US Sanctions Against China's Chip Sector Could Impact Samsung and SK Hynix

After the U.S. imposed sweeping sanctions against China's semiconductor industry that prohibit shipments of advanced chip production equipment to the People's Republic of China, South Korea-based Samsung and SK Hynix got a one-year waiver to keep upgrading their fabs in China.

Samsung's and SK Hynix's fabs in China produce a substantial portion of the global 3D NAND and DRAM supply, reports Nikkei. Samsung makes some 40% of its 3D NAND chips in China, whereas SK Hynix produces around 40% of its DRAMs in the People's Republic. Normally, both companies installed the latest production equipment at their fabs and adopted leading-edge fabrication technologies there to be competitive. 

Under the new rules U.S.-based companies cannot ship tools that can be used to make 3D NAND with 128 or more layers as well as DRAM using a 18nm or more sophisticated production technology. Most products of Samsung and SK Hynix are made on even more advanced nodes. 

Both Korean companies will still be able to add advanced American tools to their operations in China for a year, but after that their suppliers will have to either get a new export license from the U.S. Department of Commerce to sell equipment to Chinese subsidiaries of South Korean companies, or stick to a case-by-case review scenario when they will have to get a different license for each deal. 

A source familiar with Samsung's matters could not confirm what would happen after the year is out. 

Such case-by-case licensing represents huge risks both for Samsung and for SK Hynix as if they are not able to procure the right production tools, they will not be able to transit to new fabrication processes and therefore they will be less competitive against their rivals (Micron, Kioxia, Western Digital) as new nodes lower per-bit production costs and increase performance. 

Most of products made by Samsung and SK Hynix in China are sold to local makers of electronics, including big PC makers like Apple and Lenovo, so if the two South Korean companies have to leave China, this will hit global suppliers. 

In a bid to assist its two major semiconductor companies the Korean Ministry of Trade, Industry and Energy had talked with the U.S. Department of Commerce's Bureau of Industry and Security on behalf of Samsung and SK, according to Nikkei. While this certainly increases Samsung's and SK Hynix's abilities to get appropriate export permissions, this does not mean a 100% probability of success.  

As a result, both Samsung and SK Hynix are now facing a dilemma whether to keep investing in their Chinese operations or gradually withdraw from the country and shift production of memory in South Korea, Taiwan, Japan or the U.S.