On December 2, the U.SDepartment of Commerce’s Bureau of Industry and Security (BIS) enacted new semiconductor export controls, detailing restrictions affecting 140 entities, including Chinese equipment manufacturers, foundries, and even investment firmsThese regulations particularly target domestic equipment and the high bandwidth memory (HBM) market, introducing critical new rules that include:

• Enhanced limitations on advanced process semiconductors from mainland China, with new restrictions applied to 24 types of semiconductor manufacturing equipment and three categories of software tools for designing or producing semiconductors (EDA). This action now implicates 99 semiconductor equipment firms and 14 material companies in the updated entity list, significantly impacting American suppliers' procurement processes.
• New export controls on high bandwidth memory (HBM), essential for AI chips, prohibit independent HBM exports while exempting compliant logic chips and HBM integrated offeringsAny HBM stacks exceeding a bandwidth density of 2GB/s/mm² will now face export restrictions to China.

The U.S. has consistently tightened semiconductor exports to China under the guise of national security, responding to these pressures by further advancing the independence of its domestic semiconductor industryIndustry insiders view this latest wave of restrictions as a catalyst for enhancing domestic production capabilities, mirroring trends observed over the past few years.

This realignment affects not only the semiconductor industry but also the larger global supply chain, with adverse repercussions for consumersBasic economic principles indicate that any seemingly "rational" non-market behavior harms efficiency.

In particular, the semiconductor sector has long achieved a state of global division of labor; abrupt disconnection will only increase friction within the supply chainThe efficiency derived from specialization has been evident, with the U.S. driving innovation, Europe and Japan contributing equipment expertise, and China showcasing unparalleled production assembly efficiency

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This collaboration fulfills the classical economist David Ricardo's theory of comparative advantage presented in his seminal work, "Principles of Political Economy and Taxation."

This global division of labor has sustained the smartphone market, valued at around $500 billion, enabling consumers to acquire sophisticated technological products at relatively affordable pricesSuch cooperation represents an exemplary case of technological equality in the semiconductor field.

Previously, the U.S. played a crucial role in this cooperative structure; however, in recent years, it has exploited its leading position to sever these ties, leading to increased chain costs ultimately borne by consumers worldwideThis future scenario suggests that users in developing countries may find it challenging to purchase high-performance smartphones for under $100. Meanwhile, consumers in Europe and North America, grappling with inflation, will face further burdens imposed by their domestic industry policies.

Furthermore, semiconductor equipment manufacturers are bracing for significant challengesThe export control measures have directly impacted the performance of overseas equipment firms, with some businesses potentially facing substantial downturnsNormal commercial interactions involving the sale of equipment to Chinese foundries are now hampered by stringent export reviews, conducted with a presumption of culpability.

Despite the evident desire among equipment firms to maintain business relations with China, their operations have been severely compromisedAs mainland revenue diminishes for these overseas equipment firms, certain patterns are emergingThe financial reports from ASML, a leading semiconductor equipment company, provide irrefutable evidence of these evolving dynamicsIn the booming U.S. stock market of 2024, ASML found itself among the year’s poorest-performing tech firms.

Following an impressive run that peaked at $1105.461 per share in July 2023, ASML's stock price has witnessed a steady decline

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Although ASML possesses superior technology and enjoys a monopoly in cutting-edge extreme ultraviolet (EUV) lithography, its quarterly earnings reports for 2024 illustrate troubling trendsOrders from mainland China have plummeted, culminating in a staggering 50% dip in new contracts compared to the previous quarter.

On October 16, ASML released its Q3 2024 financial report, revealing new contracts totaling €2.6 billion—flat year-over-year but more than 50% lower than the prior quarter, primarily due to a 43% drop in DUV contract ordersThe escalation of U.S. restrictions has significantly hindered China's ability to purchase essential DUV lithography machines from ASML.

Without new demand to bolster its prospects, ASML has revised its revenue guidance for 2025 downward, indicating a sharp decline in its income reliance from mainland China, now expected to fall to about 20%, representing a reduction of more than 50% in its operating revenue.

The market's reaction to these disclosures was swift; ASML's stock price plummeted nearly 20%, with international investors who had heavily invested in the firm incurring significant lossesThe detrimental consequences of supply chain decoupling have thus affected overseas investors alongside consumers.

Interestingly, as ASML’s orders fell short of expectations, the Chinese semiconductor industry has remained relatively unfazedAnticipating U.S. jurisdictional overreach, companies in China had preemptively placed orders with international equipment manufacturers to cover anticipated demands for two to three yearsFor firms like ASML, regaining lost market demand post this order surge will likely prove extremely difficult.

The recent sanctions issued by the U.S. have seen little to no pushback from companies in Japan or the Netherlands, with U.S.-based equipment firms opting for silence on the matterSuch abrupt restrictions significantly interfere with the normal production schedules of overseas equipment providers, consequently undermining their commercial interests.

China’s manufacturing prowess cannot be easily dismissed, as it capitalizes on its efficiency to dominate global smartphone assembly, accounting for over 80% of production

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As the largest manufacturer of various consumer products, China's importance escalates, emerging as the leading single-chip market worldwide.

In the context of supply chain detachment, China has risen to become the most crucial wafer capacity builder in recent yearsData from the Semiconductor Equipment and Materials Institute reflects that the global semiconductor equipment market soars at $100-120 billion annually, with China representing the largest consumer demand—a share increasing from 26% in 2020 to 34% in 2023, projected to drive nearly 47% of global equipment demand as domestic fabs reach peak operations in 2024.

