BRUSSELS — The chips industry faces a different kind of summer heat: Chinese and Western governments meddling with its supply chains.
From Tuesday, China is putting the brakes on the export of two critical metals for making chips — gallium and germanium — in retaliation for the United States, the Netherlands and Japan curbing exports of some advanced chip printers. The Dutch restrictions, published before summer, will apply from September 1.
This tit-for-tat trade war is unfolding against the backdrop of a global subsidies race to re-shore and secure microchip production. What began in a time of pandemic-era shortages is now a race to avoid supply chokepoints in case conflict breaks out in Taiwan, a major chips hub.
Despite China’s stranglehold on raw materials — with, for example, 95 percent of the world’s supply of primary gallium — chips companies have stayed relatively quiet about the incoming restrictions in their recent quarterly earnings reports.
Europe’s leading chip makers, like NXP Semiconductors, rarely mention China’s upcoming raw materials restrictions in their earnings releases or follow-up calls with analysts.
There was equal indifference to the Western restrictions that provoked the Chinese counter-move. ASML, the Dutch chip equipment supplier that is the main target of the Dutch export controls, said the measures would not have a “material impact” on the firm’s 2023 outlook, nor on longer-term scenarios.
But that doesn’t mean there won’t be any consequences.
Because Chinese gallium and germanium producers will have to seek export permits, much will depend on how rigorous the permitting procedure is, analysts from research firm Wood Mackenzie wrote in a report in early July with the ominous title, “Chips wars: a sign of things to come?”
“If the permitting process restricts the supply of raw materials to chip manufacturers outside China, this will impact downstream end-use markets, including electric vehicles,” the report reads. That brings back memories of the chips shortages in 2020 and 2021, which increased waiting times for car deliveries.
Particularly vulnerable countries in Europe: Germany — the second-largest importer of gallium after Japan — and the Netherlands.
Ramping up
A bigger concern, however, is that the current restrictions are only the start of a larger escalating trade war. “The concern is that this protectionism could escalate to other critical materials end sectors,” according to the Wood Mackenzie report.
ASML CEO Peter Wennink was already forced to comment during the company’s quarterly earnings presentation on media reports that more chip export controls out of the U.S. are coming: “Of course, we will and cannot respond to speculation.” But more in general, he had to admit during the same earnings call that there’s “significant uncertainty” in the market, citing “the geopolitical environment, including export controls” as one of the reasons.
The message: The industry is waking up to the fact that governments consider semiconductors to be strategically important and no longer hesitate to intervene to secure their national security interests.
Both the U.S. and the EU have rolled out multibillions’ worth of subsidy programs — the EU’s Chips Act (€43 billion) and the U.S.’s CHIPS and Science Act ($52 billion) — to lure private investments from U.S.-based Intel, South Korea’s Samsung or Taiwan’s TSMC.
If that’s the carrot tack, some experts point out that governments are also increasingly using the stick approach of export controls — and the current pace of restrictions between the West and China would have been unthinkable a few years ago.
Chris Miller, an associate professor of international history at Tufts University and author of the book “Chip War,” said last week at an event in Washington that he was “surprised by the success” of the U.S.-led effort to build a coalition on export controls.
“Zoom back five years ago, in 2018, ask anyone in this room: Would it have been possible to have established an export control regime bringing together countries from Europe and Asia? Most people would have bet against it,” Miller said.
It’s a new reality for the companies involved — and one that could have unintended consequences.
Intel CEO Pat Gelsinger summed it up at the Aspen Security Forum earlier in July: “Right now, China represents 25 to 30 percent of semiconductor exports. If I have 25 or 30 percent less market, I need to build [fewer] factories.”
That comment got a rebuke from U.S. Commerce Secretary Gina Raimondo, who said that she didn’t see “any inconsistency” between the export controls to China and the U.S.’s multibillion-dollar plan to re-shore chips capacity.
Brendan Bordelon contributed reporting from Washington.
