In a significant setback for Samsung and SK Hynix, the Trump administration has revoked Validated End-User (VEU) status – a designation that streamlined their ability to continue using U.S. technology in China. Instead, the U.S. government will now require Samsung and SK Hynix to seek individual licenses for the use of U.S. equipment at their facilities in China. The shift not only threatens the long-term viability of their Chinese facilities but also signals a continuing shift in the U.S. approach to allies and technology.
Samsung and SK Hynix initially received VEU status during the Biden administration after it implemented export controls. The export controls announced on October 7, 2022, were designed to slow China’s development of its own semiconductor industry, as well as ensure that the United States maintained a lead in the development of artificial intelligence (AI).
The October 7 export controls, however, also impacted Samsung and SK Hynix’s facilities in China due to the restrictions on both the export of U.S. semiconductor manufacturing equipment and the ability of U.S. firms to service existing equipment. KLA, one of the semiconductor equipment manufacturers used by SK Hynix, for example, quickly halted sales and service for advanced fabs in China. As the Biden administration’s intent was not to hobble Korean facilities in China, it quickly provided a one-year waiver that was followed with the VEU status.
In ending the VEU statuses the Trump administration indicated that it is taking this step to close “export control loopholes – particularly those that put U.S. companies at a competitive disadvantage.” However, with the completion of the sale of Intel’s facilities in China to SK Hynix earlier this year, no U.S. semiconductor firm still maintains a fab in China. Any efforts by a U.S. firm to set up a new fab in China would likely be opposed by the Trump administration.
The Bureau of Industry and Security, which manages U.S. export controls, indicated that it planned to “grant export license applications to allow former VEU participants to operate their existing fabs in China. However, BIS does not intend to grant licenses to expand capacity or upgrade technology at fabs in China.”
Both SK Hynix and Samsung already faced strict restrictions on the expansion of their Chinese facilities for a decade due to the CHIPS Act guardrails. The more significant consequence from losing the VEU status is the inability to upgrade facilities in China to fend off increasing competition from Chinese competitors.
In the NAND (flash memory) segment, China’s homegrown Yangtze Memory Technologies Corp. (YMTC) increased its share of global production to 8 percent and has plans to expand that share to 15 percent by 2026. It is also further along than other Chinese semiconductor firms in integrating Chinese equipment into production and plans to test a plant fully utilizing Chinese semiconductor manufacturing equipment next year. If successful, YMTC would be able to continue its expansion without access to U.S., Japanese, or European semiconductor equipment.
The competition with China’s ChangXin Memory Technologies (CXMT) in the DRAM (dynamic random-access memory) segment is perhaps more intense. CXMT is rapidly gaining market share by focusing on commoditized RAM and is projected to reach production levels similar to Micron within the next year. This would place it only behind Samsung and SK Hynix in this part of the memory segment.
Samsung, which produces between 35-40 percent of its NAND in China, is in the process of upgrading its plant from 128-layer NAND to 286-layer NAND to better compete with YMTC, which recently began producing 294-layer NAND. SK Hynix which produces 40 percent of its DRAM in China and 20 percent of its NAND at the plant it acquired from Intel, was planning on updating its DRAM facility. It’s unclear whether any of these upgrades will be allowed to be finalized.
The switch to annual licensing could create other complications. The Trump administration is taking a 15 percent share of revenue from Nvidia’s and AMD’s sales of their H20 and MI308 AI chips in China to issue licenses. Samsung and SK Hynix cannot preclude the possibility that this move is an initial step to seeking a share of revenue in return for the issuance of licenses needed to continue or upgrade their operations in China.
This move by the Trump administration is also an interesting contrast to what it did with Nvidia and AMD. Part of the reason that the Trump administration decided to allow the sale of the H20 and MI308 chips in China was to keep Chinese firms dependent on U.S. AI chips and slow the transition to Chinese competitors. In the case of memory, the United States seems to be taking the opposite approach and easing the rise of Chinese competitors by ending the ability of Samsung and SK Hynix to upgrade their Chinese facilities.
While Samsung and SK Hynix still lead their Chinese competitors in market share, over time an inability to upgrade equipment at their Chinese fabs will force them to continue to cede market share as these facilities become less competitive. To an extent, China’s subsidization of domestic firms in the semiconductor industry and drive to have Chinese firms use domestic semiconductors would have produced the same result. But if the Trump administration excludes planned upgrades to South Korean fabs in China from licenses, it will hasten this process.
In the short term, Samsung and SK Hynix will likely look to move some production back to South Korea. SK Hynix has extra capacity at its M16 facility in Incheon and will be bringing online the new M15X facility in Cheongju later this year. Samsung is also considering restarting construction on its P5 facility in Pyeongtaek. Moving some production back to South Korea will address the issue of producing more advanced chips, but not the larger competitive issues Samsung and SK Hynix face from YMTC and CXMT.
Even if the Trump administration does not seek to monetize export control licenses for Samsung and SK Hynix’s operations in China as it has for the sale of Nvidia and AMD AI chips, Washington could use the new export controls as leverage for more investments in production in the United States. With the Trump administration also threatening tariffs on semiconductors and suggesting it might try to take a equity stake in semiconductor firms that received CHIPS Act funds, the shift in export licenses is one more complication for Samsung and SK Hynix’s operations from shifts in U.S. policy.