The semi–cold war between the U.S. and China just got a whole lot icier, with the world’s leading chipmakers caught in the middle at a particularly inopportune time.
Semiconductor executives and analysts spent the weekend assessing the fallout from President Joe Biden effectively weaponizing the global semiconductor industry against China—and the results aren’t great for chip companies.
Under sweeping new export controls instituted Friday by the Biden administration, U.S.-based companies cannot sell advanced semiconductors—including those used for A.I. and high-performance computing—or equipment used to fabricate newer chips to China. In addition, foreign firms cannot sell advanced semiconductors to China if the chips were developed using American-made technology, software, or equipment. A new restriction on the sale of chip manufacturing equipment also is expected to blunt China’s advanced—and perhaps even rudimentary—semiconductors.
By most accounts, the freeze marks the most dramatic use of export restrictions in a decade, with the potential to curb billions of dollars in commerce.
For the American government, the case for strict export controls is straightforward.
Chipmakers in the U.S. and allied nations are years—if not decades—ahead of their Chinese counterparts from an innovation standpoint. Advanced chips represent the new frontier of warfare, as well as economic and technological dominance. Ergo, cutting off China’s ability to import all-important semiconductors will slow its geopolitical ascendance and aggression. (Whether this theory, laid out rather simplistically here, comes to fruition is hardly certain.)
For semiconductor companies, however, the export bans become the latest headache for an industry already suffering from a sudden-onset migraine.
Following a pandemic-induced period of surging market values—a product of skyrocketing demand, limited supply, and massive margins—the chip outlook has cratered in recent weeks. Several firms have warned that chip demand is plummeting, largely the result of a weakening global economy.
Investors haven’t taken too kindly to these developments. The Philadelphia Semiconductor Sector, a weighted index of the 30 largest chip companies, was down 41% year to date before Friday’s announcement, wiping out last year’s gain of 29%. This month alone, chipmaking giants Samsung, AMD, and Micron have issued quarterly revenue projections that fell stunningly short of earlier estimates. (One notable exception: Taiwan Semiconductor Manufacturing Co., the global leader in advanced chip fabrication and a chief Apple supplier, beat quarterly revenue estimates.)
The additional economic fallout from the export controls isn’t yet known. The U.S. could issue licenses that blunt the impact of sanctions. Conversely, China could retaliate against American and U.S.-allied companies.
Wall Street, however, expects some kind of burden. The Philadelphia Semiconductor Index tumbled 6% on Friday and fell another 3% in midday trading Monday. Firms with deeper ties to China have been particularly battered since the announcement, including Nvidia (down 11% between Thursday’s close and midday Monday) and Applied Materials (down 10%).
Industry observers reinforced the pessimistic outlook in media interviews and client notes.
Paul Triolo, senior vice president for China and technology policy lead at consultancy firm Albright Stonebridge Group, told the Financial Times that the full impact will “take some time to become clear.” However, he expected the export controls will at least “slow innovation in both China and the U.S., ultimately costing U.S. consumers and companies hundreds of millions or even billions of dollars.”
In a client note cited by Bloomberg, Citigroup analysts wrote: “This will not only be negative to the Chinese semiconductor industry but also indirectly impact global semiconductor makers’ business opportunities longer term.”
And Sarah Kreps, director and founder of Cornell’s Tech Policy Institute, warned in an interview with the Wall Street Journal that the U.S. chip companies could lose market share if American allies keep selling their nonrestricted chip products to China.
Biden’s maneuver, if executed correctly, could prove shrewd in the long run, helping to ensure that global free markets thrive. For that to happen, though, it’ll cost chipmakers in the short term.
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In need of a reboot. Global personal computer shipments fell 15% year over year in the third quarter, according to figures released by the International Data Corporation and reported by CNBC. The drop reflects slowing demand for PCs following a pandemic-related surge that lasted about two years. HP and Dell saw their shipments tumble more than 20%, while Apple bucked the trend and saw its PC output rise 40%.
Going greener overseas. Amazon confirmed plans Monday to spend about $1 billion over the next five years on electric delivery vehicles used in Europe, The Verge reported. The e-commerce giant said it expects to roughly double the size of its electric fleet to about 10,000 vans and 1,500 heavy-duty vehicles following the investment. Amazon has pledged to reach carbon-neutral status by 2040, though the company’s carbon emissions increased by 18% year over year in 2021.
Outside the scope. Federal antitrust regulators withdrew a key allegation levied as part of their lawsuit targeting Meta’s planned acquisition of virtual reality fitness app developer Within, the Wall Street Journal reported late Friday. The Federal Trade Commission is no longer claiming that a Meta-developed game, Beat Saber, constitutes a fitness program that directly competes against an app created by Within. Critics of the lawsuit have argued that Beat Saber is not a fitness app, while also lamenting other aspects of the FTC’s intervention.
FOOD FOR THOUGHT
Losing the troops? One year ago this month, Facebook announced plans to change its name to Meta as part of a corporate shift in focus toward the so-called metaverse. And so far, change hasn’t been easy. The New York Times reported Monday that company insiders are frustrated with buggy products, ever-changing strategies, and enormous budgets for unproven projects dedicated to CEO Mark Zuckerberg’s vision of pioneering the metaverse. While the Facebook and Instagram parent continues to project confidence in the metaverse, loosely defined as an immersive and social virtual-reality experience, some employees are losing faith in the endeavor. Meta is expected to spend roughly $10 billion on virtual- and augmented-reality projects this year.
From the article:
Mr. Zuckerberg’s zeal for the metaverse has been met with skepticism by some Meta employees. This year, he urged teams to hold meetings inside Meta’s Horizon Workrooms app, which allows users to gather in virtual conference rooms. But many employees didn’t own V.R. headsets or hadn’t set them up yet, and had to scramble to buy and register devices before managers caught on, according to one person with knowledge of the events.
In a May poll of 1,000 Meta employees conducted by Blind, an anonymous professional social network, only 58 percent said they understood the company’s metaverse strategy. Employees have also grumbled about the high turnover and frequent shuffling of employees as Mr. Zuckerberg’s priorities change. Inside Meta, two employees said, some workers now jokingly refer to key metaverse projects as M.M.H., an acronym for “make Mark happy.”
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BEFORE YOU GO
A costly error? PayPal is paying the price for a fine print fiasco. The fintech giant’s shares sank 5% in midday trading Monday after eagle-eyed users noticed that the company’s new terms of service included a potential $2,500 fine against those who spread misinformation on its platform. PayPal officials quickly rescinded the provision, saying that it was added by mistake and never intended as a company-approved term of use. Still, that didn’t stop a wave of criticism from prominent libertarian- and conservative-minded pundits (Elon Musk included) who saw the wayward guideline as Silicon Valley’s latest attempt at censorship. Coincidentally, PayPal took the top spot Monday on Fortune’s eighth annual Change the World list, primarily because of its Ukraine relief efforts.
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