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Trade war

Chinese chipmakers brace for next US crackdown

Top tech companies vulnerable to high political risk

U.S. chipmaker Micron Technology is suing Fujian Jinhua Integrated Circuit, to which the Trump administration just barred exports, on charges of stealing corporate secrets.   © Reuters

TAIPEI/HONG KONG -- Washington's battle against Beijing's tech ambitions stepped up a gear this week with the decision to indict a Chinese and Taiwanese company for industrial espionage. But few involved in China's drive to create its own semiconductor industry -- critical to realizing its ambition to dominate advanced technologies -- believe the crackdown will stop there.

Dozens of Chinese chip companies are braced for further action by the U.S. Commerce Department, which on Tuesday banned American companies from trading with Fujian Jinhua Integrated Circuit Co. Fujian Jinhua is a little-known dynamic random access memory (DRAM) chipmaker that has been accused of stealing trade secrets from U.S. rival, Micron Technology.

Chinese tech projects -- including the two major state-sponsored chip programs of Innotron Memory and Yangtze Memory Technologies -- are subject to high political risks, market watchers said. Innotron is building an $8 billion DRAM chip project in Hefei while Yangtze Memories is preparing a $24 billion site in Wuhan to produce NAND flash memories. Neither project has yet begun to generate revenues.

These projects are at the heart of Beijing's "Made in China 2025" policy, which aims to develop world leadership in sensitive technologies such as semiconductors, biotechnology, medical devices, aerospace, and advanced materials.

"If any of these chip projects come across a similar ban -- that also means the doomsday for those new players," said Sean Yang, a semiconductor analyst at research company CINNO. "It's not possible for any chip manufacturers in the world to get rid of U.S. suppliers any time soon."

Semiconductor companies are on the front line of the battle with the U.S., but many others are also on Washington's radar screen and could become subject to export-controls if tensions increase. On April 19, the U.S.-China Economic and Security Review Commission published a report naming Huawei Technologies, the world's biggest telecom equipment maker, ZTE, which has already once been the subject of a U.S. ban, and Lenovo Group as companies that pose cyberespionage risks to the U.S.

It also flagged Apple supplier GoerTek, an audio component maker and Dell supplier Lishen Power Battery Systems for links to China's military, nuclear and spy programs. More than 10 Chinese enterprises and research labs -- including leading server maker Inspur Group -- were highlighted in the report and all are subject to export-control risks.

Many chip industry executives and market watchers said the ban was almost certainly a death sentence for Fujian Jinhua's $5.6 billion chip project, which is scheduled to enter trial production by the end of this year. Insiders told the Nikkei Asian Review that many employees are already starting to look for jobs elsewhere. All email and phone calls between the company and its suppliers have been suspended, a company source told Nikkei, and all supporting staff immediately recalled.

Fujian Jinhua's Taiwanese technology partner United Microelectronics -- which has also been indicted on a charge of alleged industrial espionage -- on Wednesday stopped its shared research program. Meanwhile, European chip-equipment provider ASML and Japan's Tokyo Electron and others will also have to halt shipments to Fujian Jinhua as their products also contain U.S.-made parts, industry executives confirmed.

"It's quite surprising that the U.S. could view such a semiconductor startup that does not yet have products in the market as a serious threat," said Doris Hsu, Chairman and CEO of GlobalWafers, the world's leading wafer substrate provider. "Fujian Jinhua is one of our... potential customers and we did talk about supplying to them starting from 2020."

"The U.S. is using the Fujian Jinhua case to demonstrate its ability to kill any of these semiconductor projects or hit top tech companies badly in one day," said Roger Sheng, a Shanghai-based analyst at research company Gartner.

Chip manufacturers worldwide are heavily reliant on U.S. equipment makers such as Applied Materials, Lam Research and KLA-Tencor. Tech companies too would it difficult to eliminate U.S. components and services. Huawei has aggressively developed its own chipset, boosted its patent portfolios and localized its supply chain. But on its latest Premium Mate 20 phone, for instance, Huawei still uses many chips from Skyworks, Texas Instruments, Micron Technology, and Lumentum. It also needs Google's Android system to operate its handsets while Intel's central processing units, or CPUs are indispensable to its server business.

BOE Technology Group may be the world's leading display maker, but its heavy dependence on glass substrate provider Corning and the top display equipment maker Applied Materials, still make it vulnerable should the U.S. also block the supply of these crucial parts.

For PC and server provider Lenovo Group and Inspur Group, they rely on core processors from Intel and Advanced Micro Devices and the operating system of Microsoft Windows.

However the U.S. aggressive crackdown on Beijing's tech ambitions could backfire by spurring Chinese companies to look beyond U.S. suppliers. Most are already trying to look for alternatives domestically and in Europe, Japan, Taiwan, and South Korea, Nikkei Asian Review reported earlier this year. But such changes are time-consuming and painstaking while many redesigns and qualifications are involved.

"We do hope to find non-U. S. alternatives soon, but it's very difficult to drop all of them in years to come. The U.S. still controls many essential parts and software for the global supply chain," an executive from Chinese electric carmaker BYD told the Nikkei Asian Review.

Lee Wai Kwong, CEO of ASM Pacific Technology, a Hong-Kong- listed chip packaging equipment maker, is more optimistic.

"The trade war, in the long run, will just make China more determined to build its own semiconductor industry. Everybody in my sector believes that," said Lee.

Some of that belief has already translated into action. Lee said semiconductor companies established to serve the Chinese market have been "expanding aggressively" in recent months. "The assumption is that if the U.S. bans imports from China, China won't buy from the U.S., either. That, in turn, will drive up the domestic demand for made-in-China chips," Lee added.

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