By Asa Fitch and Bob Davis 

The U.S. semiconductor industry is pressing to get out of the firing line between the U.S. and China, warning its position as the global market leader could become a casualty of the trade spat.

The industry is ramping up its lobbying with a new report spelling out potential costs of largely severing U.S. chip-supply ties with China.

The effort comes as cabinet-level officials are set later this week to meet and discuss proposed changes to Commerce Department regulations that would further restrict U.S. sales to Chinese companies that U.S. officials have said pose espionage risks. Some in Washington also believe these companies purloin U.S. technology, according to people familiar with the administration's discussions.

The chip industry is one of the top U.S. exporters and one of the few sectors that still generates a trade surplus, largely driven by sales growth in China. But many in the Trump administration want to limit those links and get chip makers to do more of their manufacturing work in the U.S.

Chip companies have already lost sales from dueling tariffs both sides have imposed and from limits the U.S. has put in place on sales to Chinese telecom giant Huawei Technologies Co., citing national-security concerns. President Trump last month indicated he was eager for U.S. companies to be able to freely sell products to China. But, according to people familiar with the matter, administration officials leery of dealing with China are pushing for additional trade restrictions by invoking further national-security concerns.

Such measures, the Semiconductor Industry Association says, would do lasting harm to companies that made Silicon Valley a byword for U.S. innovation and help the country maintain a technological and military edge over global rivals.

Export restrictions can help safeguard U.S. national security, "but they must be targeted to avoid undermining America's longstanding global leadership in semiconductors," said Keith Jackson, chief executive of ON Semiconductor Corp., an electronic-components supplier based in Phoenix.

The regulations, if implemented, could cost U.S. chip makers about $36 billion in revenue, according to a new industry-commissioned, Boston Consulting Group report seen by The Wall Street Journal. The hit, the report said, would be bigger than the impact on U.S. companies from China's push to become more self-reliant in this field, as outlined five years ago in a plan called "Made in China 2025." The Trump administration regularly cites that effort -- a comprehensive strategy to advance China's domestic industrial base -- as a reason for its trade offensive against China.

A complete severing of technological ties with China would eventually cede U.S. market leadership to South Korea in the short term and could make China the global leader in the long term, the BCG report says. If shipments of U.S. chips and chip-making equipment to China were stopped, and China banned imports of U.S. electronics and software, it could cost the U.S. companies $83 billion in annual sales, more than one-third of their total in 2018, according to the study.

U.S. chip executives say pressuring China without damaging domestic manufacturers is difficult because of the tightly woven global supply chain in the tech industry. "All the regions of the world are connected commercially very closely. Disturbing one corner impacts all," said Risto Puhakka, a semiconductor manufacturing expert at VLSI Research Inc., a market-research firm based in San Jose, Calif.

For some Silicon Valley employees, the tensions between the U.S. and China already are having an impact. Chip maker Xilinx Inc. this year said it would cut about 7% of its workforce, blaming, in part, the trade tensions.

"The unprecedented change in U.S.-China relations and trade clearly has an impact on the industry, and specifically, our business," Chief Executive Victor Peng said at the time.

The SIA plans to use the new report as the backbone of its lobbying campaign to sway the Trump administration and Capitol Hill to allow companies to continue to supply Huawei and other Chinese companies when the products sold don't endanger U.S. national security. In 2018, about 36% of U.S. semiconductor company revenues, or $75 billion, came from sales to China, the SIA estimates.

The new restrictions under consideration in Washington include narrowing the products chip makers are allowed to ship to Huawei without a Commerce Department export license.

U.S. companies have been restricted from selling to Huawei since May. A rule that allowed entities outside the U.S. to sell to Huawei if products were less than 25%-U.S.-made could be revised, lowering the threshold to 10% and thus expanding its application to more goods.

The Commerce Department also might require licenses for the sale of tools used in the chip-manufacturing process if those machines are used to produce components for HiSilicon, Huawei's semiconductor subsidiary, according to people familiar with the matter.

Separately, proponents of tougher restrictions on China have suggested designating more semiconductor-manufacturing tools to fall under what is known as the Wassenaar Arrangement, a multinational agreement to control the export of dual-use goods with civilian and military applications, according to a person familiar with the matter. That would subject their export to China to more scrutiny.

Made in China 2025 goals themselves threaten to reduce U.S. semiconductor-market share to as low as 43% from 48% in 2018, according to the BCG report. Further decoupling because of additional U.S. trade restrictions, the report said, could lead U.S. market share to fall as low as 30% of global sales.

Huawei has already successfully replaced some U.S. components with ones sourced elsewhere, in a sign of how big the commercial stakes are for U.S. companies. The Chinese tech company also has said it now can make 5G base stations, a crucial piece of equipment to deploy the superfast cellular networks, entirely without U.S.-made parts.

The sales losses could have other, long-term repercussions for U.S. companies, industry officials say. Among them, they could starve firms from cash needed to fund research and development, which helps U.S. companies develop smaller and faster transistors and maintain a technological edge.

"They make a bunch of money and plow it back and take a big risk to go down one more size. Historically, that's been how we've been able to stay ahead," said Robert Atkinson, the founder and president of the Information Technology and Innovation Foundation, a Washington, D.C. think tank.

Write to Asa Fitch at asa.fitch@wsj.com and Bob Davis at bob.davis@wsj.com

 

(END) Dow Jones Newswires

March 09, 2020 05:44 ET (09:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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