Semiconductors: Their Widespread Impact on Markets and Companies

An issue at the core of US-China relations has been semiconductors. Amid rising political tension, the US government has imposed tight restrictions on trading semiconductors to China, citing concerns about military usage. US semiconductor companies, such as Nvidia and Arm, have faced many challenges because of these regulations.

Nvidia, in particular, has been extremely successful globally, largely due to their chips that incorporate industry-leading AI technology. China and Hong Kong have historically accounted for 22% of Nvidia's total revenue. Therefore, with the US government imposing controls on semiconductor trade and the looming threat of more restrictions, one would expect Nvidia's stock to plummet, causing investors to be wary. In October 2022, after the US government required Nvidia to sell only to companies in China with licenses, Nvidia's stock dropped by over 3%. However, Nvidia's stock quickly recovered, and it has continued to grow since then. In the past year, Nvidia's stock has grown by 220%, and its current stock price is just over $460.

Nvidia's CFO, Colette Kress, explained why these restrictions do not impact them at an investment conference. She stated, "Given the strength of demand for our products worldwide, we do not anticipate that such additional restrictions, if adopted, would have an immediate material impact on our financial results. We do not anticipate any immediate material impact on our financial results."

While Nvidia's stock has not been impacted by these government measures, as well as US markets, these US government measures have had massive implications on China. Not only do these controls impact the Chinese military, but they also severely harm Chinese AI, science, and technology industries, threatening future growth as well. Alibaba and Baidu stock have been in steady decline since their peak in 2021, with many crediting the semiconductor war as a primary cause.

While Nvidia's financial situation has been stable, they are still wary of these measures. At the same conference as earlier, Kress stated that the US government's actions "would result in a permanent loss of opportunities for the US industry to compete and lead in one of the world's largest markets and impact our future business and financial results." So, while this move handicaps China and its economy in the way the US government intended, it also completely takes the US out of an extremely lucrative market with a lot of potential.

Arm, another company in the semiconductor industry, has not been as fortunate in the US-China trade war. Arm licenses its semiconductor designs to other companies, which, in turn, produce and distribute them.

Arm's problem stems from the fact that 25% of its business operates in China. Their stock price has fallen by over $15 since their IPO, although it has only been just over a month since their IPO. It will be interesting to track how it performs in the near and far future. With the USA continuing its crackdown on semiconductors, however, many predict the stock price to continue to fall.