China's Revenge: What A Ban On Micron Products Could Mean For Other US Chipmakers

A recent decision by China's cyberspace regulator is weighing on chipmaker Micron Technology, Inc. MU. The company's stock prices picked up slightly on Monday afternoon, after opening the weekly trading session with a 5% loss.

The market's reaction was clear: investors saw potential losses in the company's future after the Cyberspace Administration of China released a report stating that U.S.-based Micron's products presented "significant security risks" to the country's "critical information infrastructure supply chain."

While Micron's share of revenue coming from China is 11%, other chipmakers have substantially more exposure to the Chinese market. This situation highlights the implicit question sprouting from the report: was this a retaliation to a recent U.S. ban on chip exports to China?

The Chip Wars, Explained

The U.S. and China are in an all-out race to dominate the global supply of semiconductors, which are a key piece of technology for everything from consumer electronics to military equipment. Most recently, the emergence of generative AI models raised the stakes in this race, as it is perceived that dominating this type of technology can lead to political and economic supremacy.

The U.S. government has released several measures aimed at hampering China's semiconductor manufacturing industry, of which the country has limited capacity.

Stuck in the middle is Taiwan, home of the world's most advanced semiconductor manufacturing facilities including the world's largest manufacturer Taiwan Semiconductor Mfg. Co. Ltd. TSM. The island nation has emerged as a key player in the ongoing U.S.-China conflict, with China’s territorial claim over Taiwan causing alarm due to increasing indications of potential aggression.

While diplomatically standing by Taiwan and releasing several programs aimed at boosting domestic chip production, the U.S. has set direct sanctions on China's, including an export ban on high-end chips needed to develop artificial intelligence, a ban on selling chip manufacturing tools and designs, and warning U.S.citizens or legal residents working for the semiconductor industry that they could lose their citizen status if they continued to collaborate with Chinese companies.

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Former FBI counterintelligence official in Beijing Holden Triplett, told Bloomberg that the Chinese report was politically motivated and that "no one should understand this decision as anything but retaliation for the US's export controls on semiconductors."

Yet China's Ministry of Foreign Affairs Mao Ning said that the "review is for preventing cybersecurity problems and the harms it poses to national key infrastructure and security."

Specific details on what risks were found or which Micron products would be banned wasn't made public, but Micron's Chief Financial Officer Mark Murphy said on Monday that the company is expecting the measures to hit its revenue in the single digits. 

Other U.S. chipmakers have significantly higher exposure to the Chinese market. According to data compiled by Bloomberg, Qualcomm QCOM generates 64% of its revenue from China, with Intel INTC, Advanced Micro Devices AMD and Nvidia NVDA making between 21% and 27% from China.

This means that, if the review results were indeed politically motivated, China's leadership still holds significant power to further retaliate against the U.S. semiconductor industry, potentially increasing the volatility of stocks in the sector.

While the U.S. tech industry continues to heavily rely on Chinese manufacturing, a recent meeting of G7 nations in Japan concluded that measures should be taken to “de-risk” but not “decouple” from China as a strategic partner, showing a more conservative approach from Japan and Europe who still perceive China as a valuable ally.

Bernstein analyst Mark Li said in a Monday report that while "decoupling” is the trend, progress in the semiconductor sector but will be very gradual as "China doesn’t have a viable domestic memory supply and China’s demand can be served only by suppliers from the US and other countries," which are, for the most part, U.S. allies.

The roles of South Korean chip manufacturers like Samsung and SK Hynix will be key, as the jury is still out on whether they will make up for China's lack of U.S. chip technology, or side with the U.S. in choking China out of chip supplies.

Broadcom and Qualcomm were trading lower on Monday, while Intel and AMD were in the green at the time of writing.

• VanEck Semiconductor ETF SMH was down 0.25%
• BlackRock's iShares Semiconductor ETF SOXX was up 0.1%.
• Direxion Daily Semiconductor Bull 3X Shares SOXL was up 0.6%.

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