour more of their newfound riches into innovation.

No matter what the hawks do, China will be the largest chip manufacturing nation in the world by the end of this decade (unless Chairman Xi succeeds in subjugating China’s best companies to his CCP toadies.) With luck, the United States could remain number one in chip design, which is a higher margin business. Maintaining that position will be much harder if Washington forbids American companies to contract out to Chinese manufacturers.

Taiwan Semiconductor, the best chip manufacturer in the world, has been the secret weapon behind the success of such American companies as Nvidia (NASDAQ: NVDA), Qualcomm (NASDAQ: QCOM), Apple (NASDAQ: AAPL), Advanced Micro Devices (NASDAQ: AMD) and Lam itself. TSM’s next great rival likely will emerge in China. But that great new Chinese company will be of no help to the United States. By then, American China Hawks will have destroyed the global semiconductor eco-system built up over decades, spanning three continents and thousands of companies, knitting the world’s most productive men and women into a global force for learning and for peace.

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