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Trade war

Chinese chip giant downplays US 'red-flag' impact after stock dips

Production concerns remain after American supplier stops shipment and services

Applied Materials of the U.S. is a key supplier to China's Xiamen San'an Optoelectronics. (Photo provided by Applied Materials)

TAIPEI/TOKYO -- China's biggest LED chip maker Xiamen San'an Optoelectronics said on Tuesday it will feel only a "limited" impact from the decision by key supplier Applied Materials to halt deliveries to the Chinese group after its was named on a red-flag list by the U.S. government last week.

"Applied Materials is a supplier, and it's not the exclusive one. We still have domestic suppliers for the equipment, so the impact to our business could be limited," San'an said in a statement released to local media. The company aims to "send a group of people to the U.S. to help work with the U.S. government to help remove itself from the unverified list."

The statement was released following a drop in its share, which was down 8% on Tuesday morning from its Friday closing price.

The decision by U.S.-based Applied Materials to immediately halt supplies and services to San'an was based on the Chinese company's inclusion on the U.S. government's "unverified list" released on April 11. American companies are required to treat any foreign companies on the list with caution, though they are not banned from dealing with them. U.S. suppliers also have to apply for new licenses to sell products or services to red-flagged companies.

While San'an has struck a confident tone, there are concerns that the company could run into production issues without Applied Materials to service or repair its equipment.

"If the Applied Materials equipment has some issues, the whole San'an production line could be affected as it's not that easy to remove and reinstall a new tool in chip production sites," an industry source told Nikkei Asian Review.

The wafer processing equipment used in LED chip manufacturing is much less advanced than that used to produce memory and core processor chips.

Chairman Lee Biing-Jye of Taiwan's Epistar, a rival to San'an, told local reporters on Tuesday that if other key tool vendors follow Applied Materials and cut off supplies, it could create a chain reaction that impacts San'an's production.

Lee added that even though China has its own domestic LED chip manufacturing tool providers, San'an still relies on many vendors from the U.S. and Europe. "Those vendors' attitude would be very crucial, too."

The Chinese company was among at least three Applied Materials customers newly named on the "unverified list," which was released on April 11.

Applied Materials sent a notice to all staff involved with the named companies that they should "immediately stop all pending and future equipment delivery and cease all service activities at their sites."

While Applied Materials' is not expected to be fatal for San'an, it could signal greater caution among suppliers in dealing with companies on the unverified list.

Key suppliers specializing in equipment for LED chipmakers include Aixtron and Veeco of Germany as well as China's homegrown Advanced Micro-Fabrication Equipment. A Chinese state-fund attempted to take over Aixtron but the move was blocked by the U.S.

San'an Optoelectronics, which has received hefty government subsidies, went public in 2008 and is now the world's biggest LED chip manufacturer. Its rivals, including Epistar, have suffered years of losses due to a glut and price war.

The U.S. is looking to curb Beijing's "market-distorting" practices such as subsidizing companies, and an agreement on the issue could be reached in trade talks that have been going on between the two countries.

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