China is in for ‘a tough time’ as U.S. targets tech sector, expert says

SINGAPORE — China is in for “a tough time” in the short term as the U.S. tries to deny it access to crucial tech components, a business consultant told CNBC on Monday.

Tensions between the two countries in the technology space heated up over the weekend with the U.S. considering blacklisting China’s largest chipmaker, Semiconductor Manufacturing International Corporation or SMIC.

The measure would restrict SMIC from obtaining specific goods made in the U.S. Even though China has been developing its own semiconductor manufacturing capabilities, companies such as SMIC still relies on American equipment in its production line.

Richard Martin, managing director of IMA Asia, told CNBC’s “Squawk Box Asia” that China may have to “look elsewhere” for supply of semiconductors if SMIC’s ability to produce them is crippled by the U.S. move.

“The problem with looking elsewhere is if you go to Europe or if you go to Japan, the companies in Europe and Japan are using U.S. machinery at some point in their production process. And therefore … they can be hit by this U.S. effort to choke it off,” he said.

“So what China needs to do is move the entire supply chain into China,” he added.

Such effort may take years given that SMIC is still “a long way” behind its rivals in terms of chip-making capabilities, said Martin.

“That’s going to be the big drive,” he said. “It’s going to take them two or three years to get past this and move the whole supply chain into China.”

Analysts from Jefferies estimated that 40% to 50% of SMIC’s equipment is from the U.S. They said in a Sunday note that a ban on exports to SMIC — and potentially other Chinese semiconductor producers — is a “lose-lose proposition.”

They explained that China is a major buyer of equipment to produce semiconductors and is expected to account for around 24% of global purchases this year. Therefore, blacklisting companies such as SMIC could also hurt makers of the equipment, including those from the U.S., the analysts said.

The U.S.-China tech dispute is part of a broader conflict between the world’s top two economies. While a damaging tariff war has been halted, the two countries have recently clashed over a wide range of issues that include the origin of the coronavirus and Hong Kong’s autonomy.

Before the announcement of SMIC’s potential blacklisting, the U.S. had made other moves against Chinese tech players, noted Martin. That includes requiring foreign manufacturers using American chip-making equipment to get a license before selling semiconductors to Huawei, he said.

“They’ve really been trying to close down the China tech sector.”

— CNBC’s Arjun Kharpal contributed to this report.