China Can’t Win Its Chip War Against U.S. Here’s Why.
The country can’t do anything substantive to reciprocate because it is too far behind and needs the latest Western technologies.
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Paper Dragon. Hi, everyone. China is striking back at America in the global battle for semiconductors. After the Biden administration blocked China’s ability to buy powerful artificial intelligence chips and advanced chip-making equipment last year through additional export controls, the Asian country recently has decided to retaliate against U.S. companies.
But the bark may be worse than the bite. While the moves have generated a lot of attention, there isn’t much more China can do against Silicon Valley. The country can’t do anything substantive to reciprocate because it is too far behind and needs the latest Western technologies.
Last Friday, the Cyberspace Administration of China said it had launched a review of Micron Technology (ticker: MU) products on national security grounds. It said it would analyze the chip maker’s semiconductors to see if there were network security risks. On Tuesday, The Wall Street Journal also reported that Chinese regulators have slowed down the merger approval process on pending acquisitions by U.S. companies.
Micron, a leader in the memory chip market, said it is fully cooperating with China and stands by the security of its products.
“Micron is [the] first hit by China’s retaliation in the silicon war,” New Street Research analyst Pierre Ferragu wrote on Monday. “China can afford to take a strong position against Micron with minimal supply risks.”
The company is a unique case because of the commoditized nature of its products. For example, the analyst says China can easily buy similar memory chips from Korea-based manufacturers such as SK Hynix and Samsung.
While there may be some risk in the smartphone area, Ferragu doesn’t think China can add sanctions to other more advanced chips beyond the ones for memory and mobile phones.
Maintaining access to advanced semiconductors has become the center of global geopolitics. Chips are the critical enablers of vital applications, from defense systems to the cloud-computing services corporations use to run their businesses. The strategic importance of chips to maintain military capability and economic security can’t be understated.
Following China’s probe into Micron, some outlets presented simplistic narratives that the action could be bad for other U.S. chip makers with large revenue exposure to China. Reality is more nuanced.
China’s ability to retaliate is limited because American companies dominate the market for logic chips that are required to process data. Logic chips are much harder to design and manufacture than memory chips.
There are two types of logic chips: central processing units (CPUs) that act as the main computing brains for PCs/servers, and graphics processing units (GPUs) that are used for gaming and AI applications.
Intel (INTC), Advanced Micro Devices (AMD), and Apple (AAPL) are the leaders in the CPU processor market, while Nvidia (NVDA) and AMD (AMD) account for the vast majority of the GPU segment. These American CPUs and GPUs are irreplaceable, and China has essentially no supply alternatives.
It means concerns of a severe crackdown against other leading U.S. chip suppliers may be overblown.
“We expect China to remain reliant on Western vendors for years to come,” Ferragu wrote.
If China wants to inflict pain and escalate tensions, it may need to move against consumer-oriented American corporations selling products within its borders, such as Starbucks or Nike. But that has other issues with a potential negatives on China’s economy and workers.
We can expect more grumbling and noise from China over semiconductors but little actual impact. Simply put, the U.S. holds all the chips.
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Write to Tae Kim at tae.kim@barrons.com or follow him on Twitter at @firstadopter