U.S. chip export restrictions could hamper China’s semiconductor goals

The US government has introduced some of its most extensive export controls yet aimed at cutting China off from advanced semiconductors. Analysts said the move could hamper China’s microchip industry.

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China’s ambitions to boost its domestic chip industry have likely become more difficult and costly after the United States launched some of its most sweeping tech-related export controls against Beijing.

The US Commerce Department on Friday introduced sweeping rules aimed at preventing China from obtaining or manufacturing key chips and components for supercomputers, in what is seen as a huge escalation in tensions between Beijing and Washington in the technological field.

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

“There is no turning back,” Abishur Prakash, co-founder of the Center for Innovating the Future, a consulting firm, told CNBC.

“With the latest action, the chasm between the United States and China has now widened to the point of no return.”

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

  • Companies need licenses to export high-performance chips, usually designed for artificial intelligence applications, to China.
  • Even foreign-made AI and supercomputing-related chips, which use American tools and software in the design and manufacturing process, will require a license to be exported to China.
  • American companies will be severely restricted in exporting machinery to Chinese companies that manufacture chips of a certain sophistication.

“The latest chip rules are a sign that Washington is not trying to rebuild relations with Beijing. Instead, the United States is making it clear that it takes this competition more seriously than it has ever done and are ready to take actions that were once unthinkable,” Prakash said.

What impact will US restrictions have on China?

Semiconductors are among the most important technological products. They go into everything from smartphones to cars and refrigerators. But they are also considered essential for military applications and the advancement of artificial intelligence.

As geopolitical tensions between China and the United States have escalated in recent years, technology, and especially sensitive areas like chips, have been drawn into the fray.

Artificial intelligence, quantum computing and semiconductors are all areas that China has identified as “pioneering” technologies in which it wants to strengthen its national capabilities. But new US rules will make this extremely difficult, especially in the area of ​​chips.

“The United States has officially shifted its focus from overtaking China in the semiconductor industry to actively denying it access to advanced chips,” Pranay Kotasthane, chair of the high-tech geopolitics program, told CNBC. the Takshashila Institution.

“China’s local chip industry will be hampered by these extensive controls.”

The nature of the supply chain

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

It comes down to the global nature of the chip supply chain, but also how power and expertise are controlled by very few companies.

The United States, although strong in many market sectors, has lost its dominance in manufacturing. Over the past 15 years or so, Taiwan TSMC and South Korea’s Samsung have come to dominate the manufacture of the world’s most advanced semiconductors. Intelthe largest chipmaker in the United States, is far behind.

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

Pranay Kotasthane

Takshashila settlement

Taiwan and South Korea account for approximately 80% of the global foundry market. Foundries are facilities that manufacture chips designed by other companies.

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

Washington has already used this so-called foreign direct product rule on the Trump-Huawei-era poster of US-China tech tensions. Under these rules, Huawei was cut from the most advanced chips that TSMC made and which were designed for its smartphones. Huawei, which was once the number one player in the smartphone market, has seen its handset business crippled.

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

China will have to “reinvent the wheel”

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

The nanometer number refers to the size of each individual transistor on a chip. The smaller the transistor, the more it can fit on a single semiconductor. Generally, downsizing to nanometer size can produce more powerful and efficient chips.

China’s most advanced chipmaker, Semiconductor Manufacturing International Co. or SMIC, currently manufactures 7nm chips, but not on a large scale. These are generations behind TSMC and Samsung who have a roadmap for making 2nm chips.

But to manufacture chips of this sophistication on a large scale, with lower costs and more reliability, SMIC and other Chinese foundries will need to get their hands on a specific kit called an extreme ultraviolet lithography machine. The Dutch company ASML is the only company in the world capable of manufacturing this essential machine.

If it falls under U.S. export restrictions or comes under pressure from Washington not to sell to Chinese companies, it could hamper the progress of the country’s chipmakers.

ASML highlights the complexity of the semiconductor supply chain.

“Semiconductor production is a hyper-globalized supply chain. Being cut off from this engine will mean that Chinese companies have to “reinvent the wheel” domestically. China’s semiconductor industry will need a much larger injection of capital and talent to absorb this shock,” Kotasthane said.

But it will be a tough climb.

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

Meanwhile, Chinese firms will have to rely on “low-end” domestic alternatives for design tools, Kotasthane said, which they would typically have obtained from US and Japanese firms.

Washington’s latest rules also require any “American person” to obtain a license if they want to support the development or production of semiconductors at certain China-based manufacturing facilities. This effectively cuts off a key pipeline of American talent to China.

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

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