Regulatory intelligence for US exporters

Costs of New China-Related Export Controls Could 'Rise Quickly,' Firm Says

Although the new U.S. export controls against China are likely to have minimal impacts on the U.S. semiconductor industry, a broader implementation of the controls could quickly raise costs on U.S. and allied suppliers and hurt the domestic chip industry, the Rhodium Group said in a report this month. The research firm said damages to semiconductor companies “could balloon quickly under a tightening of controls,” which it believes is “highly plausible.”

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“The immediate costs to U.S. semiconductor manufacturing equipment (SME) firms arising from a narrow implementation of the controls would be fairly limited,” Rhodium said in the report, adding the controls are estimated to cost U.S. companies about $1.4 billion to $3 billion in annualized sales. “However, if these controls were to be applied more broadly, for example to target foreign fabs in China, costs could rise quickly.” In that case, U.S. companies could lose $4.6 billion to $5.2 billion in annualized sales.

Annual losses of $1.4 billion to $3 billion are not “insignificant,” Rhodium stressed, adding that the figures represent 9% to 19% of U.S. firms’ sales in China. But it also likely wouldn’t be “life-threatening” for many U.S. chip companies. U.S. firms could redirect many of their lost sales in China to fabs outside the country, particularly because most semiconductor manufacturing equipment suppliers are “trying to manage large order backlogs of a year or more,” the report said.

But if the restrictions were broadened to cover non-Chinese chip manufacturers in China, which control much of the logic and memory market, lost sales would rise fast, Rhodium said. The firm specifically pointed to SK Hynix and Samsung, which were granted one-year licenses (see 2210120002), saying it “cannot be certain these licenses will be renewed and for how long.” But Rhodium also said lost U.S. sales to China could be made up “if leading memory chipmakers follow through on their plans to expand capacity outside of China.”

And if the U.S. determines that allies aren’t moving quickly enough to adopt the controls, it could “ratchet up” additions to the Entity List, Rhodium said, and subject more Chinese semiconductor firms to foreign direct product rule restrictions. “[B]illions more in global semiconductor and SME revenues would be at risk of disruption,” Rhodium said.

The research firm said it didn’t factor in second-order impacts on the semiconductor industry, including long-term costs to U.S. and global supply chains and “short-run price increases.” Rhodium said the memory market is “running at overcapacity,” but experts expect the surplus to last for two quarters at most. “If China-based memory production were to be severely disrupted by the controls,” the firm said, “the memory industry could see significant price hikes within half a year -- at least until more capacity is brought online outside of China over at least a couple of years.”

And even though the Bureau of Industry and Security is “under-resourced,” which could limit the agency’s implementation efforts, Rhodium said the agency can overcome its staffing constraints. BIS can “take a shortcut to enforcement by making examples of high-profile companies” to prompt broader industry compliance, Rhodium said. The agency also has a new ability to transfer companies on the Unverified List to the Entity List within 60 days if the company doesn’t allow an end-use check (see 2210070006), which shifts the end-use compliance burden to Chinese entities, the report said.

Rhodium stressed that there is “ample room” to build on the controls, which could be used as a weapon to deter or further penalize China. “Ultimately, the impact of new rules depends on how they are applied,” the report said. “In this case, the tone of the U.S. political debate on China policy, and the risk of rising tensions between the U.S. and China over Taiwan, suggest that we could be headed for a more stringent implementation of the tech controls.”