Expertise about technology, markets, economics and politics

Should We Imitate China, or Taiwan?

Despite the anti-Chinese hysteria gripping our rulers in Washington, much of what they do seems devoted to making us more like the country they profess to hate so much.

From Democrats, some 65% of whom pine for the socialist path, this is hardly a surprise. Republicans, however, are doing as much or more to imitate what they profess to abhor. Though desperately afraid of “falling behind China,” they have supported what amounts to a massive attack on the U.S. semiconductor industry.

GOP congressmen enthusiastically back the administration’s ban on U.S. and allied semiconductor firms selling their best, highest-margin products to Chins. That will mean a loss of as much as 30% of revenues for some crucial firms, in turn reducing budgets for research and development. Worse yet, it reduces the volume of production, slowing companies’ progress along the learning curve, which yields a 20-30% reduction in costs for every doubling of accumulated volume.

China is, by far, the world’s biggest importer of both semiconductors and the machines that make them, yet increasingly closed to U.S. exports. Whiners about our trade deficit with China should note that the United States is a net exporter of microchips—for now.

Making headlines are retaliations by the Chinese government. These include banning imports from Micron (NASDAQ: MU), the only U.S.-based large manufacturer of memory chips with more than 25% of the global market. China also bans exports of crucial materials such as gallium nitride, which is used in power-control chips essential to “electrifying” the economy.

Far more consequential have been the reactions of Chinese semiconductor firms, which have stepped up efforts to do without the West.

U.S. leaders seemed quite proud of forcing the Netherlands to join in the export ban, forbidding ASML (NASDAQ: ASML) to export to China its most advanced extreme ultra-violet (EUV) photolithography machines. These were believed necessary for making the most elite classes of microchips, the so-called seven (7nm) and five (5nm) nanometer nodes.

Nice try. In 2022, China’s Semiconductor Manufacturing International Corporation HKG: (0981), the largest Chinese chip “foundry” (manufacturer of chips designed by other companies) and fifth-largest in the world, began manufacturing chips at the 7nm node without ASML’s machines. Likely will soon be making 5nm chips without ASML The 5nm and 7nm nodes are, by a large margin, the most profitable of all microchips.

SMIC is China’s best weapon against Taiwan, the tiny nation that currently manufactures more than 60% of the world’s microchips and 90% of the most advanced chips.

By punishing China, we pushed SMIC further along in its attempt to overtake the Taiwan Semiconductor Manufacturing Company (NYSE: TSM), currently the world’s largest foundry. TSM is the beating heart of the Taiwanese semiconductor ecosystem, extending to hundreds of firms and producing 15% of Taiwan’s gross domestic product (GDP) and more than 35% of its exports.

The most significant effect of the U.S. ban has been to boost the capabilities of Chinese makers of semiconductor manufacturing equipment. These companies, like ASML or U.S.-based Applied Materials (NASDAQ: AMAT) make the machines that make the chips. According to Robert Castellano and The Information Network, a leading analyst of the microchip market, in just one year, from 2021 to 2022, Chinese semiconductor manufacturing equipment makers in five crucial segments increased both their revenues and their market share by more than 60%.

Though the increases were from a small base, it would take only a few years of such growth to make Chinese semiconductor equipment makers a leading force in the global market, rendering U.S. sanctions irrelevant.

Over the same period, total revenues for all non-Chinese semiconductor manufacturing equipment makers decreased 4.6%. Even worse was the impact on vulnerable second-tier equipment makers. Their revenues dropped by more than 12%. These second-tier firms such as U.S.-based Lam Research (LRCX) face existential threats from being cut off from the Chinese market.

In good socialist fashion, the Biden Administration, with the enthusiastic support of the GOP, has decided the way to help the U.S. companies they are mugging is to write them checks amounting to at least $50 billion under the CHIPs act. Intended by the usual useful idiots to boost U.S. manufacturing of chips, the money is already being doled out to victorious lobbyists and dissipated on marginal or destructive initiatives compelled by U.S. regulators.

This $50 billion is on top of a 25% tax credit to U.S. chip manufacturers for investment in new equipment. All these subsidies go to the weakest segment of the U.S. industry rather than the most profitable, the chip designers such as Nvidia (NASDAQ: NVDA), AMD (NASDAQ: AMD), Qualcomm (NASDAQ: QCOM), and Apple (NASDAQ: AAPL). Let’s hope none of those firms is distracted into manufacturing.

The net effect is to waste both talent and capital. Naturally, the European Union (EU) is piling on as well with nearly $60 billion in new direct subsidies. South Korea is putting up $450 billion.

A saving grace may be that China is rediscovering its socialist roots. Chairman Xi has resumed massive subsidies to state-backed corporations, with the result being a more than 50% decrease in the country’s return on capital.

Chinese direct subsidies to its own semiconductor sector are estimated at some $300 billion from 2018 through 2025. Tacked on are massive tax rebates and exemptions.

Guess who hardly plays the socialist subsidy game at all. Taiwan doles out less than $2 billion a year in direct subsidies, plus some modest tax benefits, all for R&D, to support its world-leading chip manufacturing industry.

Could Taiwan’s market share surpass even its current 60%? With Republican help, it just might.

P.S. Join my Eagle colleagues and me on an incredible cruise! We set sail on Dec. 4 for 16 days, enjoying a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Hear seminars on the days we are cruising from one destination to another, as well as dine with members of the Eagle team. Places we’ll visit include Mexico, Belize, Panama, Ecuador and more! Click here now for the details.

Log In

Forgot Password