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US semiconductor policy looks to cut out China, secure supply chain

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A close up image of a CPU socket and motherboard laying on the table.

Narumon Bowonkitwanchai | Moment | Getty Images

GUANGZHOU, China — If you talk about chipmaking, two companies usually spring to mind — Taiwan’s TSMC and South Korea’s Samsung Electronics. The two Asian firms combined control more than 70% of the semiconductor manufacturing market.

The U.S., which was once a leader, lags behind in this space after monumental shifts in the business models in the semiconductor industry.

But a global semiconductor shortage and geopolitical tensions with China have bolstered Washington’s scrutiny of the supply chain, which is concentrated in the hands of a small number of players, and has created a drive to bring manufacturing back to American soil to regain leadership.

The U.S. has earmarked billions of dollars and is reportedly looking at alliances with other nations.

Semiconductors are critical to everything from cars to the smartphones we use. And they have also been thrust into the center of U.S.-China tensions.

“One characteristic of US policy is that it has heavy emphasis on China. This has now become a national imperative to enhance self-sufficiency in semis production, accelerated by the recent chip shortages and the ‘tech war’ against China,” Bank of America said in a note published Wednesday.

How Asia came to dominate manufacturing

The key to understanding the geopolitics of semiconductors, which countries dominate and why the U.S. is trying to boost its domestic industry, lies in coming to grips with the supply chain and business models.

Companies like Intel are integrated device manufacturers (IDMs), which design and manufacture their own chips.

Then there are the fabless semiconductor firms, which design chips but outsource manufacturing to so-called foundries. The two biggest foundries are TSMC in Taiwan and Samsung Electronics in South Korea.

Over the last 15 years or so, companies began shifting to this fabless model. TSMC and Samsung took advantage as they began to invest heavily in leading-edge manufacturing technology. Now if a company like Apple wants to get the latest chip for their iPhone produced, they have to turn to TSMC to do it.

TSMC has 55% foundry market share and Samsung has 18%, according to data from Trendforce. Taiwan and South Korea collectively have 81% of the global market in foundries, highlighting the dominance and reliance on these two countries as well as on TSMC and Samsung.

“In 2001, 30 companies manufactured at the leading edge however as semi manufacturing grew in cost and difficulty, this number has fallen to just 3 firms” — TSMC, Intel and Samsung, according to a note from Bank of America published in December.

However, Intel’s manufacturing process is still behind that of TSMC and Samsung.

“Taiwan and South Korea have become leaders in wafer fabrication which requires massive capital investment; and part of their success over the last 20 years is due to supportive government policies and access to skilled labour forces,” Neil Campling, head of technology, media and telecoms research at Mirabaud Securities, told CNBC by email.

The complex supply chain

What is the U.S. planning and why?

So, the U.S. is not necessarily falling behind in the semiconductor industry as a whole. Some of its firms are integral to the supply chain. But one area it has lagged in is manufacturing.

Under President Joe Biden, the U.S. is looking to regain leadership in manufacturing and secure supply chains.

In February, Biden signed an executive order which involves a review of the semiconductor supply chain to identify risks. As part of a $2 trillion economic stimulus package, $50 billion was earmarked for semiconductor manufacturing and research. A bill known as the CHIPS for America Act is also working its way through the legislative process and aims to provide incentives to enable advanced research and development and secure the supply chain.

Meanwhile, U.S. firm Intel last month announced plans to spend $20 billion to build two new chip factories and said it will act as a foundry. This could offer a domestic alternative to the likes of TSMC and Samsung.

Part of that scrutiny on the supply chain has been prompted by a global chip shortage that’s hit the automotive industry. The coronavirus pandemic accelerated demand for personal electronics like laptops and games consoles just as industrials and automakers wound down production. But a rebound in production plus heightened demand for chips in various sectors has triggered a shortage.

The concentration of production in the hands of TSMC and Samsung has worsened the problem.

The semiconductor supply shortage “has probably made the U.S. administration realise they aren’t in control of their own destiny,” according to Mirabaud Securities’ Campling.

But there are also geopolitical factors at play, informing U.S. policy.

“Over the longer-term, the Biden administration wants to continue to encourage both foreign and U.S. semiconductor manufacturers to expand capacity in the U.S., to reduce dependence on manufacturing in geopolitically sensitive areas such as Taiwan, and create high paying engineering jobs in the U.S.,” Paul Triolo, head of the geo-technology practice at Eurasia Group, told CNBC by email.

Part of the U.S. policy in the semiconductor space involves forming alliances. Earlier this month, the Nikkei reported that the U.S. and Japan will cooperate on supply chains for critical components like semiconductors. The two sides will aim for a system where production is not concentrated on specific regions like Taiwan, the Nikkei said.

“The U.S. is trying to cut China out of the equation,” Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future, a Toronto-based consulting firm, told CNBC via email.

“It is trying to redesign how the world’s chip industry works in the face of a rising China. This is not necessarily about self-sufficiency, although Washington would welcome this. Instead, it is about building up critical sectors — from AI to chips — that are insulated from geopolitics. And, because several nations share U.S. concerns about China, the U.S. is taking a chunk of the world with it.”

