Choking point

The war of words in the semiconductor sector rumbled on this weekend when Xi Jinping, the Chinese president, promised to “resolutely win the battle in key core technologies” during his speech at the opening of the twice-a-decade National Party Congress in Beijing.

But it’s his American counterpart Joe Biden that is taking the most action in the confrontation over chipmaking, with his administration tightening the screw again this month with the most aggressive measures yet to stop Chinese firms from matching their peers in the industry.

The US government has been broadening the controls on exports to China’s semiconductor sector for years, including another round of instructions this summer. But the latest rules, which come into effect this month, are the most comprehensive yet in drawing these efforts together across a wider range of items from chips made by companies like AMD and Nvidia through to the equipment needed to manufacture them, much of it from US producers KLA, Applied Materials and Lam Research.

Under the regulations the Chinese can still import basic semiconductors that power items like household appliances and lower-grade computing. But any chip that exceeds new benchmarks set by the Bureau of Industry and Security at the US Department of Commerce will be subject to export controls, bringing new kinds of graphic processing units, memory chips and other computing architecture chips into scope, according to Caixin, a business magazine.

Gregory C Allen, a Senior Fellow at the Center for Strategic and International Studies, says the impact will be felt in an unprecedented way across Chinese chipmaking, describing the campaign as “strangling with an intent to kill”.

However, he describes the move as a bid to tighten the chokepoints around four particular areas: AI chip design, electronic design automation software, semiconductor manufacturing equipment and equipment components.

As an example: high-end AI chips can no longer be sold to anyone operating in China, including American companies running data centres there.

Washington argues that the programme is designed to prevent the People’s Liberation Army from getting its hands on the latest technology. But the restrictions are being extended across the entire market because the Americans don’t believe there is a way of preventing technology leakage from local companies to military sources.

“I think the whole policy of the administration can be justified by the fact that if you sell an AI chip to any entity in China for cloud server activities and that’s the alleged end use, it can also be used elsewhere and there’s no way around that problem,” agreed Mathieu Duchatel, director of the Asia Programme at the French think-tank Institut Montaigne, in comments cited by Protocol, a tech blog.

In another demonstration of the pervasiveness of the plan, Washington is prohibiting any semiconductor manufacturer worldwide from providing services to Chinese chip design firms wanting to make high-end chips for AI or supercomputing.

Anyone that ignores this directive risks losing access to American manufacturing equipment, while a subset of Chinese organisations on Washington’s target list will be blocked from outsourcing the manufacturing of any type of semiconductor at all.

A regular response to embargoes like these is that they are self-defeating in spurring Chinese efforts to develop the same capacity domestically. Beijing has already directed hundreds of billions of yuan into investment in semiconductors, which it classes as one of the seven “core technologies” it wants local firms to master. But progress towards self-sufficiency hasn’t been stellar, especially in more sophisticated components and equipment, where many local firms still rely on American technology.

The bid to close the gap hasn’t been helped by revelations of corruption and mismanagement at some of the state-backed agencies tasked with encouraging the national effort to establish parity in the sector, including a series of problems at the China Integrated Circuit Industry Investment Fund (commonly known as the ‘Big Fund’).

The Biden administration clearly thinks that catch-up isn’t going to come easily to the Chinese and that it can make it even harder for their chipmakers, especially in higher-end semiconductors that support advances in areas like autonomous driving.

In the short term the sector is also set for significant disruption after this month’s announcement surprised the industry by going beyond controls on equipment and components to restrictions on how scientists and engineers with US citizenship can work at Chinese companies.

Any US citizen or entity is now required to seek permission from the Department of Commerce before providing support to Chinese plants, with an executive at a local chip design firm telling Caixin that this would create major problems for US nationals with technical positions at foundries like ChangXin and SMIC.

According to calculations by the Wall Street Journal at least 43 US citizens held senior executive roles with listed Chinese semiconductor firms. The newspaper said these employees are now in “limbo” in the wake of the prohibition on US citizens from “supporting China’s advanced chip development”.

The withdrawal of support for American manufacturing equipment will also disrupt the efforts of the Chinese foundries to expand output, Caixin adds. “The reality is that domestic equipment is not enough to support a similar production line,” an insider in the sector lamented.

The Chinese reaction to the measures was swift, with a Foreign Affairs Ministry spokeswoman accusing the US of “abusing export control measures to wantonly block and hobble Chinese enterprises”.

Critics of the American stance also argue that the restrictions aren’t sustainable when China is the largest market for so many of the leading US suppliers. Equipment sales to China account for 33% of Applied Materials revenues, 35% of Lam Research’s and 26% of KLA’s, for instance.

But the commercial impact of the campaign was felt almost immediately this month as companies scrambled to respond to the changes in the landscape. ASML, a Dutch multinational that makes high-end lithography machines, reacted quickly with an email to its US staff instructing them to stop “servicing, shipping or providing support to any customers in China until further notice”. Lam Research has already suspended supplies of components and equipment to its Chinese clients, a source confirmed to Caixin, and its engineers have also been leaving China, while Nikkei Asia reports that Apple has dropped a plan to use memory chips from Yangtze Memory Technologies for upcoming iPhone production, after the chipmaker was added to a list of firms that US officials have been unable to inspect, starting a 60 day-clock on its likely inclusion on a fuller export blacklist.

That must be a major frustration for the Californian tech giant: Nikkei Asia says Apple had undertaken a multi-month process to certify YMTC’s 128-layer 3D NAND flash memory chips. All the effort that went into that certification now seems to have been rendered redundant.

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