Aurelia Butler

Last December, South Korean semiconductor company Magnachip reluctantly announced the demise of its proposed $1.4bn merger with Chinese private equity firm Wise Road Capital.Apart from its listing on the New York Stock Exchange and a nominal corporate presence in Delaware, Magnachip has no substantive operations — in manufacturing, research and development or sales — in the US. But that did not stop the Committee on Foreign Investment in the United States, a body initially set up in the 1970s to screen the purchase of US strategic assets by OPEC countries, from intervening in the merger.In a move that took the global semiconductor industry by surprise, Cfius intervened in the merger and ruled that it posed a potential risk to US national security, effectively killing the deal and casting a chill over the sector. “Cfius has traditionally been involved in traditional security issues like ports and infrastructure, and yet it blocked the takeover of this relatively small chip firm that had hardly any US presence at all,” said Chris Miller, assistant professor at Tufts University and author of Chip War: The Fight For The World’s Most Critical Technology. “That was a really important signal for the entire industry.”The Magnachip case is an example of how mounting US-China tensions are affecting chipmakers, which are increasingly being pressed to align with Washington as it seeks to counter China’s rise as a technological power.The companies are vying for billions of dollars in US grants through the $280bn Chips and Sciences Act and do not want to be caught out by restrictions from an increasingly hawkish White House.

The Financial Times reported this month that Korean semiconductor titans Samsung Electronics and SK Hynix are re-evaluating their investments in China in response to “guardrails” in the legislation that prohibit recipients of US federal funding from expanding or upgrading their advanced chip capacity in China for 10 years.Competitors including Taiwan’s TSMC and US chipmakers Intel and Micron, all of which have manufacturing operations in China, are also under pressure to boost domestic US production while making it harder for Beijing to obtain advanced semiconductor technology. The pressure is likely to build as the US attempts to rally allies Korea, Taiwan and Japan behind a “Fab 4 chip alliance” designed to co-ordinate policy on research and development, subsidies and supply chains.Korean chipmakers, historically reluctant to take sides in the technological rivalry between the US and China, have acted as a bellwether for the direction of the global semiconductor industry.Samsung and SK Hynix have boosted investments in US production facilities even as they remain heavily exposed to the Chinese market. South Korea exported $50bn of chips to China last year, up 26 per cent from 2020 and accounting for nearly 40 per cent of the country’s total chip exports, according to the Korea International Trade Association.But they share a near-total dependence on a small number of US, Japanese and European chip designers and equipment makers for the technology required to produce advanced chips, giving Washington leverage over what Miller described as the “main choke points in the semiconductor production process”.Those companies include US chip designers Cadence and Synopsis, Siemens-owned Mentor Graphics, American equipment makers Applied Materials and Lam Research and ASML in the Netherlands, which makes the extreme ultraviolet lithography tools needed to produce cutting-edge Dram memory chips.“China has the market, but the US has the technology,” said Yeo Han-koo, who served as South Korea’s trade minister until May. “Without technology, you have no product. Without a market, at least you can find a way to diversify and identify alternatives.”Neither Samsung nor SK Hynix, which both specialise in memory chip production, manufacture their most advanced semiconductors in China. China’s largest chipmaker Semiconductor Manufacturing International Corp announced last month that it had started shipping advanced 7-nanometre semiconductors. However, analysts said that without access to the world’s most sophisticated equipment, SMIC would struggle to close the gap with Samsung and TSMC, which are major global suppliers of 5nm and 4nm chips.A person close to TSMC, which dominates the global market for foundry chips, said the US bill was unlikely to have a dramatic effect as the Taiwanese government already had restrictions on producing advanced chips in mainland China.But Dylan Patel, chief analyst at SemiAnalysis, said that US guardrails on upgrading or expanding companies’ Chinese operations would still have an impact. SK Hynix and Samsung would probably only maintain their existing investments, said Patel. “As a result, the share of their production in China is likely to reduce substantially over time,” he said. The dilemma for Korean and other chipmakers is how to execute their pivot away from China and towards the US without provoking a backlash from Beijing, which has grown increasingly vocal in its opposition to what US officials describe as “friendshoring”.