China’s push for self-sufficiency

China meanwhile is trying to push self-sufficiency amid U.S. moves to cut it off from key supplies. Over the past few years, China has tried to boost its semiconductor industry through huge investments and incentives like tax breaks.

But China remains well behind everywhere else and that goes back to the supply chain. SMIC is China’s largest foundry, a competitor to the likes of TSMC and Samsung. But SMIC’s technology is several years behind that of its Taiwan and South Korean rivals.

And even if it wanted to advance, it’s extremely difficult due to U.S. sanctions and actions. Washington put SMIC on a blacklist known as the Entity List last year. That restricts American companies from exporting certain technology to SMIC, holding back the chipmaker due to the key role U.S. firms play in the semiconductor supply chain. Roughly 80% or more of SMIC equipment comes from U.S. vendors, according to Bank of America.

Last year, Reuters reported that the U.S. pressured the Netherlands government to stop the sale of an ASML machine to SMIC. The Dutch firm is the only company that makes the so-called extreme ultraviolet (EUV) machine that is needed to make the most cutting-edge chips. That machine has still not been shipped to China.

“If China wants to manufacture leading edge chips, it is virtually impossible without equipment from the US or allies,” Bank of America said in its December note.

“We remain skeptical about a meaningful progress in China’s progress due to US restrictions as it is materially behind in IP (intellectual property) and has limited access to IP given the US restrictions,” Bank of America said in a separate note last week.

“Our team expects a delay of around 5+ years before it makes a more significant progress.”

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Stock futures rise after Wall Street begins week with modest losses

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Pedestrians walk past the Nasdaq in New York on Sept. 3, 2020.

Xinhua News Agency | Getty Images

Futures contracts tied to the major U.S. stock indexes ticked higher at the start of the overnight session Monday evening after Wall Street kicked off the week with modest losses.

Dow futures added 50 points, while contracts tied to the S&P 500 advanced 0.1%. Nasdaq 100 futures rose a similar 0.1%.

The moves in the overnight session came after lingering weakness in technology stocks led the major indexes lower on Monday.

The Dow Jones Industrial Average dipped 54.34 points, or 0.2%, to 34,327.79. The S&P 500 lost 0.3% to 4,163.29 as the tech sector pulled back 0.7%. The Nasdaq Composite fell 0.4% to 13,379.05.

Big Tech stocks fell to start the week, with Apple and Netflix each down 0.9%. Microsoft shed 1.2%, while Tesla dropped more than 2% as famed investor Michael Burry revealed a big short position on the electric carmaker.

Communication services stock Discovery bucked that trend after AT&T announced Monday that it would merge WarnerMedia, which includes HBO, with Discovery. Discovery’s Class B stock jumped nearly 14%, while AT&T ended the day slightly lower after hitting a record high earlier in the session.

Growth-heavy stocks have remained under pressure in recent sessions as investors fret over whether a pop in inflation will entrench or blow over as the Federal Reserve expects. Inflation above the Fed’s 2% target for a sustained period could prompt the central bank to tighten monetary policy and dampen stocks that outperform the market when interest rates are low.

“Surging inflation data intensified the rift between secular growth stocks, which depend on lower-for-longer interest rates, and value-based investments, which need a steepening yield curve,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

“Although markets anticipated a step change in the data due to economic reopening, the magnitude of the surprises has been outsized, driving equity volatility up and market indexes down from all-time highs,” she added. “Supply/demand imbalances in commodities, manufactured goods and even labor explain much of the jump in inflation, backing the argument that trend is transitory.”

Investors blamed that angst for the S&P 500’s dismal performance last week, which saw the broad market index fall 4% through midweek amid heightened inflation fears. The broad equity benchmark eventually rebounded and ended the week down 1.4%.

The tech-heavy Nasdaq Composite, particularly sensitive to inflation fears, dropped 2.3% last week. The blue-chip Dow fell 1.1% in that period. All three benchmarks posted their worst week since February 26.

The Fed’s minutes from its last meeting, which will be released Wednesday, could offer some clues on policymakers’ thinking on inflation.

Elsewhere, the first-quarter earnings season is wrapping up with more than 90% of the S&P 500 companies having reported their results. So far, 86% of S&P 500 companies have reported a positive EPS surprise, which would mark the highest percentage of positive earnings surprises since 2008 when FactSet began tracking this metric.

Walmart, Home Depot and Macy’s will deliver earnings on Tuesday.

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Biden tells Netanyahu U.S. supports ceasefire as Israel, Hamas tensions escalate

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US President Joe Biden delivers remarks on the COVID-19 response and the vaccination in the East Room at the White House in Washington, DC on May 17, 2021.

Nicholas Kamm | AFP | Getty Images

WASHINGTON – President Joe Biden in a Monday afternoon call with Israeli Prime Minister Benjamin Netanyahu expressed his support for a ceasefire as fighting between Israel and Hamas enters a second week.

“The President reiterated his firm support for Israel’s right to defend itself against indiscriminate rocket attacks. The President welcomed efforts to address intercommunal violence and to bring calm to Jerusalem, ” according to a White House readout of the call.

