Due to its widespread use and numerous innovations, Israeli technology has gained international recognition in the last couple of decades. This is partly to do with the fact that for most tech companies in Israel the domestic market is never the final destination, but rather a stepping stone to the international arena. Therefore, when it comes to doing business, the local firms turn mostly outside the country. The manufacturing of semiconductors and microchips is one such industry. Local companies have expanded their operations throughout the world, particularly in Asia. However, the latest developments on the international political stage could potentially prove to be counterproductive.

U.S. Department of Commerce announced sweeping guidelines last month with the apparent goal of preventing China from acquiring or producing key chips and components for supercomputers. This is another indication of rising tensions between the US and China in the technology sector. Since the US began to look for ways to prevent China from gaining a competitive edge in designing and manufacturing advanced semiconductors, which will eventually lead to military advantage, the Israeli companies found themselves in a pickle.

Senior executives in the industry were asked by US administration officials to encourage more businesses to join the process of regulating their status with the US Department of Commerce after the US published a list of new export controls imposed on microchips and equipment related to its production at the beginning of October. Moreover, Washington contends that these additional limits should be applied to Israeli enterprises that excel at building electronics and manufacturing equipment because of Israel’s reputation as a global leader in this area. It appears that Israeli high-tech companies will need to adjust to the new regulations as a result of this significant change. They will have to walk a fine line between satisfying the demands of the United States government and the desire to do business in the world’s second-largest economy.

However, the US government is aiming to make compliant not only chipmakers and equipment producers but also Israeli tech companies and start-ups that work in the field of artificial intelligence (AI), quantum computers, and its software providers that are increasingly used in the military field.

On the face of it, the task at hand looks achievable as the majority of the local industry that will be forced to comply with new limits is represented by Israeli development centres of US chip corporations (Nvidia, Intel, Apple, Qualcomm etc.). However, the position is more problematic for Israeli firms that are unrelated to the US.

According to experts in the industry, practically every Israeli company producing advanced technology involving AI and supercomputing will need to investigate its ties to the US in order for them to continue exporting to China. The US Commerce Department made it clear that companies that enter the supervised list and fail to follow the requirements, may end up on the blacklist which may lead to severe consequences.

For instance, Dutch company ASML, one of the world’s top producers in the semiconductor sector, has already implemented the US restrictions. The firm has instructed its US employees to stop installing and servicing machinery in Chinese plants.

At present, the new rules are not expected to have a material impact on the financial results of the firm. However, constraints placed on sales of new machinery may have a far-reaching impact across the industry. Many companies in the sector rely on the ASML ecosystem and if Chinese businesses stop purchasing the equipment they require, they will be less inclined to continue working with providers such as Applied Materials, Lam Research or KLA.

As it happens, all three companies have a presence in Israel. Therefore, the refusal of Chinese businesses to carry on their cooperation with the listed above providers can have implications for local industry. As reported by Globes, Applied Materials, which manufactures semiconductor testing equipment and employs over 2,000 people in Rehovot, expects to lose an additional $250-500 million in the current quarter alone.

According to WSJ, KLA, which specialises in inspection and testing equipment and Lam Research, known for its etching machines,  have suspended the provision of service to the state-controlled Chinese chip producer Yangtze Memory Technologies Corp.

Finally, as to Israeli companies. Nova Measuring Instruments Ltd. (TASE: NVMI) has been directly hit with new US legislation. As a result, the company’s stock price dropped 22% after the restrictions were announced on October 7. Another Israeli company from the same sector is Camtek Ltd. (TASE: CAMT). The firm specialises in making of equipment for the fabrication of electronic components, however, it is projected to be less affected, despite the fact that it receives a considerable portion of its business from China. The reason being is that its products fall outside the scope of the legislation.

For some time now, the United States has worked to restrict the growth of China’s semiconductor industry in an effort to thwart China’s efforts to expand its military, create cutting-edge weaponry, and improve its already sophisticated surveillance network.

Unfortunately for Israel, the Biden administration has continued the crackdown that began during the trade wars of the Trump administration. The hope is that both parties can find common ground and move forward so that Israeli businesses would not have to pay the price for this rivalry.