US chip export restrictions could hamper China’s semiconductor targets

The US government has put in place some of its most sweeping export controls to cut China off from advanced semiconductors. Analysts said the move could hamper China’s domestic chip industry.

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China’s ambitions to boost its domestic chip industry have likely become more difficult and expensive after the US launched some of its most extensive technology export controls against Beijing.

On Friday, the US Department of Commerce introduced sweeping regulations aimed at cutting off China from acquiring or manufacturing key chips and components for supercomputers, in what is seen as a massive escalation in tech tensions between Beijing and Washington.

America argues that such advanced semiconductors can be used by China for advanced military capabilities.

“There’s no going back to the way things were,” Abishur Prakash, co-founder of the Center for Innovating the Future, a consulting firm, told CNBC.

“With the latest move, the gap between the US and China has now become so wide that there is no turning back.”

Here are some of the highlights of the new US rules:

Companies need licenses to export high-performance chips, mostly designed for artificial intelligence applications, to China. exported to China. US companies will be severely restricted from exporting machines to Chinese companies that manufacture chips of a certain sophistication.

“The latest chip rules are a sign that Washington is not trying to restore relations with Beijing. Instead, the US is making it clear that it takes this competition more seriously than ever, and is willing to take steps that were once unthinkable,” Prakash said.

What impact will US restrictions have on China?

Semiconductors are some of the most important technology products. They go into everything from smartphones to cars and refrigerators. But they are also seen as key to military applications and advancing artificial intelligence.

As geopolitical tensions between China and the US have increased in recent years, technology, and particularly sensitive areas such as chips, has been dragged into the fray.

Artificial intelligence, quantum computing and semiconductors are all areas China has identified as “frontier” technologies in which it seeks to increase its domestic capabilities. But the new US rules will make that extremely difficult, especially in the chips sector.

“The US has formally shifted its goal from surpassing China in the semiconductor industry to actively denying access to advanced chips,” Pranay Kotasthane, chair of the high-tech geopolitics program at the Takshashila Institution, told CNBC.

“China’s homegrown chip sector will be hampered by these extensive controls.”

The nature of the supply chain

The reason US export controls can be so effective is that they can affect various parts of the semiconductor supply chain, even those not directly located in America or not controlled by US companies.

This has to do with the global nature of the chip supply chain, but also with the way power and expertise is controlled by very few companies.

The United States, while strong in many parts of the market, has lost its dominance in manufacturing. Over the past 15 years, Taiwanese TSMC and South Korean Samsung have come to dominate the manufacturing of the world’s most advanced semiconductors. Intel, the largest chip maker in the United States, lagged far behind.

Reinventing the wheel will now be much more expensive (for China).

Pranay Kotasthane

Takshashila Institution

Taiwan and South Korea make up about 80% of the global foundry market. Foundries are facilities that make chips designed by other companies.

However, the US still has strong design tools companies, many of which are used by other companies in the supply chain. For example, it’s unlikely that TSMC’s advanced chips didn’t use American tools somewhere along the way. In this case, US export restrictions to China apply.

Washington has previously used this so-called foreign direct product rule on the poster child of the Trump-era technical tensions between the US and China – Huawei. Under those rules, Huawei was cut off from the most advanced chips TSMC made that were designed for its smartphones. Huawei, once the number one player in the smartphone market, saw its handset business crippled.

But never has such a rule been so widely used by the US

China must ‘reinvent the wheel’

Meanwhile, other countries may come under pressure not to ship certain equipment to China. For example, the latest rules mean that companies must obtain licenses to ship machines to Chinese foundries if those facilities make certain memory chips or logic semiconductors that are 16 nanometers, 14 nanometers or less.

The nanometer number refers to the size of each individual transistor on a chip. The smaller the transistor, the more can be packed onto a single semiconductor. Typically, downsizing the nanometer size can yield more powerful and efficient chips.

China’s most advanced chipmaker, Semiconductor Manufacturing International Co. or SMIC, currently makes 7nm chips, but not on a large scale. It is generations behind TSMC and Samsung who have a roadmap to make 2nm chips.

But to make chips of this sophistication on a large scale, with lower costs and greater reliability, SMIC and other Chinese foundries will have to get their hands on a specific piece of equipment, an extreme ultraviolet lithography machine. The Dutch ASML is the only company in the world capable of making this crucial device.

If it falls under US export restrictions or comes under pressure from Washington not to sell to Chinese companies, it could hinder the progress of chipmakers in the country.

ASML underlines the complexity of the semiconductor supply chain.

“Semiconductor manufacturing is a hyper-globalized supply chain. Being cut off from this engine means Chinese companies have to reinvent the wheel domestically. The Chinese semiconductor industry will need a lot more capital and talent to absorb this shock,” Kotasthane said.

But this is going to be a climb.

Kotasthane said China will be able to make advanced chips even without ASML’s machines “but the yield will be much lower, meaning higher costs and lower reliability.”

Meanwhile, Chinese companies will have to rely on “lower-tier” domestic alternatives to design tools, Kotasthane said, which would normally have gotten them from US and Japanese firms.

Washington’s latest rules also require any “US person” to be licensed if they want to support semiconductor development or production in certain China-based manufacturing facilities. This effectively cuts off an important pipeline of American talent to China.

“Reinventing the wheel will now be much more expensive,” Kotasthane said.

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