War of the wafers

Turning the silicon screw

“The future of the chip industry is going to be made in America,” crowed Joe Biden, the US president, in a trip to Ohio last week to celebrate the groundbreaking at Intel’s new $20 billion semiconductor plant. The facility is one of the first to take shape as a result of the CHIPS Act, which was signed into law last month.

The subtext to Biden’s speech is a second prong in Washington’s strategy for the semiconductor sector – steering its companies away from trade with China.

The CHIPS Act is being touted as a huge step towards bringing advanced semiconductor production back onto American soil. Critics have queried these ambitions, wondering how US foundries will compete with the cost structures and industrial excellence of rival hubs in Taiwan and South Korea.

But for Washington, the new legislation is just as much about preventing leakage of more semiconductor knowhow to China, something that stands out in the details of how $50 billion of subsidies will be distributed to firms that build facilities in the US.

Any company that takes public money will be prevented from building ‘advanced technology facilities’ in China for a decade, Gina Raimondo, the US Commerce Secretary, highlighted again this month.

A strategy like this adds to other efforts to isolate China’s domestic chipmakers, including embargos on the sales of the most advanced lithography technology, which print patterns on the most sophisticated microchips.

Washington is also pushing ahead with blocks on shipments of the electronic design automation, or EDA, software that helps engineers put together the most complex chip designs comprising billions of transistors. That was the purpose of new multilateral export controls last month that will prevent the three main producers (US firms Cadence and Synopsys, and German-controlled Mentor Graphics, which control about 70% of the market) from selling the most advanced EDA tools to China without specially granted licences.

There are further expectations that Washington will formalise restrictions communicated individually to three more American firms (KLA, Lam Research and Applied Materials) this year that they cannot ship equipment to China that supports the production of advanced semiconductors unless they obtain a licence.

Reuters has reported that Nvidia and Advanced Micro Devices received letters instructing them to stop shipments of artificial intelligence computing chips as well, as part of efforts to constrain Chinese advances in areas including supercomputing.

Previously regulators have concentrated on isolating individual customers by cutting off the supply of American-made equipment. Huawei has been restricted from purchasing EDA tools since 2019. More recently there’s been scrutiny of a wider range of shipments to China from leading suppliers, like Nvidia. But increasingly the expectation is that the licencing regime will start to be applied at industry level.

American companies will be dismayed if export controls start to eat into their commercial prospects, of course. Nvidia has already warned that a block on sales of its high-end AI chips to China could see it forfeit as much as $400 million of revenue this quarter and its shares plunged 12% on news of the Commerce Department letter.

The response in Beijing was frostier, with the foreign ministry accusing the Biden government of a deliberate effort to keep China stuck at the lower end of the semiconductor industry (an accurate assessment).

But the local media argues that the plan is doomed, not least because it will wreak havoc in the fortunes of some of America’s leading firms. The China Daily gave two examples: Applied Materials earned 34% of its revenue from the China market in 2021, while Lam Research made a third of its sales in China.

“Washington does not want China to make any progress on advanced chip technologies but its politically motivated restrictions will deal a major blow to US chip companies, which bank on China, the world’s largest chip market, for revenue growth,” Zhong Xinlong, an industry expert, told the newspaper.

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