Tech war: China’s chip self-sufficiency drive under siege

China’s ambitious semiconductor self-sufficiency drive faces greater difficulties after Washington expanded the scope of US tech export controls targeted at chip makers on the mainland, analysts said.

The Bureau of Industry and Security (BIS), an agency under the US Department of Commerce, on October 7 implemented updates that further restrict China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors used in military applications, including weapons of mass destruction.

The updates add new licence requirements for items destined to arrive at Chinese chip foundries, which will face a “presumption of denial”. By comparison, mainland chip fabrication facilities owned by multinationals will be decided on a case-by-case basis.

The relevant thresholds include: logic chips of 16-nanometre, 14nm, or below; dynamic random access memory chips of 18nm half-pitch or less; and NAND flash memory chips with 128 layers or more.

“A siege is forming,” said Arisa Liu, a senior semiconductor research fellow at the Taiwan Institute of Economic Research. “The intensified US tech export restrictions aim to strike at China’s abilities in super computing, AI [artificial intelligence] and semiconductor manufacturing.”

In addition, the US is imposing new licence requirements to export items used to develop or produce semiconductor manufacturing equipment and related items.

The tightened controls, however, establish a Temporary General Licence. This would minimise the short-term impact on the semiconductor supply chain by allowing specific, limited manufacturing activities related to items destined for use outside China.

Still, China’s semiconductor self-sufficiency is expected to be worse off under the latest tech exports restrictions imposed by the US, according to research fellow Liu.

The impact of the latest restrictions is likely to send more shock waves across China’s semiconductor industry, providing a stern challenge to Beijing’s leaders on how to keep the nation’s hi-tech self-sufficiency programme on track.

On Monday, China’s major chip makers’ shares tumbled. Semiconductor Manufacturing International Corp, China’s largest, lost 3.4 per cent to HK$16.62 (US$2.12), while Hua Hong Semiconductor sank 9.6 per cent to HK$16.34.

Shares of Naura Technology Group, China’s leading semiconductor equipment maker, closed down 10 per cent to 250.56 yuan (US$35.02) in Shanghai on Monday.

The US sanctions have “filled the whole Chinese chip industry with a sense of chill” because Washington is using semiconductor technology as a tool to contain China’s progress, Gu Wenjun, chief analyst at research firm ICwise, wrote in a research note.

“There’s no possibility for reconcilement,” Gu said. “Unprecedented challenges loom for China’s semiconductor industry.”

The BIS also updated policies related to the Unverified List and the US export blacklist, known officially as the Entity List. The BIS will add parties to the Unverified List 60 days after checks are requested, but host government’s inaction prevents their completion.

A 60-day process is needed to add Unverified List parties to the Entity List on account of sustained uncooperativeness by a host government to facilitate the agency’s review.

Yangtze Memory Technologies Co (YMTC), for example, is expected to find it tougher to expand its non-Chinese customer base for memory chips under the latest restrictions, according to integrated circuit research firm TrendForce in a recent note.

YMTC, China’s leading NAND flash maker, as well as DK Laser and Beijing Naura Magnetoelectric Technology Co, were among the 31 entities recently added to Washington’s Unverified List.

The latest restrictions also expanded the scope of the US Foreign Direct Product Rule to include advanced computing and items such as supercomputers.

This is expected to make it harder for the 28 Chinese entities added to Washington’s trade blacklist between 2015 and 2021 to obtain such foreign-produced items that contain US-origin technologies.

Changsha Jingjia Microelectronics Co, which makes graphics processing units, was among the 28 newly added companies to the Entity List.
While Chinese Foreign Ministry spokeswoman Mao Ning has described the latest restrictions as a means for the US to “maintain technological hegemony”, some analysts expect Beijing to pursue lobbying efforts in Washington.

China is expected “to encourage US firms to lobby the administration” after the US midterm elections this year and ahead of the next US presidential elections in 2024, according to Woz Ahmed, managing director at consultancy Chilli Ventures.

In the meantime, Ahmed said China’s deep-tech “Long March” – referring to the year-long journey to survive for China’s Communist forces from October 1934 – may have just started. South China Morning Post