From Caixin . . . . . . . . .
The Biden administration landed its heaviest blows yet in this month’s escalation of the U.S. war on China’s semiconductor ambitions. The sweeping new restrictions unveiled Oct. 7 affect not only the sale of advanced integrated circuits, sophisticated chipmaking equipment, and supercomputer parts but also China’s ability to hire top talent.
In the short term, the restrictions will limit Chinese chipmakers’ ability to make certain types of electronic devices that are at the heart of modern products ranging from household appliances to mobile phones, smart electric vehicles, and advanced military weapons. In the long term, the policies may spur China to try to accelerate its self-sufficiency drive in semiconductors and the equipment to produce them, industry experts say.
The new American policies have also roiled the global semiconductor industry. They amount to a “double-edged sword” as American companies will also suffer heavy losses, according to ICwise chief analyst Gu Wenjun. China is the largest market for the three biggest U.S. semiconductor equipment suppliers, accounting for 33% of Applied Materials Inc.’s revenue, 35% of Lam Research Corp.’s, and 26% of KLA Corp.’s, according to ICwise.
Washington has been ratcheting up export controls and investment barriers targeting China’s semiconductor sector for at least three years. Authorities telegraphed the most recent move months ago. An American chip industry executive warned of an expansion of export restrictions as early as July. Lam Research, a California-based supplier of silicon wafer fabrication gear, received notice from authorities to bar shipments to China of advanced chip-making machinery, the company’s chief executive Tim Archer said July 27.
In September, Nvidia Corp. and Advanced Micro Devices Inc. were barred from exporting to China their highly sought processing units that use the latest generation of chip technology.
Surprise personnel rules
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) now requires Americans participating in advanced chip production in China to apply for permits to do so. The new rules put such people working in China under the same stringent regulations as those participating in nuclear, biological, and missile proliferation activities outside the U.S., said Dai Menghao, compliance counsel at Hong Kong-based law firm King & Wood Mallesons.
As much as Chinese companies anticipated expanded export controls, the restrictions on talent caught the industry by surprise. Years of global integration resulted in an open market for semiconductor talent. Many scientists and engineers with U.S. citizenship or permanent residency work in the Chinese industry. Now they face what one semiconductor investor called an “inhuman” choice—either giving up their U.S. citizenship or quitting their jobs.
Since last week news has been circulating that many Americans working for Chinese chipmakers are leaving the country. Cutting off access to such talent will surely hurt the foundations of the industry, insiders said.
Many Chinese Americans with U.S. citizenship hold key technical positions at Chinese chip companies, an executive at a chip design enterprise told Caixin. Some key technical experts at ChangXin, Advanced Micro-Fabrication Equipment Inc., and Semiconductor Manufacturing International Corp. (SMIC) may have to leave, the executive said.
The Chinese government should provide more policy support to overseas returnees in the chip industry, the chip design executive said. “They have a strong will to stay in China to start their own businesses, so China should try to keep them,” the executive said.
American tech watchdog
Under the new rules, any chip that exceeds benchmarks set by the BIS, the American government’s tech watchdog, will be subject to export controls, regardless of use or industry, several lawyers familiar with U.S. export controls told Caixin. The new rules cover all kinds of computing chips, including graphics processing units, memory chips, and other traditional or new computing architecture chips. In terms of end use, the new restrictions mainly affect data center chips. The computing power of chips for mobile phones and self-driving vehicles has not exceed the BIS benchmarks.
The ban will limit China’s development and maintenance of supercomputers. Future supercomputers in China may not be able to obtain chips made using American technology from anywhere in the world, a source at the U.S. Semiconductor Industry Association told Caixin.
The BIS also expanded a national security-related control known as the Foreign Direct Product Rule to cover 28 Chinese enterprises. Previously it applied the rule in sanctions against Huawei Technologies Co. to target a broader range of exports, including non-U.S.-origin items that are the direct products of specified U.S.-origin software and technology. The move practically banned Taiwan Semiconductor Manufacturing Co. from producing chips designed by Huawei’s HiSilicon unit, crippling Huawei’s 5G smartphone business.
The U.S. also added more Chinese businesses to a list of companies that it regards as “unverified,” meaning American suppliers will face new hurdles in selling products to those entities. The list names companies that the BIS could not verify because an end-user check could not be completed to a satisfactory level. If a persistent lack of cooperation from local governments effectively prevents the BIS from identifying compliance, companies on the unverified list may be moved to the entity list and subjected to more stringent export limits.
This poses a dilemma for Chinese companies, said semiconductor industry market research institute ICwise director Wang Xiaolong. If they refuse to be investigated, businesses might be added to the entity list, but if they accept investigation, they could risk exposure of key information.
