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The US has been ramping up its trade war with China over the past couple of years and recently added new means of pressure by enforcing the China chip ban. In October, the US government implemented export control rules, prohibiting domestic as well as foreign companies that use American technology from selling high-end chips and semiconductor equipment to China.
While the US manufactures only 12% of the global semiconductor supply, US firms held nearly 50% of the total semiconductor market in 2020, as per Semiconductor Industry Association (SIA). This makes it difficult for Asian semiconductor firms to conduct business with China and in China, since many source parts for their production from US companies.
However, the US has said it will provide licenses to companies that wish to export to China, and several Asian companies are seeking waivers to continue their business. China is the largest manufacturer and largest consumer of semiconductors in the world, which means the US curbs can have far-reaching effects on Asian chipmakers.
Whom does the China chip ban hurt?
A 2021 report by the SIA says that almost 75% of the global semiconductor manufacturing capacity is concentrated in East Asia (Japan, South Korea and Taiwan) and China. While Beijing has been trying hard to advance its semiconductor prowess, but the chip export ban could prove to be a major hurdle as key materials and technologies are now out of China’s reach.
The US has banned chip exports to China to primarily counter their use in military enhancement. However, there is a technology lag for chips used by the People’s Liberation Army, with the China chip ban having little effect on arms production. “The chip technology for civilian use is on a higher level than for military use,” Macau-based military commentator Antony Wong Tong told the South China Morning Post.
The China chip ban restricts chipmakers from supplying China with highly advanced logic chips of 16 nanometres, 14 nanometres and below, DRAM chips of 18 nm half-pitch or less and NAND flash memory chips with 128 layers or more.
Semiconductor Manufacturing International Co (SMIC) is the largest chipmaker in China, and recently initiated the mass production of its 14 nm-class fabrication process. The company has been trying to source extreme ultraviolet (EUV) lithography systems, used to make advanced semiconductors, from Dutch firm ASML Holding.
SMIC has been on the US trade blacklist since 2020, and ASML is not currently selling its EUV lithography systems to China as it has been restricted by the Dutch government to do so, making it impossible for domestic Chinese chip foundries to manufacture advanced chip modules. The US has been pushing ASML to completely prevent the sale of chipmaking tools to China.
However, a Canadian tech analysis firm said earlier this year that SMIC had developed technology for manufacturing 7-nm chips with the existing deep ultraviolet (DUV) systems with help from a former TSMC executive. While this may be the case, SMIC is still largely dependent on US tool makers such as Lam Research Corp and Applied Materials and may see sales growth slowing in 2023.
Yangtze Memory Technologies Company (YMTC) is another major player which has been hit by the China chip ban, as Apple put plans on hold to use memory chips manufactured by the Chinese chipmaker. YMTC is also under investigation by the US Commerce Department for allegedly selling chips to blacklisted Huawei. YMTC has asked its US employees to leave as it aims to comply with the new US export restrictions.
YMTC, a state-owned firm, has released advanced NAND flash chips using the 232-layer tech, as per state-owned media Global Times.
While there are some gaps in the China chip ban by the US, some companies are more affected than others. Sugon, a Chinese computing server vendor, has been on the US Entity List since 2019 and has seen the supply of new chips from AMD, SK Hynix and Samsung drying up. ChangXin Memory Technologies, a major DRAM maker in China, is likely to delay its 17 nm DDR5 chips as it cannot obtain new chipmaking tools.
Advanced Micro-Fabrication Equipment China (AMEC), a major equipment vendor, is likely to be hit by the ban on “US persons”. AMEC’s chairman and CEO Gerald Yin, as well as several other executives of the firm, are US citizens and may need to leave the firm.
While these are Chinese companies, other Asian firms are facing comparatively more issues. TSMC, the world’s biggest contract semiconductor manufacturer, has secured a one-year waiver from the US to continue its China expansion plans. TSMC is mainly expanding its 22 nm and 28 nm production in Nanjing, China.
However, TSMC has suspended production of advanced silicon for the Chinese startup Biren Technology in lieu of the China chip ban. Shanghai-based Biren previously said it had developed chips that can outperform Nvidia’s market-leading A100 AI accelerator.
South Korea’s Samsung has also received a one-year waiver to expand its China business and continue exporting advanced chips to China. Over 40% of Samsung’s NAND flash output is from Xian, while another Korean firm SK Hynix makes over half of its DRAM chips in Wuxi. SK Hynix, too, has received a one-year waiver from the US Commerce Department.
SK Hynix has said that it may consider selling its China plan in the extreme scenario where US export control makes it difficult to sustain production. In 2021, the company halted a plan to upgrade its Wuxi facility after the US objected to shipping advanced tools to China.
The fallout of US chip curbs on Asia
The chip exports ban has seen foreign companies operating in China scale back operations, leading to Chinese firms snapping up experienced engineers. Alibaba, Huawei and several other local chip developers are laying out the red carpet for employees of foreign companies.
Media reports indicate that Chinese chipmakers are keen on hiring engineers from Japan, South Korea and Taiwan to negate the impact of US export curbs.
Meanwhile, the US is trying to pressure Japan and the Netherlands to join its effort to prevent China from accessing high-end chips and chip-making tools. “I think you will see Japan and Netherlands follow our lead,” said Gina Raimondo, US Commerce Secretary.
Three companies are known for their chipmaking equipment, American firm Applied Materials, ASML of Netherlands and Japan’s Tokyo Electron.
Tokyo Electron is a market leader in certain chip-making procedures and made 25% of its full-year sales in China during the last fiscal. The company is yet to clarify its stance on supplying chip-making tools to China.
However, Japanese semiconductor-related stocks are doing well and jumped 14% in October due to the limited impact of US export curbs. The best performer among these stocks was EUV testing gear maker Lasertec Corp, which saw its share price shoot up by 45%. The company has a mere 10% exposure to the Chinese market in terms of sales.
Lasertec does not anticipate any major impact of the China chip ban on its business, as it mainly supplies to Taiwan and South Korean companies. “The market for chipmaking equipment will grow as more countries try to have their own chip production capacity within their territory,” Lasertec President Osamu Okabayashi told Nikkei Asia in an interview.
Separately, Japan is planning to build a $2.38 bn research hub in collaboration with the US to develop next-gen semiconductors. Companies and research organizations from both countries are expected to join the effort, which is likely to be officially established at the end of the year.
