China’s chip industry set to suffer deeply from US export controls

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Two years after the United States imposed tough sanctions on Huawei, the Chinese technology group’s revenues have plummeted, it has lost its leading position in networking equipment and smartphones, and its founder told staff that the company survival was at stake.

Now, the entire Chinese chip industry is bracing for similar pain as Washington applies the tools tested on Huawei much more broadly.

Under new export controls announced on Friday, semiconductors made with American technology for use in AI, high-performance computing and supercomputers can only be sold to China with a license. export – which will be very difficult to obtain.

Additionally, Washington prohibits U.S. citizens or entities from working with Chinese chipmakers unless specifically authorized. The package also strictly limits the export to China of chipmaking tools and technologies that China may use to develop its own equipment.

“To put it mildly, [Chinese companies] basically date back to the Stone Age,” said Szeho Ng, general manager of China Renaissance.

Paul Triolo, China and technology expert at consultancy Albright Stonebridge, said: “There will be many losers as the tsunami of change unleashed by the new rules sweeps through semiconductors and related industries.”

He added that the impact would be particularly profound on Chinese companies using US-sourced hardware to deploy AI algorithms, including for self-driving vehicles and logistics, as well as medical imaging and health centers. research using AI for drug discovery and climate change modeling.

“The full impact will take some time to become clear, but at a minimum will slow down innovation in China and the United States, ultimately costing American consumers and businesses hundreds of millions, if not billions of dollars,” said Triolo.

Many of the new controls work through third-country chipmakers, as nearly all semiconductors are designed using US software and most chip factories contain US machinery.

“You can think of Huawei as a case study,” said Brady Wang, an analyst at technology market research firm Counterpoint. If Huawei could still source some supplies, he said, they weren’t the most advanced but those from an earlier era, which would limit the functionality of its products.

The new controls on semiconductor equipment are also a powerful weapon, destined to hit traditional manufacturers and producers of advanced chips. According to analysts at Bank of America, the equipment restrictions will affect logic chips designed within the last four to five years and Dram chips designed after 2017. on older tools and technologies,” said Wayne Lam, analyst at CCS Insight.

Chinese chip companies are even more concerned about Washington’s attempts to prevent US citizens from supporting them.

“It’s a bigger bomb than preventing us from buying equipment,” said a human resources manager at a state-backed semiconductor factory.

“We have [US passport holders] in our company, in some of the most important positions,” she said, calling them an “essential weapon” for the development of technology. “We need to find a way for these people to continue working for our company. It’s very difficult. Most people are not willing to give up their US passport.

Most US citizens in China’s chip industry are Chinese and Taiwanese repatriated from the United States. There are no statistics on the size of this group. But a Taiwanese intelligence official estimated that as many as 200 US passport holders worked at Chinese semiconductor companies.

And the restrictions extend beyond this group. An executive at a semiconductor materials supplier said his company would have to replace all US sales and technical support staff sent to Chinese customers.

Another threat to the entire Chinese tech industry is a new licensing requirement for exporting chips for use in AI and high-performance computing.

“The interest of politics is to overwhelm China’s AI and HPC efforts, at least those related to the military, with the collateral damage on the business side from a US government perspective,” said Douglas Fuller, an expert in China’s semiconductor industry. at Copenhagen Business School.

Even some of China’s biggest tech companies such as Alibaba and Baidu are considered vulnerable. “[Their] all research and development progress will be slowed down,” Counterpoint’s Wang said.

Experts believe that the dynamic breed of Chinese AI chip design companies will suffer. “If you lose the AI ​​startups, you lose their innovation momentum,” said a Taiwanese electronics industry executive.

As China’s semiconductor market by end user now accounts for nearly a quarter of global demand, overseas suppliers are also expected to suffer.

The American equipment manufacturer Applied Materials made 33% of its sales in China last year and its counterpart Lam Research 31%. Lam Research named Yangtze Memory Technologies, China’s largest memory chip maker that the United States is specifically targeting under the new rules, as a major customer in its annual report, and BofA estimates 6-7% of Lam’s sales. Research are intended for YMTC.

Since many of Intel’s high-end processors are aimed at Chinese supercomputers, BofA expects the restrictions to reach up to 10% of Intel’s sales.

But some analysts believe the measures will favor foreign chipmakers. As the main motive of the United States was to slow down China’s development in the most advanced semiconductor technology, major foreign chipmakers such as Taiwan Semiconductor Manufacturing Company (TSMC) or Intel would benefit, Akira said. Minamikawa, a semiconductor analyst at research firm Omdia.

He said flash-memory makers that compete directly with YMTC, such as Japan’s Kioxia, could “gain some benefit” from the new US measures, but the gains would likely be small.

Kim Young-woo, head of research at SK Securities, said the fact that Washington did not impose a general ban on equipment supplies for foreign chipmakers operating in China would be a relief for companies. Korean semiconductor companies, but the need for export licenses could still be an issue.

The bigger question is how China reacts. “We are in a negative cycle where the United States continues to push for restrictions, which pushes the Chinese to fight for technological independence, which in turn pushes the United States towards tougher restrictions,” said an industry insider in Beijing.

But Beijing’s levers are limited. “It will push the Chinese to look for alternatives, but recognizing that alternatives to American technology are decades away,” the person said.

This dire situation could lead to more intellectual property theft. As some equipment currently subject to export controls is already in use in China, Beijing could ignore intellectual property rights and reverse-engineer machinery to bolster local equipment makers, CCS’s Lam said. He added: “We may be shooting ourselves in the foot.”

Reporting by Kathrin Hille in Taipei, Qianer Liu and Eleanor Olcott in Hong Kong, Richard Waters in San Francisco, Demetri Sevastopulo in Washington, Kana Inagaki in Tokyo and Song Jung-a in Seoul

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