Chip ban: A Chinese retaliation could be ‘disastrous’ for U.S. companies, analyst says

Futurum Research Principal Analyst Daniel Newman and Race Capital General Partner Edith Yeung join Yahoo Finance Live to discuss the implications of the U.S. ban on selling microchips to China.

Video transcript

- Well, China's Ministry of Industry and Information Technology reportedly met with leading semiconductor companies over the past week, seeking to assess the fallout from the Biden administration's chip restrictions on China. The administration now also reportedly exploring the possibility of new export controls to limit China's access to emerging computing technologies. Well, what could all this mean for the path forward in the semi sector?

Let's bring in Daniel Newman. He's Futurum Research principal analyst. We've also got Edith Yeung, Race Capital general partner, here to break it all down for us. Edith, I want to start with you because I think it's worth noting an interesting stat that you have put out here, in terms of what this exactly means.

When you look at it, China consumes more than 75% of the semiconductors globally, but produces only about 15%. And we have heard so many reports since the administration came down with these tech controls about not just panic, but just full-on re-assessment happening. What are you hearing from those on the ground?

EDITH YEUNG: I think, right now, what China is trying to assess is if the intent from the US government is to make sure that China cannot even buy or produce or even maintain. What does that mean? And this actually could impact many, many industries. We're not just talking about computer or smartphone, EV. There's all sorts of industry actually really need this chipset to continue to run.

I don't think there is a conclusion yet, but what I'm worried about that if China really wants to be as aggressive as the US and retaliate, there could be a lot of impact for all the other companies in the US. And I think this is beyond just impact in terms of revenue for Intel or Qualcomm or Nvidia, or of course we need to watch out for TSMC. But if they retaliate in other industries, this is going to be disastrous.

- And we'll get to the impact on some of those companies in just a bit, but really-- a follow-up here, Edith-- what's the capability of these Chinese companies to be able to be self-sufficient when you're talking about advanced chips?

EDITH YEUNG: So for the past few years, President Xi is trying very hard to make sure that China, as a country, can be independent from buying from Nvidia, Intel, or Qualcomm. But I think personally, I think it's still very, very far away to get to that level. I don't think China is self-sufficient yet, even though, you know, the TSMC SMIC is sort of the TSMC for China. But they're still-- they're far, far-- TSMC is still far ahead in terms of what is being produced locally.

- Daniel, as Edith highlighted, I mean, these-- these as in the companies in China-- are major customers for American chip designers, chip makers, too. There's an interesting report that BCG put out a few years ago that said that full tech control, as in a complete ban, could lead to upwards of 40% drop in revenue for some of these big names in the US. How are you assessing that impact right now?

DANIEL NEWMAN: Yeah, I think we ought to look at the more broad economic story of what's going on here. I think President Xi Jinping is-- has been very declarative about the intention of China to be the leading designer and manufacturer of leading-edge semiconductors. The US has put a massive investment with the Chips Act to take more control of its own fate and its supply chain.

We have a lot of micro-aggressions going on in the South China Sea. And right now, this is one of the things-- China is very dependent on US intellectual property and engineering capabilities in order to manufacture these leading-edge chips. So a lot of this is focused on things like AI, high-performance computing, which are going to not only enable innovation in, you know, as our other guest said, in smartphones and EVs, but in biotechnology, in, you know, financial services and money laundering and fraud, and things that need a lot of compute power.

And so the US right now is looking at the opportunity to sort of control the fate of the development of leading-edge technologies, chipsets. And of course, this puts strain on both sides. It puts strains on US manufacturers and designers of semiconductors. It also puts strain on equipment makers, because part of this ban is also the shipping of equipment, the export of equipment that China needs in order to build more leading-edge capacity.

- Yeah.

DANIEL NEWMAN: So as I see it, it's a very interesting moment because it's not only macroeconomic. It's also about their economic policy and national defense and security.

- But if we're talking strictly, Daniel, what it means for businesses, I mean, if China consumes more than 75% of this and that market is effectively blocked off, you know, if the Biden administration really does put these controls in place and cracks down, what does that mean for these companies, in terms of revenue?

DANIEL NEWMAN: Well, right now, it's only very specific chips. And everybody's been assessing this. It's not the whole-- you know, it's not the whole portfolio of semiconductors. Folks I've listened to, you know, Jensen Huang at Nvidia, they're already accounting for what they think are going to be components of their portfolio and the impact that it might have on revenue. And of course, we've seen the early warnings coming out from these companies.

There's certainly a chance that this could have a much bigger waterfall effect, but I think these companies have already looked at the situation. They're assessing it. And in this sort of tough macro and tough economic period, they're starting to put those warnings out about what it could mean. I'm not overly alarmed that it's going to be the whole portfolio of all chips, lagging ads that are used to manufacture our refrigerators and air conditioning systems. I think this is about leading the arms race for the next generation of technology in areas like supercomputing, high-performance compute, and artificial intelligence.

- Edith Yeung, Race Capital general partner, and Daniel Newman, Futurum Research principal analyst, appreciate both of you joining us today. Thanks so much for your time.