China Caves on Chips

Finally. After much handwringing, the U.S. semiconductor industry received a huge boost yesterday when China agreed to drop its practice of punishing foreign chip makers with a 17% value-added tax.

The news is significant because U.S. chip makers such as Intel (Nasdaq: INTC  ) , Advanced Micro Devices (NYSE: AMD  ) , Motorola (NYSE: MOT  ) , and Texas Instruments (NYSE: TXN  ) sell more than $2 billion in circuits to China each year. But those imports had been subject to heavy taxes, presumably to help Chinese firms compete. Indeed, companies that design and produce their chips in China typically are rebated 14% of the 17% tax. Under yesterday's agreement, brokered through the World Trade Organization, China will end the practice by April.

Generally, political theater such as this has nothing more than a rudimentary impact on business. That may not be the case here. After all, it's often said that as goes the $70 billion chip industry, so goes the rest of the U.S. technology sector. Moreover, China is the world's third-largest semiconductor market at more than $20 billion and is growing at 25% annually.

Unsurprisingly, the Semiconductor Industry Association (SIA), a U.S. trade organization for chip makers, hailed the decision as a win for the global tech industry. Yeah, OK. The real winners, however, may be investors. Chip sales are spiking, with the latest numbers from the SIA showing semiconductors brought in more than $17 billion in revenue globally during May. That's a 2.1% increase over April and a 37% jump from the same period a year ago.

Removing the Chinese cover charge should help American firms capture an increasing share of these profits, without raising domestic and overseas production costs. And that makes chips appear all the tastier to this investor. Would you mind passing the salsa?

Want more Fool coverage of your favorite chip stocks? Check these out:

  • Bill Mann finds that AMD may have finally won overDell (Nasdaq: DELL  )
  • I've seen some flaws in Intel, but should you care?
  • Jeff Hwang sees the promise in Applied Materials (Nasdaq: AMAT  )

What's your take? Is China's decision key for business, or just politics? Can American firms come to dominate the Chinese market, or will the Sino semiconductor superstars rise to global prominence? Share your thoughts at the Semiconductors discussion board.

Fool contributor Tim Beyers owns no interest in any of the companies mentioned, and you can view his Fool profile here.


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