Last December, South Korean semiconductor company Magnachip reluctantly announced the demise of its proposed $1.4 billion merger with Chinese private equity firm Wise Road Capital.
Aside from its listing on the New York Stock Exchange and a nominal corporate presence in Delaware, Magnachip has no substantive operations – in manufacturing, research and development or sales – in the US.
But that didn’t stop the Committee on Foreign Investment in the United States, a body originally created in the 1970s to oversee the purchase of strategic US assets by OPEC countries, from intervening in the merger.
In a move that shocked the global semiconductor industry, Cfius ruled that the transaction posed a potential risk to US national security, effectively killing the deal and sending a chill over the industry.
“Cfius has traditionally been involved in traditional security issues like ports and infrastructure, and yet it blocked the acquisition of this relatively small chip company that had almost no presence in the United States,” said Chris Miller, assistant professor from Tufts University and author of Chip. War: The Fight for the World’s Most Critical Technology. “This was a really important signal for the whole industry.”
The Magnachip case is an example of how rising tensions between the United States and China are affecting chipmakers, which are under increasing pressure to align with Washington as it tries to counter China’s rise as to technological power.
The companies are vying for billions of dollars in US grants through the $280 billion Science and Chips Act and don’t want to be trapped by restrictions from an increasingly hawkish White House.
When it comes to circumventing US regulations, China moves like water around rocks
The Financial Times reported this month that Korean semiconductor titans Samsung Electronics and SK Hynix are reassessing their investments in China in response to “railroads” in legislation barring recipients of US federal funding from expanding or improving their advanced chip capacity in China for 10 years.
Competitors including Taiwan’s TSMC and U.S. chipmakers Intel and Micron, all of which have manufacturing operations in China, are also under pressure to boost U.S. domestic production while making it harder for Beijing to obtain advanced technology from semiconductors
Pressure is likely to increase as the US tries to rally allies Korea, Taiwan and Japan behind a “Fab 4 chips alliance” designed to coordinate research and development policy, subsidies and supply chains.
Korean chipmakers, historically reluctant to take sides in the technology rivalry between the United States and China, have acted as an indicator of the direction of the global semiconductor industry.
Samsung and SK Hynix have increased investments in US production facilities, although they remain heavily exposed to the Chinese market. According to the Korea International Trade Association, South Korea exported $50 billion worth of chips to China last year, up 26 percent from 2020 and accounting for nearly 40 percent of the country’s total chip exports .
But they share an almost total dependence on a small number of US, Japanese and European chip designers and equipment manufacturers for the technology needed to produce advanced chips, giving Washington leverage over what Miller described as the ” main choke points in the semiconductor production process.”.
These companies include US chip designers Cadence and Synopsis, Siemens-owned Mentor Graphics, US equipment makers Applied Materials and Lam Research, and ASML in the Netherlands, which makes the extreme ultraviolet lithography tools needed to produce cutting-edge Dram memory chips.
“China has the market, but the US has the technology,” said Yeo Han-koo, who served as South Korea’s trade minister until May. “Without technology, you have no product. Without a market, at least you can find a way to diversify and identify alternatives.”
Neither Samsung nor SK Hynix, which specialize in the production of memory chips, make their most advanced semiconductors in China.
China’s largest chipmaker, Semiconductor Manufacturing International Corp, announced last month that it had started shipping advanced 7-nanometer semiconductors. However, analysts said without access to the world’s most sophisticated equipment, SMIC would struggle to close the gap with Samsung and TSMC, which are the world’s leading suppliers of 5nm and 4nm chips.
A person close to TSMC, which dominates the global foundry chip market, said the US bill was unlikely to have a dramatic effect, as the Taiwanese government already had restrictions on the production of advanced chips in mainland China.
But Dylan Patel, chief analyst at SemiAnalysis, said US curbs on companies upgrading or expanding their Chinese operations would still have an impact.
SK Hynix and Samsung would likely just keep their existing investments, Patel said. “As a result, the share of its production in China is likely to decline substantially over time,” he said.
The dilemma for Korean chipmakers and others is how to execute their pivot away from China and toward the United States without provoking a backlash from Beijing, which has become increasingly vocal in its opposition to what North officials – Americans describe as “friendshoring”.
“Decoupling with such a large market is no different from commercial suicide,” read an editorial last month in the Global Times, a nationalist Chinese state-owned tabloid. “The US is handing a knife to South Korea and forcing it to do so.”
However, Patel said China’s continued reliance on chips and technology from foreign groups meant its leverage was limited. “Beijing needs these chip imports for its own manufacturing industries. What are they going to do, stop making electronics in China?”
He said Washington could further increase pressure by banning the export of chipmaking equipment used to make advanced Nand memory chips to Chinese plants, including those owned by foreign companies. Samsung and SK Hynix have Nand memory chip plants in China.
David Hanke, a partner at the Washington law firm ArentFox Schiff, which advises multinationals on China competition issues, said chipmakers would be wise to heed the spirit of the CHIP Act, not just the letter. own legislation.
“It will be evaluated to what extent a company has contributed to China’s technological development,” Hanke said, noting that subsidies to chipmakers would be reviewed every two years by the U.S. Commerce Department.
“There’s going to be a big optics problem for companies that play it too close to what this legislation allows.”
He added that companies should also consider the possibility of Washington taking an even more hawkish turn in the near future. Republicans are slated to retake the House and possibly the Senate in November’s midterm elections.
“When it comes to circumventing US regulations, China moves like water around rocks. So it shouldn’t be surprising if people on Capitol Hill start saying in a year or two that the current railings were too weak.”
Additional reporting by Kathrin Hille in Taipei