Proposed Restrictions on Technology Transfers to China Leaves Some Tech Companies in Limbo

US precision chip equipment makers could be hardest hit

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Jun 28, 2018
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Semiconductor equipment makers are nervous about the latest trade spats with China. And, they should be worried, as many stand to lose a substantial amount of business if President Trump’s proposals for constraints on U.S. technology transfer to China are implemented.

For a number of weeks, the administration has advanced a two-part plan to restrict Chinese companies from securing advanced U.S. technology. This would include prohibitions on Chinese companies investing in U.S. tech companies. At the same time, technology exports to China would be limited. Both prongs of the plan are being justified on national security grounds.

The goal of the restrictions is to stymie China from advancing its ambitious technology plans detailed in its “Made in China 2025.” The goal is to become a world leader in 10 broad areas of technology, including information systems, aerospace and electric vehicles.

The announcement concerning technology transfers caused investors to exit some of the best performing tech stocks. On Monday, the Dow Jones Industrial Average was down 49, before closing at 328 — a 1.8% decline. Lately, however, the president seems to be equivocating on the issue.

Concern over technology transfers to China didn’t begin with the Trump Administration. There has long been concern relating to China’s theft of America’s advanced technology.

China has exhibited a callous disregard for American intellectual property rights as well as other proprietary technology it has acquired. According to defense analysts, China’s production of its recent stealth fighter borrowed heavily from top secret U.S. technology that Beijing stole by hacking into defense contractor’s computer systems through what amounts to cyber warfare.

China has made a direct and provocative challenge to U.S. interests in the Pacific with its aggressive policies in the international waters in the South China Sea, notably its claims to the Spratly Islands that it is using for military purposes. Thus, though the sales of the chip makers equipment to China may not directly put U.S. defense secrets at risk, assisting a country that has increasingly become a potential adversary with its ability to achieve a domestic semiconductor operation could indirectly harm U.S. interests, as at present China lacks the specialized machinery and technology necessary for large-scale chip production.

Should the technology transfer proposed restrictions be implemented, a number of different companies in the tech sector would be at risk. The semiconductor equipment corporations could be the hardest hit in any trade war. China has been an increasingly large buyer of this precision equipment to facilitate the development of its own homegrown semiconductor sector.

By order of revenue generated from operations in China, the semiconductor equipment firms that stand to lose the most are: Applied Materials, (AMAT, Financial), Lam Research (LRCX, Financial), ASML Holding (ASML, Financial) and KLA-Tencor (KLAC, Financial).

Although Intel (INTC, Financial), Samsung (SMSN, Financial) and Taiwan Semiconductor Manufacturing (TSM, Financial) have accounted for the bulk of this sector's sales, Cowen & Co. estimates that sales to China accounted for approximately 14% of trailing 12-month revenue for the eight semiconductor tool companies Cowen & Co. follow.

Unsurprisingly, China has responded unfavorably to the proposed restrictions, as it would seriously hamper one of the goals of its “Made in China 2025" plan that seeks to develop a homegrown semiconductor industry that over time would be self-sustaining.

I have no position in any of the securities referenced in this article.