ANALYSIS | US restrictions on microchips could curb China’s ambitions and escalate tech war

Hong Kong ( Business) — China’s leader Xi Jinping’s drive to “win the battle” in core technologies and bolster its position as a tech superpower could be severely undermined by unprecedented moves by Washington to limit the sale of advanced chips and cell-making equipment. chips to the country, according to analysts.

On October 7, the Biden administration unveiled a sweeping set of export controls that prohibit Chinese companies from buying advanced chips and chip-making equipment without a license. The rule also restricts the ability of “US persons,” including US citizens or green card holders, to support the “development or production” of chips at certain manufacturing facilities in China.

“The US moves pose a major threat to China’s tech ambitions,” say Mark Williams and Zichun Huang, analysts at Capital Economics, in a recent research report. Analysts noted that the global semiconductor industry is “almost entirely” dependent on the United States and countries aligned with it for chip design, the tools that make them and manufacturing.

“Without them,” the analysts said, “Chinese companies will lose access not only to advanced chips, but to technology and inputs that could have allowed domestic chipmakers to climb the ladder and compete at the forefront over time.” “. And they added: “The United States has cut the rungs.”

Chips are vital to everything from smartphones and self-driving cars to advanced computing and weapons manufacturing. US officials have spoken of this move to protect national security interests. It also comes at a time when the United States wants to bolster its domestic chipmaking capacity with heavy investment, after chip shortages early in the pandemic highlighted the country’s reliance on foreign imports. .

Arthur Dong, a professor at Georgetown University’s McDonough School of Business, described the recent US sanctions as “unprecedented in modern times.”

Previously, the US government had prohibited the sale of certain technology products to certain Chinese companies, such as Huawei. It has also demanded some of the major US chip-making companies stop their shipments to China. But the last measure is much broader and more significant. It not only bans the export to China of advanced chips made anywhere in the world with US technology, it also blocks the export of the tools used to make them.

With its “Made in China 2025” roadmap, Beijing has set a goal for China to become a world leader in a wide range of industries, such as artificial intelligence, 5G wireless technology and quantum computing. At the Communist Party Congress earlier this month, which secured a historic third term, Xi stressed that the nation will prioritize technology and innovation and grow its talent pool to develop its own technologies.

“China will seek to join the ranks of the world’s most innovative countries in 2035, with great self-sufficiency and strength in science and technology,” Xi said in the party congress report released on Oct. 16.

Dong said the latest US sanctions will make it harder for China to advance in AI as well as 5G, given the role advanced chips play in both industries.

“Under any circumstances,” said Williams of Capital Economics, “it would be difficult for China to achieve global technology leadership.”

Mass resignation of US executives?

One shocking and potentially disturbing aspect of the rules is the ban on US citizens and legal residents from working with Chinese chip companies.

Dane Chamorro, a partner at Control Risks, a London-based global risk consultancy, said such measures are normally “only enacted against ‘rogue regimes,'” such as Iran and North Korea. The decision to use it against China is “unprecedented,” Chamorro said.

Many executives working for Chinese companies may now have to choose between keeping their jobs or acting as legal residents of the United States. “They can’t do both,” Chamorro said.

The ban could lead to mass resignations of top executives and senior research staff working at Chinese chip companies, hitting the industry hard, said Georgetown University’s Dong.

So far it is unclear how many US workers there are in the Chinese chip industry. But a review of company files indicates that more than a dozen chip companies have top executives with US citizenship or green cards. At Advanced Micro-Fabrication Equipment China, one of the country’s largest semiconductor equipment makers, at least seven executives, including founder and chairman Gerald Yin, hold US nationals, according to the latest company filings.

A woman inspects the quality of a chip at an integrated circuit package manufacturer in Nantong, east China’s Jiangsu province, on Friday, Sept. 16, 2022. Credit: Xu Congjun/Future Publishing/Getty Images

Other examples include Shu Qingming and Cheng Taiyi, who are currently Vice President and Deputy General Manager, respectively, of GigaDevice Semiconductor, an advanced memory chip company. The Financial Times newspaper it states in a recent report that Yangtze Memory Technologies has already asked US employees in entry-level technology positions to resign, citing anonymous sources. But it is not clear how many.

AMEC, GigaDevice Semiconductor and Yangtze Memory Technologies did not respond to requests for comment.

If these top executives resign, “a leadership and technology vacuum will be created in China’s chipmaking industry,” Dong said, as the country loses executives with years of chipmaking experience in an industry with “one of the most complex manufacturing processes known to mankind”.

Is it the beginning of a technological war?

Although most of the world’s chip manufacturing is centered in East Asia, China relies on foreign chips, especially for advanced processors, memory chips and related equipment.

China is the world’s largest importer of semiconductors, and has spent more money buying them than oil. In 2021, China bought a record $414 billion worth of chips, or more than 16% of the value of its total imports, according to government statistics.

But some Western suppliers have already started preparing to stop sales to China in response to restrictions on US exports.

ASM International, the Dutch supplier of semiconductor equipment, said on Wednesday that it expected export restrictions to affect more than 40% of its sales in China. The country represented 16% of the company’s equipment sales in the first nine months of this year.

Lam Research, which supplies semiconductor equipment and services, also said last week that it could lose between $2 billion and $2.5 billion in annual revenue in 2023 as a result of restrictions on US exports.

According to analysts, the recently concluded party congress has slowed China’s response to the latest US export controls. But when Beijing begins to assess the importance of the measures, it could retaliate. Xi is “concerned” about US plans to boost domestic chip production as his administration moves to restrict China’s ability to make them, US President Joe Biden said. in a speech on Thursday.

“This conflict is just beginning,” Chamorro said.

He added that the most valuable “card” in China’s hand could be the supply of processed rare earth minerals, which Beijing could seize. Rare earth minerals are important materials in the production of electric vehicles, battery manufacturing and renewable energy systems.

“They are not easy or quick to substitute and China dominates the processing and supply chain,” Chamorro said.

The Biden administration, meanwhile, is also weighing new restrictions on other technology exports to China, a senior US Commerce Department official said Thursday. according to The New York Times.

If either country takes these steps, the US-China tech race could move to a whole new level.