How the US exerts controls over foreign chipmakers in China

By John Liu, CNN

(CNN) — Despite years of engagement in a global chip war, China remains a vital operation base for several Asian-grown champions. But even from afar, Washington still holds key levers of power.

The latest example: The US government’s revoking of authorization for Taiwanese and South Korean chip titans to freely send vital American technology-powered equipment to plants in China.

The change, which will go into effect next year, could hobble production, ultimately even threatening the plants’ survival.

The Biden-era exemption let chipmakers TSMC, SK Hynix and Samsung export critical production equipment to China. Cutting that exemption underscores how important the US is to the global chip supply chain – and to all the products those chips help power, from cars to phones to weapon systems.

That’s because, even though TSMC and Samsung are major chip manufacturing leaders, the US still holds commanding positions in chip design and related software, exemplified by Nvidia’s dominance in AI chips. The Taiwanese and South Korean companies also rely heavily on crucial chipmaking equipment from American companies like Applied Materials, Lam Research and KLA.

Washington’s move also highlights the tough balancing act these companies face as tensions between the world’s two largest economies intensify.

The Commerce Department said in a statement last week the policy change closed an export control “loophole.” The department added it intends to grant licenses to allow the firms to continue their operations in China but not to expand capacity or upgrade technology.

Analysts, however, worry if the licenses will be approved fast enough to avoid disrupting operations abroad.

Chipmaking is a precision business that requires constant adjustments, maintenance and updates to the vast array of machineries used to etch tens of billions of transistors – each 10,000 times smaller than the width of a human hair – onto a single microchip.

Sanjeev Rana, head of Korea research at brokerage firm CLSA, said applying for licenses for each of these steps is a “cumbersome” process. Delays could cause disruption, leading prices to surge for memory chips, the semiconductors that help devices store data that Samsung and SK Hynix make in China.

The two Korean firms are more vulnerable under the change, since they have a larger presence in China. Samsung’s facility in China accounts for 30% of its NAND chips, one of two kinds of memory chips that don’t require power to store data.

SK Hynix, meanwhile, makes around 37% of its NAND chips in China and 35% of its DRAM chips, which provide short-term storage, according to Bernstein, an equity research firm.

Together, Samsung and SK Hynix’s China plants contribute to 15% of the global NAND chips and 10% of DRAM chips, Bernstein data showed.

Even if the companies can secure licenses in time, the competitiveness of these facilities in China would decline significantly over time, Rana said.

“With the current setup, I think it will be difficult to continue producing memory chips in the longer term,” he said. “I think the US ultimately wants these companies to build memory fabs, or at least some capacity in the US,” he added, referring to fabrication plants.

This tightening of the screws from Washington contrasts with President Donald Trump’s apparent embrace of major American tech firms’ desire to ease curbs on China. In recent months, Trump has rolled back Biden-era limits on global access to AI chips and permitted some Nvidia chip sales to China.

The US has been stepping up efforts to curtail China’s technology gains since Trump’s first term. The Biden administration in 2022 imposed sweeping curbs on selling chips and chipmaking equipment to America’s strategic rival, though it exempted the three chip powerhouses’ China plants from the restrictions.

SK Hynix said in a statement that it will take necessary measures to minimize the impact of the current moves on its business as it maintains close communication with both Korean and American governments. Samsung declined to comment.

CNN has reached out to the Commerce Department’s office responsible for export controls for comment.

In comparison with SK Hynix and Samsung’s relatively high exposure, the loss of the authorization is expected to pose only limited impact to TSMC – the world’s largest contract chipmaker – which only makes a small number of its less advanced computing chips in China, experts said.

Although the Taiwanese chip titan has kicked off ambitious global expansion plans in the US, Japan and Germany, at least 80% of its production capacity will remain in Taiwan by 2030, according to TrendForce, a market research firm.

In a statement, TSMC said that it is evaluating the situation and taking appropriate measures, including communicating with the US government. “We remain fully committed to ensuring the uninterrupted operation of TSMC Nanjing,” it said.

Taiwan’s Ministry of Economic Affairs said in a statement the US move could pose uncertainty for TSMC’s China operations. But given that the Nanjing facility only accounts for around 3% of the Taiwanese chipmaker’s total production capacity, it said the change will not affect the nation’s chip industry competitiveness.

An inadvertent boost to Chinese companies

Over the past decade, China has worked to build a self-reliant semiconductor supply chain, a nationwide push made more urgent by Washington’s tightening of tech restrictions since Trump’s first term.

In the memory chips sector, China’s ChangXin Memory Technologies (CXMT) and Yantze Memory Technologies (YMTC) have emerged as top contenders – at least in the country for now – in a market long dominated by Samsung, SK Hynix and America’s Micron.

But the White House’s move could instead boost these Chinese players, experts said, even as it would further curb China’s access to foreign-made semiconductors.

“While Samsung and SK Hynix still lead their Chinese competitors in market share, over time an inability to upgrade equipment at their Chinese fabs will force them to continue to cede market share as these facilities become less competitive,” said Troy Stangarone, a non-resident fellow at Carnegie Mellon Institute for Strategy and Technology.

Stangarone also warned of additional complications. In an unprecedented arrangement with Trump last month, Nvidia and AMD agreed to pay the US government 15% of their revenues from chip sales to China in exchange for export licenses.

“Samsung and SK Hynix cannot preclude the possibility that this move is an initial step to seeking a share of revenue in return for the issuance of licenses needed to continue or upgrade their operations in China,” he said.

For now, Beijing has voiced opposition, as it has with every US measure aimed at strengthening tech controls against China.

A Commerce Ministry spokesperson on Saturday called on the US to “correct its wrongdoing,” adding that Beijing would take necessary measures to safeguard the interests of its enterprises without further details.

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