Requiring licenses for Huawei and its affiliates to use US-origin equipment or technology in the manufacture of semiconductor devices “could severely impact the US and global semiconductor and electronics industries, create confusion and uncertainty in manufacturing supply chains, reduce investment in new capacity, and lead to the design-out of US technology and US components.”
That’s the warning that Ajit Manocha, president of SEMI, the semiconductor equipment and materials industry association, sent to President Trump in a letter in early March.
These proposals had originated in the Department of Commerce, which also proposed expanding licensing requirements for shipment to Huawei and its affiliates of semiconductors produced outside the US and incorporating US content.
And on February 19 Trump already had tweeted his opposition to the proposals:
“The United States cannot, & will not, become such a difficult place to deal with in terms of foreign countries buying our product, including for the always used national security excuse, that our companies will be forced to leave in order to remain competitive. We want to sell product and goods to China and other countries. We don’t want to make it impossible to do business with us. That will only mean that orders will go to someplace else.”
Manocha thanked Trump for his comments, which in this case were spot on. But the trade executive has felt the need to keep pounding on the issue to be sure that’s the presidential last word.
With US producers accounting for roughly 40% market share outside the US, SEMI says, “over $21 billion in US equipment sales to non-US fabs could be affected.” That’s in addition to non-American companies using American equipment, components or technology to supply Huawei, which would be required to stop doing so until they’re licensed by the US government.
The 40% market share figure is key to both SEMI’s and Trump’s argument. Contrary to many reports on the subject, American companies are important but not dominant suppliers of semiconductor production equipment.
ASML of the Netherlands has a near-monopoly on lithography equipment with most of what’s left produced by Nikon, while Tokyo Electron and Screen Holdings of Japan make all the photoresist processing equipment.
These and other Japanese companies – including Hitachi High-Technologies, Kokusai, Disco, Advantest and Lasertec – are also strong in etch, deposition, dicing, inspection and test. According to VLSI research, seven of the top 15 makers of semiconductor production equipment are Japanese, four are American, two are European, one is Korean and one is a Hong Kong affiliate of a European company.
Commentators often assume that leading American equipment suppliers Applied Materials, LAM Research and KLA are essential suppliers, without which Huawei or other companies could not survive. But only KLA’s defect inspection and review systems would be difficult (although not impossible) to replace with non-American equipment.
Over the next two years, SEMI expects China to account for about 25% of total worldwide sales of semiconductor production, followed closely by Taiwan and Korea. America is expected to account for about 12%.
Last July, fed up with South Korean President Moon Jae-in’s policy of scoring domestic political points by reneging on agreements made by his predecessor over compensation for forced labor and “comfort women” sex-slaves during World War II, the Japanese government restricted exports of chemical products essential to the production of Korean semiconductors and cell phones. These included photoresists used in lithography, hydrogen fluoride used in etching and fluorinated polyimide used to make optical films.
The products are made primarily by Japanese chemical companies including JSR, Tokyo Ohka and Shin-Etsu Chemical (photo-resists), Showa Denko and Morita Chemical Industries (hydrogen fluoride), and Sumitomo Chemical and Kanto Denka Kogyo (fluorinated polyimide). Japanese companies control an estimated 90% of the markets for photoresists and fluorinated polyimide and 70% of the market for hydrogen fluoride etching gas.
Previously part of an extensive unhindered relationship between Japanese equipment and materials makers and Samsung Electronics, SK Hynix, LG and other Korean customers, each individual shipment of these products to Korea became subject to case-by-case Japanese government approval. To the dismay of corporate managers on both sides, this resulted in a large increase in paperwork, additional costs and delays.
In response, the South Korean government allocated more than $6 billion to support the efforts of Korean companies to develop and supply competing products. Small in scale and generally one or two product generations behind the Japanese, they now have a better chance of catching up. On top of that, DuPont recently announced plans to build a photoresist manufacturing plant in South Korea.
The political battle was then cranked up by South Korea’s decision to stop working with Japan under the General Security of Military Information Agreement (GSOMIA), which led in turn to Japan removing South Korea from its Group A “whitelist” of nations with which Japanese companies can trade with minimal oversight and restrictions. This alarmed the US, which – rightly fearing that the dispute benefited only North Korea – made strenuous efforts to bring its two allies to their senses.
In November, South Korea finally decided not to exit the GSOMIA and by December, Japanese high-tech chemical exports to South Korea had started to recover. In early March, the two countries held their second round of talks on export controls and agreed to continue the negotiations.
While there is little hope that political friction between Japan and South Korea will come to an end, business relations are getting back on track. South Korean chemical companies are likely to improve their technology and gain some market share over time, but a radical change of suppliers seems unlikely.
The question now seems to be: Will President Trump change his mind regarding restrictions on the use of American equipment, components or technology in the manufacture of semiconductor devices for Huawei? With a Chinese official having suggested that Covid-19 virus was brought to Wuhan by the US military, it’s a possibility.