The
Biden administration
has announced new regulations on trade in the most advanced semiconductor technologies.
The purpose of the new regulations is to prevent
United States
technologies from being used to increase the defense capabilities of
China
, and a handful of other states that are enemies of the U.S. Semiconductors are key components of advanced weapons systems that would prove invaluable to China in building weapons for any future war with the U.S. or its allies. The new regulations supplement export restrictions first introduced in October 2022. Those earlier export rules were clearly insufficient.
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The catalyst for the expanded export controls appears to have been the introduction by China’s leading technology company, Huawei, an entity ultimately controlled by the Chinese military, of a surprisingly advanced smartphone. The new phone, released coincident with the visit to China by Secretary of Commerce Gina Raimondo, was a not-so-subtle signal to the U.S.
The new U.S. regulations are good policy. They will principally restrict the export of high end semiconductors designed by Nvidia to satisfy the October 2022 regulations. Nvidia was trying to thread a very narrow needle. The expanded regulations are also necessary because, in June 2023, Reuters
reported
that the specific semiconductors proscribed for export by the October 2022 regulations were available in China.
But while these expanded regulations are necessary, they are not sufficient. The U.S. Bureau of Industry and Security is understaffed. It is the agency responsible for administering export controls. It needs dramatically increased funding. The U.S.
must increase surveillance of endemic Chinese efforts
to smuggle the most proprietary technology through third party countries and companies. China is using Taiwanese companies
to thwart
the regulations, for example.
What do the new rules mean for business?
A bump in the road, to be sure. Nvidia and other advanced semiconductor companies involved in design, fabrication and fabrication equipment — such as the Dutch company ASML — will lose near term sales. ASML has a monopoly position, 100%, in the manufacture of the most advanced semiconductor lithography technology, essential in creating artificial intelligence systems. Still, in its quarterly earnings report this past Wednesday, ASML said the long term outlook for its business
is strong
. The most advanced semiconductors can only be fabricated with ASML technology. ASML remains an excellent long-term investment.
On the announcement of the expanded regulations, Nvidia’s share price fell by almost 10%, or a loss in market value of almost $100 billion. But that decline is clearly excessive. For its fiscal year which ended August 31, 2023, Nvidia generated total revenues of almost
$27 billion
. Nvidia’s total data center revenue exposure to China does not exceed
$4 billion
. Much of that revenue will be unaffected by the new export controls. Moreover, Nvidia is
sold out
of its most advanced semiconductors for the next several quarters. Some future revenues will be lost, but not enough to justify a decline in market capitalization of around $100 billion.
Top line: the expanded regulations are absolutely necessary. But the long term fortunes of Nvidia, ASML and companies such as AMD will largely be unaffected.
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Note: the writer owns shares in Nvidia and ASML.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.
