Israeli chipmakers face a dilemma. How can they remain loyal to the US while avoiding the US sanctions imposed on companies exporting smart chips and manufacturing equipment to China. After the publication of the list of new export controls imposed by the US on these exports at the start of the month, US administration officials have asked senior executives in the industry to encourage more companies to join the process of regulating their status with the US Department of Commerce.
The US is determined to prevent China from achieving a relative advantage in developing and manufacturing advanced semiconductors and using them, because it could give them a military advantage, for example by building data centers allowing advanced research and encryption capabilities. Washington believes that these new controls should apply to Israeli companies, which excel in developing chips and manufacturing equipment.
"The idea is to prevent the Chinese from obtaining all the advanced applications of the semiconductor sector and continually keeping it one step behind the US," explains Psagot analyst Shahar Carmi, who specializes in chipmakers. "Chips are the engine that moves the world in the 21st century and the US task is to prevent technology transfer to China at any price."
"This move is the closest thing to what can be described as a declaration of technological war," says a senior official in the chip industry who is familiar with the details. "But only now are Israeli entrepreneurs realizing how serious the Americans are, and they will have to deal with the new rules of the game."
The main interest of US representatives in Israeli industry concerns not only the companies that develop chip manufacturing equipment, but also the startups and Israeli tech companies that develop advanced computing technologies: chip companies in the field of AI and supercomputing, quantum computing companies, and software that supports supercomputers. Such applications may reach a state of "dual use" in China - the term for the spillover of commercial technology into the military field.
Israeli startups are in a complicated situation
Israeli development centers of US chip companies including Apple, Intel, Nvidia, Amazon, Qualcomm and Broadcom, represent the lion's share of local industry that will be compelled to comply with the new restrictions. Last February, Intel acquired Israeli chipmaker Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE:TSEM) plant in Migdal Ha'Emek for $5.8 billion, in order to prepare for this type of confrontation with China. However, for Israeli startups, ostensibly unrelated to the US, the situation is more complicated.
Adv. Yair Geva, head of the startups and emerging companies group at Herzog law firm told "Globes." "The new controls apply mainly to the export of integrated circuits to China, computer components that include such circuits and certain semiconductor production components. They require a license to export components to certain Chinese companies that appear on the list, as well as a license for so-called US PERSONS - a broad category that also includes foreign subsidiaries - to perform operations that support the development or production of certain components, in or for China."
According to the broad definition, almost every Israeli company developing advanced technology involving AI and supercomputing is required to examine its ties to the US, in order to continue exporting to China. "The application of the controls is very broad and also encompasses foreign products of the restricted type, which incorporate US developments or in certain cases those whose development was carried out on servers located in the US," Geva added.
Several Israeli companies have already started applying to the US Department of Commerce to request an exemption from the export controls to China, sources inform "Globes." One of the new restrictions, for example, prohibits the export of encrypted technology to China. "Companies that enter the supervised list but ignore the guidelines, may find themselves on the black list. The problem intensifies, when it is still not clear which companies will enter supervision and which will not," says a source in the chip industry.
Violating the restrictions could lead to harsh penalties
According to Geva, violating the controls may lead to sanctions such as administrative fines, cancellation of export rights and criminal sanctions in serious cases that could lead to imprisonment of up to 20 years. A major restriction imposed by the Americans is a severe ban on exporting to China smart processors or equipment for the development and production of chips with the tiny 16 nanometer technology. In other words, advanced processors with more developed miniaturization technologies.
One of the prominent foreign companies that has already adopted the US restrictions is Dutch company ASML, which is one of the world's largest suppliers of chip manufacturing machines. ASML, which works with Intel and Taiwan's TSMC, asked its US employees to stop installing machines in Chinese factories, and to stop servicing them.
ASML is also harmed by the new regulations that prohibit US citizens and green card holders from working with the Chinese chip companies. "Many American workers are required to choose between their continued work with Chinese companies and their loyalty to the US, and therefore we see mass resignations in the east of American workers," said Geva.
Psagot's Carmi said, "It is true that ASML claimed with the publication of its quarterly results that they do not anticipate any significant damage to revenue from the new restrictions, but the new restrictions on the sale of its machines have a far-reaching effect on the entire industry. Many companies in the industry make their living from ASML's ecosystem, and if the Chinese stop purchasing its machines, they will reduce their appetite for purchasing machines and equipment from companies such as Applied Materials, KLA or Lam Research."
Companies losing revenue worth hundreds of millions
Thus there are ramifications for Israel's industry. Applied Materials, for example, which manufactures equipment for testing semiconductors and has more than 2,000 employees in Rehovot, expects to lose an extra $250-500 million in the current quarter alone. According to LinkedIn, the Rehovot plant is continuing to grow. Over the past six months, the number of employees has risen 22% but the number of vacant jobs has fallen 17%.
KLA, which has over 1,000 employees in Migdal Ha'emek and Yavne, and Lam Research, which has 50 employees in Israel, have halted supporting equipment already installed by Chinese chip manufacturer YTMC, according to "The Wall Street Journal." KLA has increased its workforce by 7% over the past six months but the number of jobs advertised on LinkedIn has fallen 18%. Analysts expect revenue at Applied Materials, Lam Research and KLA to fall by 5%-10%.
The chip manufacturing measurement systems of Rehovot-based Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI) are often sold for the more advanced generations of processors, mainly in the 5 to 14 nanometer range, which puts it on the list of new restrictions. Since the restrictions were published on October 7, Nova's share price has fallen 22%. Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT), another manufacturer of equipment for the production of electronic components, is expected to be less affected, even though a significant part of its revenue comes from China: it serves factories, most of which have a geometry larger than 14 nanometers.
The US Department of Commerce said "Regarding dual-use technologies and updates on the subject from time to time, we monitor the issue, coordinate with the relevant parties and adapt the information and requirements to the industry as needed."
Published by Globes, Israel business news - en.globes.co.il - on October 24, 2022.
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