The US Department of Commerce’s Bureau of Industry and Security issued new regulations on 7 October 2022, which were expected to bring about protests from semiconductor equipment makers and foundries. While Washington insists that the measures are designed to protect US intellectual property and defend national security, they reflect the heavy competition in the global semiconductor equipment business.
According to 2019 figures, the United States had a 17 per cent share of overall semiconductor manufacturing equipment exports, trailing behind Japan (28 per cent) and closely followed by the Netherlands (17 per cent), Singapore (10 per cent) and South Korea (10 per cent).
The United States is dominant in the upstream integrated circuit design process, but it faces competition from the Netherlands and Japan in the midstream integrated circuit manufacturing process. It also does not have a substantial market share in the downstream integrated circuit packaging and testing process.
The competitive nature of the global semiconductor industry is particularly salient in lithography equipment (dubbed scanners or steppers). The Dutch company ASML Holding NV dominates this market, which was valued at US$11.8 billion in 2022 and is expected to grow at a compound annual growth rate of 10 per cent, reaching US$18 billion by 2025.
The current moves to deter the Netherlands and Japan from exporting semiconductor equipment to China aim to undercut China’s access to high-end chip manufacturing equipment. But these efforts might also lead to a shift in market share depending on how export controls are implemented.
After months of deliberation amid negotiations with the United States, ASML announced it would prevent the sales of specific models of semiconductor equipment to an unnamed country. The affected models were the TWINSCAN NXT:2000i, the NXT:2050i and the NXT:2100i, which are immersion deep ultraviolet machinery used for lithographic processes in the most advanced logic and memory chips.
ASML has announced that the added measures will not affect its revenue, as it is currently operating at capacity. But given that the US Department of Commerce’s Bureau of Industry and Security has already prohibited the sale of extreme ultraviolet machinery to China, ASML must plan its next steps wisely and diversify into other jurisdictions. The additional measures are pending implementation until the Netherlands enacts new laws and ASML is bound by any existing contracts to deliver machines until that time.
Japan has expressed its intent to participate in export controls, announcing its own export control mechanisms in March 2023. But Japanese Foreign Minister Yoshimasa Hayashi subsequently paid a visit to his counterpart in Beijing, Qin Gang, given the possible backlash from China. As expected, China has contemplated placing export controls on rare earth materials in retaliation. There is speculation on which Japanese companies would be subject to the ban on semiconductor equipment sales to China, with the most likely being Tokyo Electron.
Depending on how Japan implements the export curbs, Japanese companies Canon and Nikon may seek to revive their lithography businesses, a market in which they once flourished but in which they have lost market share as they have instead focussed on camera lenses.
The Bureau of Industry and Security measures announced on 7 October 2022 have led to a plunge in semiconductor equipment sales to China, demonstrating the immediate impact of the measures on US companies such as Applied Materials, KLA and Lam Research.
The implementation of US export controls on semiconductor equipment may reset the competition for market share and created uncertainty for major players. Other countries such as Singapore, Germany and South Korea are likely to be subject to additional measures in the near future.
As access to the Chinese market shrinks under US export controls, it is bound to spur heightened competition and geo-economic conflict between the United States and China.
June Park is a political economist and an inaugural Asia Fellow of the International Strategy Forum at Schmidt Futures.