Conversely, the U.S., which has advocated for manufacturing resourcing, shares a meager 10% of global equipment demand—a figure that may drop to just 7% in 2024. Despite the introduction of significant subsidies through the CHIPS Act, the long-awaited semiconductor manufacturing revival in America has shown little progress over five years, with only TSMC having made substantial investments apart from others yielding trivial advances.

Interestingly, recent reports suggest that American manufacturers are reconsidering their plans amidst geopolitical tensionsFor instance, on December 4, Bloomberg reported Microchip Technology's CEO disclosing the halt of formal negotiations regarding subsidy agreements under the U.S. semiconductor act, which would only cover about 15% of investment costsThe company preferred not to incur the remaining 85% of expenses.

The ongoing situation reveals the futility of reversing industry inefficiencies; the trajectory for "reshoring" semiconductor production in America appears increasingly misguidedGiven the highly technical nature of semiconductor equipment, the market remains predominantly controlled by established overseas leadersFirms such as ASML and the American companies Applied Materials and KLA Corp dominate critical segments of the industry.

ASML leads the lithography business, while American firms Applied Materials and KLA dominate film deposition and etching equipment, with Tokyo Electron also retaining significant shares

Monitoring Applied Materials' quarterly reports over the past decade reveals striking shifts in the global semiconductor landscape, particularly following the U.S.-led globalization retrenchment that intensified post-2018.

Historically, by 2018, China represented approximately 18-20% of Applied Materials' revenuesIn the wake of that year, the urgency for China's semiconductor localization sped up, leading to a remarkable increase in equipment demand, which eventually rose to around 30%. If trends continue, the figure might soar to 40% in 2024, given the imminent launch of new 12-inch wafer fabrication plants.

Corporate operations hinge fundamentally on efficiency and profit motives; thus, American, Japanese, and European equipment manufacturers will likely struggle to sustain stable operations without engaging the vast Chinese marketThe irony of the situation lies in the fact that during the years of heightened restrictions, U.S. equipment companies have grown increasingly reliant on revenues from mainland China.

Notably, Applied Materials is not alone in this scenario; similar patterns emerge among other equipment firmsFor instance, Lam Research has reported that up to 42% of its revenue now stems from mainland China, while Tokyo Electron captures an impressive 47%, and ASML’s revenue from China has also increased significantly during these years.

It is clear that the Chinese market has become essential; it sustains a substantial portion of U.S., Japanese, and European demandNo other single global market can adequately substitute for the void left by Chinese disengagement.

Moreover, China’s semiconductor sector has made remarkable strides backed by both scale and policy supportFor example, in the first quarter of 2024, Semiconductor Manufacturing International Corp. (SMIC), China’s leading foundry, elevated itself to become the world’s third-largest foundry—trailing only TSMC and Samsung—with a 6% market share

In response, semiconductor equipment firms are rapidly advancing their domestic production as they cater to growing fabrication demands.

Post-announcement of newly imposed restrictions, the semiconductor industry has shown a surprising degree of calmHomegrown companies announced promptly that the impact of these restrictions on their operations would be minimalThe forced disconnection from the Chinese market inevitably inflates the cost of consumer electronics, accelerating the domestic production of equipment and further constraining the market shares of overseas suppliers.

In fact, many international semiconductor manufacturers are now carefully weighing their options amid contrasting equations, still reluctant to forfeit the benefits that arise from the Chinese marketRecently, notable developments have emerged with leading European semiconductor firms such as STMicroelectronics, NXP Semiconductors, and Infineon Technologies commencing local chip manufacturing within China.

For instance, STMicroelectronics announced collaborative initiatives with the Chinese foundry Huahong Semiconductor to establish a new production line for 40nm STM32 micropcontrollersTheir commitment underscores the strategic significance of local manufacturing for maintaining competitive advantagesConcurrently, Infineon announced plans to build a supply chain specifically for chips in China during a groundbreaking ceremony for a twelve-inch fab with Vanguard International SemiconductorSimilarly, Infineon's CEO Jochen Hanebeck has highlighted localized production efforts for commercial-grade products as essential to fostering closer relationships with Chinese customers.

Several U.S. semiconductor companies, despite geopolitical sensitivities, continue to invest in China, underscoring their reluctance to abandon a market of such magnitudeTexas Instruments recently announced full-scale operations at its second packaging and testing facility in Chengdu, effectively doubling its manufacturing capacity in that region

Similarly, MPS Semiconductor broke ground on its global R&D and testing facility in Chengdu, projected to test up to 20 billion power management chips annually post-completion.

Even Intel has continued to invest, with yearly expenditures in China surpassing $13 billion in 2022 and further expansions of its Chengdu packaging and testing center announced for 2024.

Drawing from Adam Smith's "The Wealth of Nations," which elaborated on the benefits of labor division in enhancing productivity and wealth, the anti-competitive measures of the U.SDepartment of Commerce undermine essential principles of efficiency in the semiconductor spaceIn a world increasingly driven by specialization and technological interdependence, the notion of cutting ties with key markets only serves to exacerbate inefficiencies in the semiconductor industry.

In 2019, TSMC's founder Morris Chang expressed a grim perspective, asserting that "free trade in semiconductors, especially the most advanced ones, is now a thing of the past." He reflected on the challenges posed to sustained growth within such an environmentThose grappling with similar thoughts extend beyond just TSMC, highlighting the larger implications for the industry as it navigates an increasingly complex landscape.