U.S. Semiconductor Equipment Makers Reap Record Profits, Despite Export Controls

Despite export controls meant to stop sensitive U.S.-made technology and equipment from getting into the hands of China’s government and military, American semiconductor manufacturers Lam Research, KLA and Applied Materials have enjoyed record profits from continued sales to Chinese state-owned companies.

In 2018 the global semiconductor industry experienced its biggest year ever. U.S. semiconductor toolmakers makers cornered half the world’s sales and stable growth in recent years—largely because of increasing demand from China. According to the chief financial officer of Applied Materials, China’s spending on U.S.-made semiconductor manufacturing equipment (SME) is up a whopping 50% in the last year alone.

SME makers like Lam Research ship to China more than any other country. About half of those sales go to “local” Chinese companies that may be state-owned and working with the Chinese military. KLA and Applied Materials both recently said export controls would not diminish their revenue.

The soaring profits show that, regrettably, American SME makers do not care where they sell, so long as they are making money. “As long as the ducks are quacking, [SME makers] are generally not concerned where the end market resides,” Risto Puhakka, a financial analyst explained, explained recently.

Lam Research’s CFO has argued that China’s demand “has to be satisfied by somebody.” In other words, if the US does not supply China’s military, another country will. This logic misses the point. Strategic trade controls build consensus around lawful exports and limit where sensitive technologies can be sold, so that they are only supplied to their intended recipients and for their intended use.

Sometimes the rule of law is financially painful. Export controls, if properly implemented, could impact U.S. SME firms in the short run. However, acting now reduces the financial damage. Policies will only become more expensive to implement in future, and increasingly difficult, as China has no plan to slow its military’s development.