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Chip manufacturers in China most impacted by chip war, global companies less so: DBS

The restrictions will affect Chinese semiconductor companies to manufacture advanced chips, as they require key foreign tech.

The Singapore research team at DBS Group Research, along with analysts Ling Lee Keng, Sachin Mittal and Jim Au, see that Chinese chip companies are likely to be the hardest hit in the ongoing chip war between the US and China.

“Among Chinese companies, we see the most impact on chip manufacturers (IDM/fabless) followed by the foundries,” the team writes in their Nov 22 report. “We do not expect a material impact to equipment manufacturers and software developers, as China’s current technology is way behind the thresholds mentioned in the latest curbs.”

On the other hand, more global companies will be better off due to mitigating factors, such as temporary licenses, relatively smaller contributions from advanced chips and related equipment from China, and companies exploring options to bypass the US ban such as the modification of chips and production processes.

The DBS team is referring to the Oct 8 ban put in place by the Biden administration, which bans the transfer of advanced US semiconductor technology to China.

This affects US firms that sell to China and any company whose products contain American semiconductor technology.

In the latest round of measures by the US Bureau of Industry and Security (BIS), it sought to restrict China from obtaining equipment and tools for high-end semiconductor chips.

DBS points out that chip wars have global ramifications on chip manufacturers and equipment manufacturers. Based on the export restrictions by the US, both chip manufacturers and equipment manufacturers will be affected.

Given the complex nature of semiconductor supply chains and the Foreign Direct Product Rule (FDPR), the impact of the restrictions goes beyond Chinese companies, they write.

They highlight that the FDPR enables the US government to stop a product from being sold if it was made using American technology, and this includes products manufactured in a foreign country.

For instance, Taiwanese chip manufacturer TSMC faced restrictions in selling advanced chips to Huawei without a license, as the product manufacturing process included US technology.

Chinese companies

Separately, the DBS team notes that Chinese companies have already entered all the segments of the semiconductor industry and made remarkable progress over the last few years.

These companies have strong positions in segments with lower technical barriers, such as OSAT, low-end semiconductor materials, and legacy node wafer manufacturing, but are still lagging behind in areas such as Wafer Fab Equipment (WFE), Electronic Design Automation (EDA), semiconductor IP, and advanced process node manufacturing.

Nonetheless, the team points out that on a short-term basis, the restrictions will hamper the ability of Chinese semiconductor companies to manufacture more advanced chips, as they no longer have access to key foreign technologies.

However, this segment is still relatively small. According to GlobalData, more than 90% of the chips sold and used worldwide involve low-process production technology, and China mainly focuses on 32 nanometre (nm) chips, 28nm or above.

For reference, the chip in the latest iPhone 14 Pro and Samsung S22 smartphones is a 4nm chip, while a 28nm chip is used mainly for microcontrollers, as well as integrated circuits for wireless communications and sensors.

Should it be broken down by segment in the value chain, DBS thinks that IDMs, or integrated designed manufacturers and fabless companies will be most affected, as well as Chinese companies with operations in the US are also affected.

As for foundries, the market share gain may outweigh the negative impact of the latest curbs, the team says, noting that the current technology process nodes of wafer foundries have been largely limited to 28nm or above in China.

Local foundries like SMIC and Hua Hong focus on the mature process node foundry, and about 15% of SMIC’s revenue is generated from 28nm technology foundries, while all of Hua Hong’s revenue is generated from mature node foundries.

However, chip talents who are US citizens or green card holders are also not allowed to work in certain China-located semiconductor fabrication facilities without a license.

This has resulted in the loss of personnel in core tech positions, and they expect this will hamper technology advancement going forward.

Global companies 

For global industry bellwethers such as TSMC, SK Hynix, and Samsung, these companies had already been granted temporary exemptions or waivers for areas such as access to key equipment and tools, thereby reducing disruptions to their operations in China, at least in the short term.

The team writes “Overall, we still see some negative impacts on global peers; however, it could be mitigated through license grants.”

However, they also highlight that with China’s technology a few generations behind that of global peers, the bulk of revenue contributions from China can be associated with mature chips and its related equipment.

“In other words, we see relatively smaller contributions involving advanced and high-performance computing chips that are currently under US restrictions,” which also could mean that the majority of the revenue contributions from China should not be directly affected by the US export restrictions.

DBS has come out with a base case that has a 60% probability, saying that there are no further changes to the US restrictions, and that they remain the status quo.

Their next most likely occurrence at 30% will be their bear case, which assumes an intensifying chip war with broader restrictions on less advanced chips, as well as more companies facing restrictions.

And finally, DBS’s bull case, with only a 10% chance, will assume a relaxation or narrowing of restrictions on improving US-China tensions with restrictions being relaxed on more companies.

Their picks in this sector are Hong Kong-listed SMIC and Hua Hong, Taiwan-listed TSMC, and in Singapore, UMS Holdings and Venture Corp.

As at 3.26pm, shares in UMS and Venture are trading at $1.23 and $17.44 respectively.

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