Beijing is choosing its targets carefully as it goes on the offensive in US pawn wars

When Washington imposed sweeping controls in October limiting chip and equipment exports to China, it was accused by Beijing of “bullying” its technology sector and “violating the spirit of cooperation”.

Such responses, which amounted to little more than verbal jabs in response to a slow choke of semiconductor supplies, reflected Chinese industry’s reliance on foreign chip technology and the need to tread carefully with any retaliatory measures.

But Beijing finally went on the offensive earlier this month, with the Cyberspace Administration of China announcing an investigation on national security grounds into Idaho-based memory chip maker Micron Technology. The CAC said it would review the importation of Micron̵[ads1]7;s products to ensure the security of its information infrastructure.

Industry insiders say Micron, which generates 11 percent of revenue in mainland China and another 5 percent in Hong Kong, was an obvious first target for Beijing because its technology would be more easily replaced with competitors’ chips if China eventually decided to ban it. The American group had also reduced some of its mainland operations while increasing investments in the United States.

However, industry experts believe further retaliation will be limited, given China’s reliance on artificial intelligence chips made by Nvidia and other processors produced by the likes of Intel and Qualcomm.

Mark Li, senior semiconductor analyst at Bernstein, said “memory chips are standardized, so it’s easy to switch suppliers from US to non-US”, adding that South Korean groups Samsung and SK Hynix would mop up most of Micron’s orders in China.

Beijing sees Micron as having played “an unfriendly role in the country’s semiconductor industry”, said Wang Lifu, a chip analyst at Shanghai-based research group ICwise. He pointed to Micron’s legal action against Chinese competitors for intellectual property theft and its alleged role in “lobbying Washington to impose sanctions on China.”

Paul Triolo, an expert on China technology at consultancy Albright Stonebridge, said Micron was seen as “supporting specific controls” that “severely limited China’s memory leaders YMTC [Yangtze Memory Technologies Corp] and CXMT [ChangXin Memory Technologies] from acquiring semiconductor manufacturing equipment to remain competitive in the memory sector”.

Last year, the US placed restrictions on the export of technology to produce Nand memory chips with 128 layers or more – the level of YMTC’s most advanced chips.

Shares of Chinese memory chip makers rose this month on news of the Micron probe, but analysts say domestic rivals won’t get much of a boost from the investigation. “There is no Micron equivalent in China. There are only small memory companies making lagging and niche products,” Li said.

“We are in communication and cooperating fully with the CAC,” Micron said in a statement. “Product shipments, engineering, production, sales and other functions are operating as normal. Micron is committed to conducting all business with uncompromising integrity, and we stand by the safety of our products and our commitments to customers.”

Carolyn Bigg, head of law firm DLA Piper’s cyber security team in Hong Kong, said that “launching a cyber security investigation of a company in conjunction with other underlying issues is a well-trodden path for Chinese authorities”.

The CAC investigation could culminate in Micron getting limited operations in China. Unlike in Europe, where companies are hit with a fine if they break cyber security rules, in China they can also “lose their operating license or have their platforms offline”, she said.

Analysts say the commercial impact on Micron would be limited if it were cut out of the Chinese market. “Micron can easily redirect elsewhere. Memory chips are standardized, so chips reserved for Lenovo, for example, can easily be redirected to Dell,” Li said.

Last year, Micron shut down a Dram chip design unit in Shanghai, and the engineers were reportedly told to move to the US or India. It also announced a $20 billion investment in a new US chip factory, in a significant rebalancing of global manufacturing that will see the most advanced manufacturing move back to the US.

However, the company still has a staff of around 3,000 in China, most of whom work at an assembly and testing facility in the central Chinese city of Xi’an.

In the longer term, industry insiders say this is a clear signal from Beijing to the tech industry to accelerate efforts to de-Americanize its supply chains. “People talk about a cold war. It is clear that Chinese technology companies have no choice but to find different sources of supply where they can, said a top executive at a Chinese artificial intelligence group.

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