An interesting take on the “true impact of the impact of export controls on China and US semiconductor toolmakers”. However, the author makes a number of rookie mistakes in assessing China’s industrial policy and its effectiveness, and the impact on US toolmakers. A short thread. https://t.co/2f01AGNhkM

First, citing China’s Made in China 2025 initiative, the author asserts that “China always intended to remove foreign semiconductor manufacturing tools from its supply chains.” This is an often heard argument that fundamentally misunderstands how China’s industrial policies work,

Asserting that a government aspirational document related to a globally and highly competitive industry, will move domestic players, such as say, front-end semiconductor manufacturers, to choose domestic over foreign equipment, is unsupported by any data, nor is it how the

This type of analysis neglects completely the complex relationships that develop between equipment manufacturers, manufacturers, and other upstream firms in the supply chain. These relationships are built on close collaboration to meet specific requirements for production, with

Equipment makers do not just sell equipment to front-end manufacturers, they engaged in complex R&D relationships to move forward advances in process technology. In addition, switching comes at a cost, production facilities do not generally switch providers who maintain and

And yes, Beijing has directed significant subsidies to the semiconductor industry via the National IC Investment Fund since 2014, but all of this largesse, before the export controls, had produced little progress specifically in the toolmaking sector, again illustrating the

But there was a reason the National IC Fund did not focus on the semiconductor tool equipment sector in China, it did not have to as long as Chinese front-end manufacturers could buy the best foreign tools.

Given this, before the export control package of October 2022, the data shows that Chinese frontend manufacturers continued to choose to work with US, Japanese, and Dutch equipment manufacturers, all of which maintain R&D facilities in China and worked closely with leading

Of course Chinese toolmakers such as Naura, AMEC, SMEE, and Piotech were making incremental progress improving their products, but particularly US, Japanese, and Dutch firms maintained large technology leads, primarily because of the close R&D relationships they had developed

Hence, absent the unprecedented export controls, particularly the unilateral end use, U.S. persons controls, and Foreign Direct Product Rules that only restrict U.S. toolmakers, all the foreign equipment manufacturers would have maintained sizeable market shares in China...

...with a modicum of competition from Chinese toolmakers, but the frontend manufacturers would have had little incentive to boost collaboration with domestic toolmakers absent the controls. This is clear to anyone who understands the industry and has spoken with Chinese industry

Significantly, the author also misses one of the biggest impacts of the export controls: the activation of Huawei. Previously not in the business or even interested in semiconductor manufacturing, the Entity List and FDPR actions against Huawei in 2019/2020 massively incentivized

US actions thus created a huge force multiplier for China’s domestic tool industry, given Huawei a leading position in the sector as a overseer and catalyzer of domestic toolmaking efforts to move up the value chain. The full impact of this is not yet clear, for more on this see:

In terms of the “true impact” of export controls on US toolmakers, as many casual observers of the industry have noted, sales of US and other equipment makers in China have gone up, despite the export controls. These observers also usually cite stock prices as relevant to

There are many reasons for the increase in foreign equipment sales to China, and of course the fact that these sales are up over the past two years, in most cases, illustrates the above points that Chinese frontend manufacturers have continued to prefer foreign equipment,

The issue of the impact of lost sales in China on R&D budgets is another factor often cited by causal industry observers. Of course, here, well run equipment companies have been able to fund innovation, albeit not increase it, after the unprecedented US restrictions.

The author of course fails here to cite a growing number of independent reports showing that the impact on US companies I significant, while the national security gains are difficult to pin down. See for example: https://t.co/KpttBADmvz

However, what these observers never tackle is how much more R&D could have been funded without the impact of the restrictions. Could these firms have moved faster to innovate without the major impacts on their R&D budgets? Of course they could have.

Also, as seasoned industry observers realize, the impact of missing R&D funding will not be visible for several years as that is the timescale from funding to invention to industry adoption. Another way to look at it is that successful equipment companies were built to survive

The US government here has created an artificial downturn, in addition to a real downturn of course, that well run companies have thus far been able to survive by a variety of cost cutting and discretionary measures...

...but this does not mean that continued unilateral controls of the type likely to drop next week will not continue to have a long-term impact on the ability of the US toolmaking industry to maintain its technology lead. Hint: current stock prices for these companies has zero