“Decoupling with such a large market is of no difference from commercial suicide,” read an editorial last month in the Global Times, a Chinese state-owned nationalist tabloid. “The US is now handing South Korea a knife and forcing it to do so.”Yet Patel said China’s continued dependence on the chips and technologies from foreign groups meant that its leverage was limited. “Beijing needs these chip imports for their own manufacturing industries. What are they going to do, stop having electronics manufactured in China?”He said Washington could increase the pressure further by banning the export of chipmaking equipment used to manufacture advanced Nand memory chips to Chinese plants, including those owned by foreign companies. Samsung and SK Hynix both have Nand memory chip plants in China.David Hanke, partner at Washington law firm ArentFox Schiff, who advises multinationals on China competition issues, said that chipmakers would be wise to heed the spirit of the Chips Act and not just the letter of the legislation itself. “How much a company has been contributing to China’s technological development will be scrutinised,” said Hanke, noting that grants to chipmakers would be reviewed every two years by the US Department of Commerce. “There will be a big optics problem for companies that play it too close to the edge of what this legislation allows.”He added that companies should also consider the possibility that Washington will take an even more hawkish turn in the near future. Republicans are tipped to recapture the House and possibly the Senate in November’s midterm elections.“When it comes to circumventing US regulations, China moves like water around rocks. So it shouldn’t come as a surprise if people on Capitol Hill start to say in a year or two’s time that the present guardrails were too weak.”Additional reporting by Kathrin Hille in Taipei More

Electricity companies can dampen spiralling energy costs for British households by agreeing to sell some of their production at fixed prices “far lower” than current wholesale rates, the UK energy group SSE said.The FTSE 100 company has admitted electricity companies could play a part in smoothing out surging energy costs for families, although it also joined calls for the government to “artificially” suppress domestic energy prices by providing payments to suppliers so they can avoid passing on huge increases in Britain’s price cap.Writing in the Financial Times, SSE chief executive Alistair Phillips-Davies proposed a voluntary scheme through which low-carbon electricity companies that own existing assets, such as wind farms and nuclear plants, could agree to fixed prices well below current rates for wholesale power for production they have not committed to sell in advance. Such fixed-price contracts could run for 15 years, which would help bridge “the gap” until other longer-term plans to reduce the price of electricity in Britain are established, Phillips-Davies said. For example, the government has set out targets for cheap low carbon technologies, such as offshore wind by 2030, as it seeks to reduce Britain’s dependence on expensive imported gas. The radical proposal would help take the heat off power companies, which fear a windfall tax if they generate huge profits while households face the biggest squeeze on their income in a generation, fuelled by spiralling energy costs. Oil and gas companies operating in UK waters have already been hit with a new 25 per cent windfall levy.Allies of Nadhim Zahawi, the chancellor, who held an urgent meeting with energy companies including SSE last week, have said he is keeping alive the prospect of a windfall tax if generators are seen to be returning excess profits to shareholders.

Phillips-Davies’s intervention comes ahead of Ofgem announcing on August 26 the new level of the energy price cap, which dictates bills for the vast majority of households. Current forecasts suggest the energy regulator will announce a rise to more than £3,600 a year for a typical household from October 1 from £1,971 currently.Phillips-Davies said renewable and nuclear generators would pay the difference between the agreed fixed price and current wholesale rates back into a pot “which could then help pay down any debt created by capping [household] prices”. SSE owns renewable energy generation, such as wind farms, as well as electricity networks and gas-fired power plants in Britain. It no longer sells electricity and gas directly to British customers after it sold its retail business to Ovo in 2020.The proposal echoes a scheme suggested earlier this year by academics at the UK Energy Research Centre, who estimated that more than £300 could be knocked off household energy bills a year. The academics claimed most existing large scale renewable energy projects still benefit from a legacy support scheme that pays generators a subsidy on top of prevailing wholesale power prices.Phillips-Davies insisted the government would still have to play the biggest part in helping families this winter, as he backed a billion-pound loan scheme proposal to help suppress domestic energy prices. The scheme, first suggest by ScottishPower in April, has been gaining support as concern about energy bills has risen. Phillips-Davies added that a loan scheme should be viewed as a “mortgage” rather than a “handout”.“As with Covid emergency support, it would rely on relatively cheap government borrowing, but with a plan to pay down this debt as we complete our energy transition and prices fall,” he added. More

