How the US chip export controls have turned the screws on China

The US introduced sweeping export controls on chips in October to slow China’s advances in artificial intelligence and supercomputers and make it harder for the country to make advanced semiconductors.

The controls are arguably the toughest measures President Joe Biden has taken against China and his first serious attempt to slow its military modernization by targeting the technologies behind everything from modeling nuclear weapons to developing hypersonic weapons.

“When Huawei was targeted, it was peacetime trade tensions. Now we are on the brink of war,” said Hideki Wakabayashi, a professor at Tokyo University of Science, referring to the Chinese telecom equipment maker.

How will they affect China’s semiconductor industry?

China’s leading chipmaker Semiconductor Manufacturing International Corporation, which makes logic chips that power computers, will be hit by the restrictions as they prevent US companies from supplying technology for chips more advanced than 14 nanometers, or in some cases 16 nm. The rules will make it more difficult for SMIC to continue production at the 14nm level as they will impact areas such as maintenance and device replacement.

Memory chip manufacturers such as Yangtze Memory Technologies Corp and ChangXin Memory Technologies will also be affected. Their more advanced products already meet the US limits for memory chips. In the case of YMTC, for example, the US imposed restrictions on the export of technology used to manufacture NAND memory chips with 128 layers or more – the level of the Chinese company’s most advanced chips.

Without access to US technology, China will struggle to sustain its rapid expansion in artificial intelligence and supercomputing — two areas important to the Chinese military — and cloud computing.

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Douglas Fuller, an expert on China’s semiconductor industry, said the crux of US policy is to “bring down” Chinese artificial intelligence and supercomputers that have military applications.

But Tudor Brown, a former independent director at SMIC, said the controls could also backfire in the long run because they could “supercharge” China’s domestic chip industry. “The US is naïve if they think this will slow them down for any length of time. I think it will slow them down for two to five years, not 10.”

Which US companies will be affected?

Analysts said the impact would depend on how aggressively the US applies the controls. Many US firms that make chips or chip-making tools cite China as their largest market. China accounts for 33 percent of Applied Materials sales, 27 percent for Intel and 31 percent for Lam Research.

Applied Materials said the restrictions would reduce next-quarter sales by about $400 million, or 6 percent. Nvidia, which cannot export its advanced GPUs (graphics processing units) used in machine learning systems to China, also put the quarterly revenue impact at $400 million, or 7 percent of its revenue.

Lam Research, a major supplier of China’s YMTC, said export controls would cut up to $2.5 billion, or up to 15 percent, of 2023 sales.

However, some U.S. companies could benefit, such as memory chipmaker Micron, which is facing increasing competition from YMTC.

Will China Strike Back?

Experts say Beijing has limited ability to retaliate. As a Chinese chip industry source put it, Beijing “doesn’t have a lot of leverage to react.”

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Last year, China passed a law allowing countermeasures against sanctions. But it has not yet been used in response to Washington’s tightening of semiconductor controls or in retaliation against other US moves.

Some pundits speculated that China could cut off tech giants, including Microsoft and Apple, from its vast consumer market. However, a manager at a Chinese chip company said that was unlikely. “China is striving to reach a truce rather than confrontation in the technology war,” said one expert.

Will there be spillover to other industries?

On Oct. 7, the US also added 31 Chinese companies, including YMTC, to the “unverified list” of companies for which Washington could not conduct end-user reviews to confirm American technology is being used for legitimate purposes.

If these concerns are not addressed within 60 days of a company’s listing, they will almost certainly be placed on the “Entity List,” which would effectively ban US companies from providing technology to them. In the case of YMTC, this would hit the company’s less advanced memory chips as the limitations would be broader.

European officials believe the US is likely to widen its range of tough measures, which would have knock-on effects for EU companies.

Some analysts warn that most Chinese manufacturers could run out of inventories, leading to chip shortages that would affect other industries such as aerospace, consumer electronics, medical equipment and cloud computing.

“A shortage of chips could pose downside risks, including an overall slowdown in vehicle deliveries and/or further deterioration in Chinese automaker profitability,” said Gui Lingfeng, a director at consulting firm Kearney.

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What was the global fallout?

Taiwan Taiwan Semiconductor Manufacturing Company, the world’s largest contract chip maker, said the immediate impact is “limited and manageable.” But Chief Executive CC Wei warned that it was “too early” to gauge the long-term impact.

South Korea South Korea’s chipmakers were given a one-year exemption from controls. But they must apply for US export licenses after the grace period. Experts said they would struggle to get U.S. approval to export state-of-the-art equipment to their factories in China, since the U.S. previously opposed SK Hynix’s plans to install ultraviolet lithography equipment at its Wuxi factory in the east Chinas had resisted.

Japan Since the US imposed tough export restrictions on Huawei in 2019, Japanese companies like Sony have scaled back their ties to Chinese chipmakers. But there are sharp disagreements in the Japanese business community about how widespread the consequences would be. “We need to look carefully at where US technology is included in our manufacturing facility,” said a Japanese executive.

Europe ASML, the Netherlands-based global leader in chip manufacturing equipment, said the controls would have a “limited” impact on its supply schedules next year as its business mostly services more mature chip production technologies in China rather than the advanced chip production that Washington’s export is targeting control rules. However, ASML underscored the far-reaching nature of the US restrictions and was one of many firms to urge US nationals on staff to stop serving Chinese customers while assessing the impact of export controls.