China’s semiconductor ambitions has constrained by the ‘once inconceivable’ export limitations imposed by the United States

The semiconductor dispute between the US and China is straining international supply networks to their breaking point.

The President’s CHIPS Act, which restricts the export of certain types of chips to China, is having a negative impact on the country’s technological development.

After the United States enacted some of its most extensive export bans related to technology against Beijing, China’s plans to grow its domestic chip sector certainly became orders of magnitude more difficult and expensive.

On Friday, the United States Department of Commerce announced comprehensive restrictions with the goal of preventing China from acquiring or producing crucial chips and components for supercomputers. This is considered a significant escalation in tensions between Beijing and Washington in the technological realm.

Those in the United States worry that China will put these high-tech semiconductors to use in their military.

“There is no turning back to the way things were,” Abishur Prakash, co-founder of the Center for Innovating the Future, told CNBC.

As a result of this latest development, the gulf between the United States and China is now irreparably vast.

The new regulations in the United States include the following salient features:

In order to export high-performance chips, often made for use in artificial intelligence applications, to China, businesses need to get export licenses.

Exporting artificial intelligence (AI) and supercomputing chips developed in a foreign country to China will require a license because of the prevalence of American design and manufacturing software and hardware.

The export of machinery by American firms to Chinese firms producing chips of a particular sophistication will be severely limited.

The most recent set of chip rules shows that the United States is not interested in mending fences with China.

Instead, “the United States is sending a signal that it is taking this competition more seriously than it ever has and is willing to take things that were previously inconceivable,” as Prakash put it.

Is there any way to predict how China will react to U.S. restrictions?

Some of the most vital components of modern society are semiconductors. They’re in your phone, car, fridge, and everywhere in between.

However, they are also essential for military use and the development of AI. Technology, particularly in particular delicate areas like semiconductors, has been drawn into the conflict as geopolitical tensions between China and the United States have escalated over the past few years.

China plans to increase its domestic capabilities in artificial intelligence, quantum computing, and semiconductors, all of which it considers “frontier technologies.”

However, the new regulations in the United States will make it very difficult to do so, especially in the field of chips.

Pranay Kotasthane, director of the Takshashila Institution’s high technology geopolitics program, told CNBC that the United States had “officially altered” its goal in the semiconductor business from surpassing China to aggressively denying it access to advanced chips.

These strict regulations will severely limit the development of China’s domestic semiconductor industry.

Supply chain dynamics

The potential effectiveness of U.S. export regulations lies in its ability to reach several nodes in the semiconductor supply chain, including those that are not based in or controlled by American companies.

This is due to the worldwide structure of the chip supply chain, as well as the fact that only a few corporations hold the majority of the industry’s power and expertise.

Although still a global power, the United States is no longer a manufacturing powerhouse.
It’s only been within the last 15 years or so that two companies—TSMC of Taiwan and Samsung of South Korea—have come to control the majority of the international market for high-end semiconductor production.

Intel, the top chipmaker in the United States, lagged well behind the competition. About 80% of the world’s foundry market is located in Taiwan and South Korea. A foundry is a factory that produces chips for other companies.

U.S. firms are still competitive in the design-tools market, and their products are widely used throughout the supply chain.

It’s very possible that American equipment was employed at some point in the production of high-tech chips made by TSMC, for instance. The current export ban on China from the United States does apply here.

Washington has previously applied the so-called foreign direct product regulation to Huawei, the face of tech tensions between the United States and China in the Trump administration.

The most cutting-edge chips that TSMC was producing at the time were made specifically for Huawei’s handsets, but the company was prevented from using them due to the rules.

Once dominant in the smartphone market, Huawei has seen its device business severely damaged.

On the other hand, the United States has never before implemented such a widespread policy.

For China to succeed, it must essentially start from scratch. Meanwhile, other nations might feel compelled to stop shipping specific types of machinery to China.

Companies producing memory chips or logic semiconductors at 16 nanometer, 14 nanometer, or lower in China will need permission to ship equipment there, as per the new regulations.

Each transistor on a chip has a specific size, measured in nanometers.

A larger number of transistors can be placed on a semiconductor if they are smaller in size.
In general, circuits with a smaller nanoscale size tend to be more potent and efficient.

SMIC (Semiconductor Manufacturing International Co.), China’s most sophisticated chipmaker, is presently producing 7nm chips, albeit on a relatively small scale.

It lags well behind competitors like TSMC and Samsung, which have plans to produce 2nm circuits in the near future.

However, SMIC and other Chinese foundries will need to acquire a specialized piece of equipment called an extreme ultraviolet lithography machine in order to mass-produce chips of this sophistication at lower costs and with more excellent dependability.

The only manufacturer of this essential piece of equipment is the Dutch business ASML. The advancement of China’s chipmakers could be hampered if it is subject to U.S. export restrictions or if Washington exerts pressure not to sell to Chinese enterprises.

By highlighting these difficulties, ASML demonstrates how difficult it is to supply semiconductors.

The semiconductor industry features a highly integrated and globally distributed supply chain.

If China is shut off from this motor, indigenous innovation will have to “reinvent the wheel.”

To weather this storm, the Chinese semiconductor industry will need a considerably more significant influx of finance and talent, as stated by Kotasthane.

Unfortunately, this is going to be a tough slog. As Kotasthane put it, “the yield will be significantly lower, meaning more prices and lower dependability,” if China doesn’t use ASML’s equipment to manufacture sophisticated chips.

Kotasthane noted that American and Japanese companies were traditionally the sources for design tools for Chinese companies, but that now Chinese companies will have to settle for “lower-end” home alternatives.

Any “U.S. people” who wish to aid in the research and development or production of semiconductors at specific Chinese manufacturing facilities are now required by Washington to seek a license.

This basically shuts down a major pathway for skilled Americans to work in China. “It’s a lot more expensive to reinvent the wheel anymore,” Kotasthane remarked.

Source: CNBC