TRADE WARS MIGHT, as US President Donald Trump says, be easy to win (although this Bystander, for one, doubts it), but some of the terrain that has to be to yomped across is complicated and treacherous. Take the example of semiconductor equipment manufacturers.
The direct costs that result from the tariffs the United States is imposing on China and the ones that China is imposing on US firms in retaliation would be unwelcome but manageable for the three leading listed US semiconductor equipment manufacturers, Applied Materials, Lam Research and KLA-Tenco.
The trio’s China business earned them $5.4 billion in the year to end-March, 2018, according to calculations by the rating agency Moody’s. That was equivalent to 18% of their total revenue. Although that was 41% up on a year earlier, their business overall seems to have been growing at a similar rate.
These are good times to be making the equipment that makes chips, as it should be given global chip sales have increased by one-third since 2016, and are forecast to be a $460 billion market this year.
This is where things start to get complicated for trade hawks. Only about one-third of the three US firms’ China revenue comes from indigenous Chinese chipmakers, Moody’s reckons; the balance comes from multinationals that manufacture semiconductors in China, such as Intel and Samsung. (That is in line with the overall rule of thumb that holds that about two-thirds of world trade is accounted for by value and supply chains.)
US-based multinational chipmakers manufacturing in China could apply for US exemptions from US tariffs for the components they export back to the United States, though that would do nothing for reducing the headline trade deficit figure by which the US president sets so much score.
China could even ban such export sales. There is no indication Beijing is considering doing so should it come to it, but who knows what symbolic gestures will be made?
Absent a trade war, US semiconductor equipment manufacturers could expect steadily growing sales in China both to indigenous and multinational companies. Prospects would be particularly bright for the next several years among Chinese companies as Beijing is pushing the development of an indigenous chipmaking industry under Made in China 2025 to wean the country off its dependence on the United States for this critical technology. China will make its own chips first, then later the equipment to make them.
In the event of a trade war, Moody’s estimates, the three would lose $660 million of business from Chinese companies this year and $775 million in 2019.
At the end of this month, the Trump administration is set to announce new rules to curb Chinese access to critical US technology. While investments in the United States by any company with at least 25% Chinese ownership will be at the forefront, restrictions on exports of technology by US firms are also likely.
Limits to the three US firms’ freedom to sell their chipmaking equipment to Chinese companies would be a significantly more serious threat to them than tariffs. That might be appealing to the Trump administration as a way of delaying China’s drive to self-sufficiency in chip-making. There are no ready alternatives to the three US companies to which Chinese firms can turn.
But that, in turn, could force China to speed up the development of its own manufacture of semiconductor-making equipment.
So who wins? There is no uncomplicated answer.