The Semiconductor Industry's China Problem: Is It Greed or Existential Threat?
Okay, let's dive into this semiconductor situation. The Select Committee on China has dropped a report alleging that US and allied companies are essentially arming the CCP with the tools to build its own chip empire. The report throws around some big numbers, and, as always, it's worth taking a closer look at what they actually mean.
The Revenue Surge: A Closer Look
The headline grabber is the revenue flowing from China to these semiconductor manufacturing equipment (SME) companies. We're talking about companies like ASML, Applied Materials, KLA, Lam Research, and Tokyo Electron (TEL). The report highlights that in 2024, TEL got 44% of its revenue from China, Lam Research 42%, KLA 41%, and ASML and Applied Materials 36%.
Now, on the surface, that looks bad. But let's put it in perspective. China is the largest market for semiconductors, and these companies are in the business of selling equipment. The report itself even acknowledges this fact. The question isn't whether they're selling to China, but who they're selling to and what those chips are being used for.
The report alleges that these SME makers are selling to entities with links to the PRC's military and intelligence apparatus, including associates of Huawei. They also point out a massive increase in sales to Chinese state-owned enterprises (SOEs). In 2022, SME sales to PRC SOEs were $9.5 billion, representing 11% of overall revenue. By 2024, this ballooned to $26.2 billion, 27% of overall revenue. That's a jump of about 175% in two years (to be exact, 175.7%).
And this is the part of the report that I find genuinely puzzling.
If the U.S. government is so concerned about China's access to advanced chips, why aren't the export controls stricter? The report itself recommends aligning allied export controls with U.S. restrictions. If the U.S. is applying pressure, why are Dutch and Japanese firms increasing their revenues from PRC entities as the U.S. imposes controls? Are we just pushing business to our allies while still allowing the CCP to get what it needs? It's a bit like trying to stop a flood with a leaky dam.
The Military Angle: AI and Human Rights
The report also raises concerns about the military applications of these chips, particularly in AI-powered weapons systems. They argue that China's "intelligentized" warfare, which leverages AI and high-performance computing, poses a direct threat to American and allied servicemembers.
And let's not forget the human rights angle. The report claims that the CCP is using AI and high-performance computing to violate human rights domestically and promote its digital authoritarianism around the world. That’s a serious accusation, and it does make you wonder about the ethical implications of selling technology to a regime with that kind of track record.
The problem is, how do you trace the end use of every single chip? These SME companies aren't selling weapons directly. They're selling equipment that can be used to make chips that can be used for military purposes or human rights abuses. It's a complex chain, and proving a direct link is difficult.
What’s more, the report suggests the CCP is stockpiling lithography equipment at sophistication levels just below current restrictions. If this is true (and I'd like to see more concrete evidence), it suggests the CCP is anticipating future restrictions and trying to get ahead of the game.
Recommendations and the Path Forward
The Select Committee offers several recommendations, including aligning allied export controls, expanding country-wide controls for the PRC, widening the list of restricted entities, and restricting the export of components that are important to the production of SME. (It also recommends creating a whistleblower program, which always seems like a good idea in these situations). These recommendations are detailed in their New Investigation Reveals American and Allied Companies Boosted the CCP's Semiconductor Industry, Fueled the PRC's Military Ambitions and Human Rights Abuses.
But here's the rub: export controls are a blunt instrument. They can hurt American companies, create friction with allies, and, as we've seen, may not even be that effective at stopping China from getting what it needs.
The report stresses that the U.S. and its allies "only have the ability to export-control SME because we collectively are the world’s leading innovators in SME. We must double down on our success.” That’s absolutely right. If we want to maintain our technological edge, we need to invest in innovation and ensure that we remain the leaders in this field.
The other interesting aspect of this is the idea of increasing resources for the Bureau of Industry and Security (BIS) and the State Department to improve enforcement and diplomacy. It's an implicit admission that the current system isn't working as well as it should be.
Profit Motives vs. National Security: A False Dichotomy?
So, what's the real takeaway here? Is it pure greed driving these companies to sell to China, or is it a more complex situation involving global markets, technological competition, and national security? I’d argue it's a bit of both. These companies are, after all, in the business of making money. But they also have a responsibility to consider the broader implications of their actions. The question is, where do you draw the line?
