- Semiconductor manufacturers facing China chip sales limits
- Restrictions could also cut future sales by driving innovation by companies like Huawei
US companies are starting to feel the impact of the Biden administration’s moves to stop China importing top artificial intelligence (AI) technology, at the same time as analysts argue that the restrictions could give fresh impetus to Chinese businesses.
The first round of export controls were announced in October 2022 by the US Department of Commerce, and banned the selling of high-end GPUs such as Nvidia’s (US:NVDA) A100 and H100 to China. In response, Nvidia came up with two less powerful models – the A800 and H800 – that did not trigger the restrictions.
This game of cat and mouse continued, and in October 2023 the commerce department blocked Nvidia’s A800 and H800 chips. Then in December last year, commerce secretary Gina Raimondo made it clear the government would do whatever it takes to prevent AI chip exports to China.
Speaking at the Reagan National Defence Forum, she said the US would immediately ban any chips that allow China access to “AI special sauce”, and called Nvidia’s approach “not productive”. “If you design a chip around a particular [restriction], that enables [China] to do AI, I’m going to control it the very next day,” she said.
Last month, Raimondo followed through on this threat by banning AMD’s (US:AMD) AI chip, designed specifically for its Chinese customers. This is a problem for AMD, given that last year China made up 15 per cent of its revenue. Its share price dropped 2 per cent in response to the news.
This is the first time the US has denied an individual country access to a suite of semiconductors and equipment. “We’re building a more muscular commerce department, to take on these challenges and you will see that’s here to stay,” Raimondo added.
But the move wouldn’t have come as a surprise to AMD given it cited this as a concern in its annual report, saying, “even new products that fall below the licensing thresholds may not be successful because we have no assurances the Bureau of Industry and Security will agree that the alternative products are not subject to the new licensing requirements”. Raimondo has called for better funding for this bureau, which sits inside the commerce department, to allow for even greater controls.
The effort to prevent China getting access to these chips might be slowing the country’s technology development, but it hasn’t halted it completely. In September, Chinese company Huawei released its newest phone, the Mate 60, powered by a 2nd generation 7nm chip, the most advanced semiconductor made in the country since restrictions were put in place.
Apple being replaced
Powered by this new chip, the Mate 60 is now taking market share from Apple (US:AAPL). This, combined with an overall slowdown in buying, saw Apple’s China revenue from the iPhone drop 24 per cent year on year in the first six weeks of the year, according to research firm Counterpoint. Meanwhile, Huawei’s revenue rose 64 per cent, with Counterpoint saying it “continued to attract and satisfy strong demand for its Mate 60 series”.
The concern for Apple is that China has been one of its fastest-growing markets over the past few years. In 2020, it made $40.3bn revenue from the country, and by 2022 this had risen to $74.2bn, making up 19 per cent of the total.
In 2023, Apple’s China revenue slipped 2 per cent to $72.6bn. On the earnings call, chief executive Tim Cook tried to ease concerns, saying “on the good news side, we had solid growth in upgrades year over year in mainland China”. Apple’s share price has fallen 11 per cent since December.
Semiconductor analyst Kevin Xu has criticised the US policy, pointing out that Chinese consumers have been turning to their domestic suppliers. “Hurting Nvidia and letting Huawei fill the void only adds more fuel to its engine, more opacity to our knowledge of China’s AI capabilities, and more unpleasant surprises ahead,” he said.
Apple is struggling because it is a mature business and the Chinese market is one of its few areas of growth. For now, the massive domestic demand for Nvidia’s chips means investors aren’t too concerned about restrictions. In the fourth quarter, Nvidia’s revenue rose 265 per cent year on year. Yet its China revenue “declined significantly”, making up just a “mid-single-digit percentage” of its data centre revenue.
Of the 10 companies in the S&P 500 with the most exposure to the country, five are semiconductor businesses. Qualcomm (US:QCOM) makes around 60 per cent of sales in China, followed by NXP Semiconductors (US:NXPI) with 32 per cent then Broadcom (US:AVGO) with 32 per cent and Intel (US:INTC) with 27 per cent.
US politicians might think that restricting Beijing is the right geopolitical decision in the long run. However, it’s not going to be without some collateral damage to its own tech champions.