U.S. businesses affected
Even Chinese companies not subject to U.S. export controls need to consider more domestic or non-American equipment supplies to reduce future sanction risks, a state-owned fund investor told Caixin.
China has long been Nvidia’s second-largest market. China accounted for 26.42% of the graphic chipmaker’s 2022 sales. Restricted exports to China of two of Nvidia’s top computing chips for artificial intelligence could affect $400 million of potential sales in the current quarter, the company said.
The Semiconductor Industry Association (SIA), which represents 99% of the U.S. semiconductor industry, said it is assessing the impact of the new export controls and is working with member companies and the U.S. government to ensure compliance. The group urged the U.S. government to implement the rules in a “targeted way” to help mitigate harm to American innovation.
Research conducted by SIA and Boston Consulting Group in 2020 estimated that U.S. companies could lose 37% of their revenue if the U.S. completely banned semiconductor companies from selling to Chinese customers, effectively causing a technology decoupling from China.
Targeting advanced chips
The BIS specified items subject to export controls including logic chips with architectures of 16 to 14 nanometers (nm) or less, DRAM memory chips of 18 nm or less, and NAND flash memory chips with 128 layers or more. In integrated circuit manufacturing, smaller nanometer ratings mean more-advanced technology.
All of the thresholds represent the most advanced technology in mass production by Chinese chipmakers. SMIC, ChangXin, and Yangtze Memory Technologies Co. Ltd., China’s three largest chipmakers, will be hit the hardest as they may get stuck at their current technology level and struggle to move toward more advanced chips, a state-owned semiconductor investor said.
In the logic chip segment, SMIC, the largest contract chip maker in the Chinese mainland, is mass-producing 14 nm chips and is developing 10 nm and 7 nm technologies. In the NAND chip segment, Yangtze Memory started mass production of NAND flash memory chips with 128 layers in 2021. It released a product with 128 layers but has not yet started mass production. In the DRAM segment, ChangXin is specialized in the production of DRAM memory. As of 2020, ChangXin can manufacture using a 19 nm process and is developing 17 nm technologies.
Starting Oct. 10, LAM suspended supplies of components and equipment to its Chinese clients, a state-owned semiconductor investor said. LAM’s engineers at the clients all left the country, an investor close to the matter confirmed with Caixin.
The withdrawal of U.S. equipment suppliers and their personnel means Chinese fabrication plants may not be able to get support from equipment manufacturers if something goes wrong or the machinery needs maintenance. Although Chinese companies can also provide basic maintenance services, some equipment needs to be replaced in a couple of years. If the quality and cost of replacement cannot be guaranteed, it will inevitably affect existing production lines, a memory chip industry participant said.
Without new supplies of equipment, Chinese chipmakers are also unable to expand their production lines and are stuck with existing capacity.
ChangXin’s 12-inch wafer production line in Hefei began production in September 2019 with a design capacity of 120,000 wafers a month. According to an original plan, ChangXin was to build two more 12-inch wafer production lines. The phase 2 project is still under construction. Yangtze Memory planned to massively expand its 128-layer NAND production line and start trial production of a 232-layer product. Now that plan will be difficult to carry out, several industry participants told Caixin.
“The reality is that domestic equipment is not enough to support a similar production line now,” a person close to local government policymakers in the semiconductor industry told Caixin. Since the U.S. imposed sanctions on Huawei, Yangtze Memory, and SMIC have been actively promoting the certification of domestic equipment, with ChangXin relatively slower, the person said. “Now, all three companies face the same problem: Some equipment is exclusively supplied by the U.S. firms, without which their production lines cannot operate,” the person said.
Making do with old technology
Experts widely say they expect that an expanded U.S. blockade on high-end chip exports to China will only accelerate China’s breakthroughs in core technology.
For now, as the U.S. restrictions don’t affect less-advanced devices. Chinese companies are expected to allocate more resources to the mature products. Since U.S. restrictions in 2020 barred SMIC from using U.S. technology and equipment to produce 10 nm or smaller chips, the company increased its 28 nm capacity. ChangXin and Yangtze Memory may also switch their growth path to increase capacity using the mature processes, industry participants said.
Globally, demand for chips with mature process nodes is still large, but China accounts for less than 20% of the market. Chinese companies can optimize and expand the mature processes, gradually lower costs, and come up with more cost-effective products to compete with Western rivals, the state-owned semiconductor investor said.
However, the level of domestic equipment is uneven, and some key components still rely on imports. A source at a foundry told Caixin that most equipment used to make 28 nm and smaller nodes are still dominated by U.S. and Japanese companies.
Several people in the semiconductor industry suggested that the government should increase support for domestic substitution, including backing the construction of fabs, encouraging fabs to use domestic equipment, and opening more markets to use domestic chips.
Source : Sixth Tone