The writer is chief executive of SSEFast forward to the early 2030s, and I believe that the UK will have solved virtually all the big energy problems it is currently facing. By then, we will have an abundance of cheap offshore wind generated in Britain and will have built the network superhighways to transport it to areas of demand. The UK will be able to balance the system with zero-carbon hydrogen, carbon-abated technologies and flexible sources of storage. We will have reformed our energy markets and successfully uncoupled the cost of homegrown technologies such as wind and solar from the international gas price. Energy will be affordable, supply will be secure and we’ll be well on the way to net zero.The destination is clear, but the journey — thanks largely to Russia’s invasion of Ukraine — will unfortunately not be smooth.The challenge facing the next prime minister requires a twin-track response: first, ensuring household bills remain affordable in the near term given predicted price rises and widespread concern over how people will manage this winter. Second, figuring out how to get to cheaper, more secure, homegrown energy even faster. The energy industry and government must work together on both parts of this equation. Government can smooth energy costs for households beyond what industry can do alone. It could artificially keep prices down for a period, providing payments to suppliers to bridge the gap between this capped price and the costs they actually incur. Rather than being a handout, this is essentially a mortgage, secured against the cheap future energy system I’ve described. As with Covid emergency support, it would rely on relatively cheap government borrowing, but with a plan to pay down this debt as we complete our energy transition and prices fall. I am sure the retailers will step up and help make this solution work — indeed many have been calling for it.As one of the UK’s largest investors in low-carbon electricity infrastructure, SSE is focused on delivering the long-term solutions to today’s problems. However, short-term measures are needed too, and we are exploring with government how we can help smooth costs for households.One idea is a voluntary scheme through which generators of non-flexible, low-carbon power such as wind and nuclear could sign up for contracts to deliver at a fixed price any power they haven’t already “hedged” or sold into the market ahead of time. This fixed price would be far lower than current wholesale rates. Generators would pay the difference back into a pot that could then help pay down any debt created by capping prices. Offering these contracts for 15 years would spread costs out over a longer period, bridging the gap until other policies delivering cheaper, more secure energy take full effect. It is vital we don’t do anything in the short term to treat the symptoms of this crisis that will slow down delivery of the solutions that will address the underlying cause. We need huge capital investments in low-carbon energy infrastructure. These are delivered most cheaply when stable, long-term policy reduces risk. That’s how the UK became a global superpower in offshore wind.For SSE’s part, our plans could see us investing £24bn by the end of this decade. We plan to invest far more than we expect to make in profit and have cut our dividend policy to prioritise investment and growth. Money we make is being ploughed straight back into infrastructure that will boost Britain’s energy security and cut costs.This is a critical moment for the UK. Nobody yet has all the answers and the ideas we’re putting forward need work. But when new ministers take office in September they will find an electricity industry willing to help in the short term, while delivering a future energy system that will prevent us ever being in a similar predicament again. More

Some investors are warning of a mismatch between market expectations and the Federal Reserve’s stated commitment to stamping out inflation as traders stand by their wagers on interest rate cuts next year. Traders in the futures market are betting the central bank’s main interest rate will be cut to 3.3 per cent by the end of next year after peaking at 3.7 per cent in March 2023. That implies the Fed will have to cut rates by the second half of next year. However, some investors argue that the market is misjudging the Fed, which has repeatedly said it is intent on tackling inflation even if tighter monetary policy results in higher unemployment and slower economic growth. “It is, to me, a glaring market mispricing,” said Rebecca Patterson, head of investment strategy at Bridgewater Associates. “Market participants are conditioned from previous cycles to expect the Fed to pivot” to a more dovish stance, she added. The most recent summary of the Fed’s economic projections, known as the “dot plot”, showed most officials expect the federal funds rate to reach 3.8 per cent by the end of 2023, before easing to 3.4 per cent in 2024. That forecast from June implies there will not be a rate cut next year. A new dot plot will be published next month. Doubts over the Fed’s commitment to bringing down inflation have percolated for months, as investors have wavered in their conviction the central bank will press ahead in the face of a slowdown.But the Fed and its officials have stressed they are determined to address the highest inflation in almost four decades. Mary Daly of the San Francisco branch this week said she was sceptical the central bank would cut rates next year. “The worst thing you can have as a business or a consumer is to have rates go up and then come rapidly down,” she said in an interview with CNN. “It just causes a lot of caution and uncertainty.”She said it would be wrong to think of a “large, hump-shaped rate path, where we’ll ratchet up really rapidly this year and then cut aggressively next year”. Also this week, St Louis Fed president James Bullard said he supported a third consecutive 0.75 percentage point rate rise at the central bank’s next policy meeting in September. Despite such protestations, equity investors are sceptical the Fed will follow through with sharp interest rate rises.When the Fed embarked on an aggressive tightening cycle in March, US stocks fell into bear market territory as investors bet that higher borrowing costs would hurt companies and consumers. But the blue-chip S&P 500 and the tech-heavy Nasdaq Composite have since June recovered nearly half of their losses this year.

“There’s this disconnect between the market and the Fed, and there’s this idea that the Fed is going to have to relent in its tightening programme to allow for weaker employment and slowing growth,” said Gregory Whiteley, a portfolio manager at DoubleLine. “That idea is really strongly embedded in markets.” The recovery in stocks has eased financial conditions, making it easier for companies to borrow and hampering the Fed’s efforts to cool down the economy. A Goldman Sachs index shows that US financial conditions have eased significantly since peaking in mid-June after the Fed’s first 0.75 percentage point rate increase. More