China Trade Fears Trigger $500 Billion Loss in Chip Stocks

The semiconductor industry faced a significant setback on Wednesday, losing over $500 billion in stock market value. This marks the worst session for the sector since 2020, triggered by reports that the United States is contemplating stricter export controls on advanced semiconductor technology to China.

The market decline intensified following comments from Republican presidential nominee Donald Trump, suggesting that Taiwan should financially compensate the United States for its defense efforts. These remarks further pressured chip stocks, causing notable declines.

In recent years, the U.S. has adopted a more protective approach towards its semiconductor manufacturing industry, viewing it as strategically crucial in the technological competition against China. The latest report from Bloomberg News indicated that the U.S. might implement the most severe trade restrictions if companies continue to provide China with advanced semiconductor technology.

• ASML Holding: The U.S.-listed shares of Dutch chipmaking equipment provider ASML Holding plummeted 13% despite surpassing second-quarter profit estimates.
• Nvidia: AI giant Nvidia saw a nearly 7% drop, translating to a loss of over $200 billion in market capitalization.
• AMD and Arm: Both AMD and Arm experienced approximately a 10% decline.
• Micron: The stock of Micron fell by 6%.
• Broadcom: Broadcom’s shares decreased by 8%.

Conversely, companies with U.S. chip manufacturing operations saw gains:

• GlobalFoundries: Shares jumped nearly 7%.
• Intel: Intel edged up by 0.35%.

Some analysts believe that Intel might benefit from the geopolitical tensions due to its ongoing investments in building several plants in the U.S. Bob O’Donnell, chief analyst at TECHnalysis Research, suggested that market reactions might be short-lived since the fundamental market drivers have not changed significantly. He noted that U.S. restrictions on shipments to China are likely to increase slightly regardless of the election outcome, as these restrictions have been in place for some time.

The Biden administration has taken aggressive measures to limit Chinese access to advanced chip technology. This includes broad restrictions issued in October to control the export of AI processors designed by firms like Nvidia. These curbs have affected U.S. chipmakers’ sales to China, with Nvidia’s revenue from China dropping to about 18% of its total revenue in the quarter ending April 28, compared to 66% in the same period last year.

Donald Trump, who is seeking to return to the presidency in the November 5 U.S. election, stated that Taiwan should compensate the U.S. for its defense efforts. His comments negatively impacted U.S.-listed shares of Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker, which fell by 8%.

Taiwan plays a critical role in the global chip supply chain, and analysts have warned that any conflict involving the island could have devastating effects on the global economy. The Philadelphia Semiconductor Index (.SOX) experienced a 6.8% decline, the largest one-day drop since the COVID-19 pandemic disrupted global markets.

Despite the recent downturn, the semiconductor index remains up by 30% for 2024, outperforming the S&P 500 index’s 17% gain, primarily driven by the AI boom.

Intel has been heavily investing to regain a manufacturing edge it lost to TSMC. As one of the biggest beneficiaries of the U.S. Chips Act signed by President Biden in August 2022, Intel received $52.7 billion in subsidies. Several policy experts believe the U.S. focus on semiconductors will continue, potentially with even more curbs on exports to China and increased support for domestic chipmakers like Intel.

However, there are concerns about Intel’s ability to revitalize its manufacturing business, with its foundry segment reporting an operating loss of $2.47 billion for the quarter ending March 30. Michael Sobolik, a senior fellow at the American Foreign Policy Council, noted that if Trump returns to power, he might not only continue the export restrictions but also strengthen them. Trump initiated several semiconductor export controls during his first administration, including the ‘foreign direct product rule’ that restricted foreign parties from enabling Huawei’s access to semiconductors.

The semiconductor industry remains a critical battleground in the technological and economic rivalry between the United States and China, with significant implications for global markets and economies.

Featured Image courtesy of Tipranks

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