Xi Jinping said at the 20th CCP Congress last October that he wanted to “win the battle of key technologies” and strengthen China’s position as a major technological power. These efforts may well be undermined by Washington’s latest moves to restrict the sale of the latest semiconductor and chip-making equipment to China.
On the 7 of October, the Biden administration unveiled a sweeping set of export controls that prohibit Chinese companies from buying more sophisticated semiconductors and semiconductor manufacturing equipment without a licence. The regulations also restrict the ability of “US persons” – including US citizens or green card holders – to provide support for the “development or production” of semiconductors at certain factories in China. The global semiconductor industry is almost entirely dependent on the United States and its allies for semiconductor design, which the industry calls design. A few US companies such as Intel or Qualcomm share the vast majority of the global design market.
“Without them,” said some analysts, “Chinese companies will lose access not only to the most sophisticated semiconductors, but also to the technologies and inputs that could have, over time, allowed domestic semiconductor manufacturers to climb the ladder and reach the cutting edge.”
Semiconductors are vital components in our digital world, from smartphones and self-driving cars to advanced computing and weapons manufacturing. As is often the case, US officials have spoken of the new initiative as a measure to protect US national security. It also comes at a time when the US is building up its own semiconductor manufacturing capacity through heavy investment in a $53 billion Chips Act. The goal is to end US dependence on imported semiconductors, mostly produced in East Asia.
What has changed:
Previously, the US government had banned the sale of certain technology products to specific Chinese companies, such as Huawei. It has also asked some major European semiconductor equipment companies to stop shipping to China. But their latest initiative is much more far-reaching and significant. Not only does it ban the export to China of the latest generation of semiconductors made anywhere in the world using US-designed technology, it also blocks the export of the machine tools used to make them.
With its “Made in China 2025” roadmap, Beijing has set a goal of becoming a global leader in a wide range of industries, including artificial intelligence (AI), 5G wireless technology and quantum computing. At the Chinese Communist Party Congress, Xi Jinping, who was re-elected for a third term, stressed that China would continue to prioritise technology and innovation, saying: “China will seek to join the ranks of the world’s most innovative countries by 2035, with great autonomy and strength in science and technology.
The latest US restrictions will especially handicap China’s ability to make progress in AI and 5G, areas that are hungry for sophisticated semiconductors. This is the Biden administration’s current way of keeping the Chinese slightly behind the US, especially in the weapons field. The question is how quickly the Chinese players will be able to close the technology gap.
The latest U.S. move is to ban U.S. citizens from working for semiconductor companies in China. American engineers and senior managers and researchers are being forced to leave their jobs in China if they want to return to the US. That’s a lot of brainpower and know-how gone.
The measure is expected to affect US nationals at Advanced Micro-Fabrication Equipment China (AMEC), one of the country’s largest semiconductor equipment manufacturers, and staff at Memory Technologies.
While much of the world’s chip production is concentrated in East Asia, China is dependent on foreign chips, particularly for advanced processors and memories and related equipment.
The high level of Chinese imports
China is the world’s largest importer of semiconductors and spent more money on them last year than on its oil supplies. The sum total of $414 billion worth of semiconductors in 2021 is equivalent to 16% of the value of its total imports, according to Chinese statistics.
Some Western suppliers have already begun preparing to halt sales to China in response to US export restrictions. ASML International, the Dutch semiconductor equipment supplier, expects the export restrictions to affect more than 40% of its sales to China. China accounted for 16% of its equipment sales in the first nine months of this year. Lam Research, which provides semiconductor equipment and services, expects to lose between $2 billion and $2.5 billion in annual revenue by 2023 due to US export restrictions.
The 20th Communist Party Congress in Beijing has delayed the occurrence of possible Chinese countermeasures. Xi is “concerned” about the US policy of boosting “made in USA” semiconductor production. One possibility is for China to impose an embargo on rare earth minerals refined on its territory. These rare earths are key materials for the manufacture of electric car batteries, for renewable energy systems and also for semiconductors. These rare earths are not easily or quickly replaceable and China dominates the processing and supply chain. The Chinese reaction must be watched. Meanwhile, on the US side, a senior Commerce Department official is talking about imposing new restrictions on exports of other technologies to China. The Sino-American technology war seems to be definitely escalating.