Biden also called on Israel to ensure the protection of innocent civilians amid the conflict.

“The two leaders discussed progress in Israel’s military operations against Hamas and other terrorist groups in Gaza,” the statement added. Biden also discussed engaging with other partners and allies in the region in order to help de-escalate tensions.

Violence intensified over the weekend, with Israel conducting an airstrike Sunday that leveled several homes in the Gaza Strip. The strike, the deadliest yet in the ongoing conflict, killed at least 42 people. Meanwhile, more than 3,000 rockets bombarded Israeli cities.

On Sunday, Netanyahu defended the punishing airstrike on Saturday that collapsed a 12-story building housing international media, citing intelligence that Hamas was using a portion of the building to plan terror attacks.

A member of the Palestinian civil defence walks amidst the rubble of a building in Gaza city which housed the Intaj Bank linked to the Hamas movement which controls the Gaza Strip, on May 15, 2021.

Mahmud Hams | AFP | Getty Images

Netanyahu said that the building’s occupants, which included the Associated Press, broadcaster Al-Jazeera and other media agencies, were given an hour’s notice to evacuate before the strike.

“Here’s the intelligence we had,” Netanyahu told CBS Sunday program “Face the Nation.”

″[It’s] an intelligence office for the Palestinian terrorist organization housed in that building that plots and organizes the terror attacks against Israeli civilians. So, it’s a perfectly legitimate target,” he explained.

This is breaking news. Please check back for updates.

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WarnerMedia-Discovery deal pressures ViacomCBS and NBCUniversal

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Shari Redstone, chairwoman of ViacomCBS and president of National Amusements, reacts as she celebrates her company’s merger at the Nasdaq Market site in New York, December 5, 2019.

Brendan McDermid | Reuters

In the words of the great Tom Lehrer, “Who’s Next?

Now that AT&T has decided to separate WarnerMedia and merge with Discovery, the rest of the media world — particularly the smaller players — face new pressure to make their countermoves.

Even before this deal, it was clear that Lionsgate, MGM, Sony Pictures and AMC Networks were probably too small to compete in a streaming world where success depends on a massive store of content and global reach.

But ViacomCBS and Comcast‘s NBCUniversal are much bigger, and probably assumed they had some time — at least a year — to see how many subscribers signed up for their streaming offerings, Paramount+ and Peacock.

“Within the next two years, it’s going to be put up or shut up for all of us,” said David Zaslav, Discovery’s CEO who will take the top job at the combined company, in December. “Can you show you’re scaling? Are you going to be a player in the U.S.? Are you going to be a player around the world?”

Under pressure

That timeline is shorter now.

Suddenly, both ViacomCBS and NBCUniversal seem subscale as they attempt to put together global streaming services. They aren’t trying to be niche players, such as Starz or AMC+.

That means both will need more content to compete against Netflix, Amazon Prime Video, Disney and whatever the new name of WarnerMediaDiscovery will be.

The obvious move would be for ViacomCBS and NBCUniversal to merge. But a combined ViacomCBS/NBCUniversal would have two U.S. broadcast networks — CBS and NBC — housed under the same corporate roof. That won’t fly with U.S. regulators. While the parent companies could theoretically spin out or sell them, the broadcast networks provide so much value to both companies — and their streaming services — that it seems unlikely.

Further, Shari Redstone controls ViacomCBS and Brian Roberts controls NBCUniversal through his family’s Comcast shares. Their dual class share structure is another obstacle for both companies, as it makes it hard for outsiders to pressure the companies to make changes the executives don’t favor. But it’s not a deal stopper — Discovery had several classes of shares too, but John Malone was willing to eliminate his voting shares to get a deal done with WarnerMedia.

Four options

That leaves Comcast and ViacomCBS with four likely options.

Buy. If both companies feel their streaming services can compete around the world, they can go on global and domestic acquisition sprees. It may take several deals to get to a scaled position, as they piece together smaller U.S.-based assets and larger global media companies in Latin America and Europe.

Sell. They could also sell. Shari Redstone is more open to the idea of selling ViacomCBS than her father, according to people familiar with the matter. It’s unclear if Roberts would consider selling NBCUniversal. Potential buyers could include Amazon or the newly merged WarnerMedia-Discovery. Apple and Netflix continue to hover along the periphery, but neither company has ever shown much interest in making big media acquisitions.

Reduce their ambitions. The third option is to throw in the towel on being a global streaming service. Instead, NBCUniversal and ViacomCBS could license their content to other, larger streamers and wind down Paramount+ and Peacock if they fail to gain global traction.

Bundle. Option four is similar but less drastic. ViacomCBS and NBCUniversal could begin bundling their streaming services together or finding new streaming partners to increase global distribution through discounted offerings. The main problem with this strategy is it limits the upside for both companies, who won’t be able to compete with larger players for top content and breadth of programming.

The fifth option — inaction — is no longer a viable strategy. The pressure is on Roberts, NBCUniversal CEO Jeff Shell, Redstone and ViacomCBS CEO Bob Bakish to find exciting go-forward solutions for their companies.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.

WATCH: What the WarnerMedia-Discovery deal could mean for the streaming wars

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