Chips make it difficult for the US to leave China

In May, Micron Technologies, the Idaho chip maker, was dealt a serious blow as part of the US-China tech war. The Chinese government banned companies that handle sensitive information from buying Micron’s chips, saying the company had failed a cybersecurity review.

Micron said the change could wipe out about an eighth of its global revenue. Still, the chip maker announced in June that it would increase its investment in China — adding $600 million to expand a chip packaging plant in the Chinese city of Xian.

“This investment project demonstrates Micron̵[ads1]7;s unwavering commitment to its Chinese business and team,” said an announcement on the company’s Chinese social media account.

Global semiconductor companies find themselves in an extremely difficult position as they try to bridge a widening gap between the US and China. The semiconductor industry has become ground zero for the technology rivalry between Washington and Beijing, with new restrictions and punitive measures imposed by both sides.

U.S. officials say U.S. products have fed into Chinese military and surveillance programs that run counter to U.S. national security interests. They have imposed increasingly tough restrictions on the types of chips and chip-making equipment that can be shipped to China, and are offering new incentives, including subsidies and tax credits, for chipmakers who choose to build new operations in the United States.

But factories can take years to build, and corporate ties between the countries remain strong. China is a big market for chips, as it is home to many factories that make chip-rich products, including smartphones, dishwashers, cars and computers, which are both exported around the world and bought by consumers in China.

Overall, China accounts for about a third of global semiconductor sales. But for some chipmakers, the country accounts for 60 percent or 70 percent of their revenue. Even when chips are manufactured in the US, they are often shipped to China for assembly and testing.

“We can’t just flip a switch and say all of a sudden you have to take everything out of China,” said Emily S. Weinstein, a fellow at Georgetown’s Center for Security and Emerging Technologies.

The industry’s dependence on China highlights how a close – but extremely contentious – economic relationship between Washington and Beijing poses challenges for both sides.

Those tensions were reflected during Treasury Secretary Janet L. Yellen’s visit to Beijing this week, where she tried to walk a fine line by rejecting some of China’s practices while insisting that the United States was not looking to cut ties with the country.

Yellen criticized punitive measures China has recently taken against foreign firms, including restricting exports of some minerals used in chipmaking, and suggested such actions were why the Biden administration was trying to make American manufacturers less dependent on China. But she also confirmed the relationship between the US and China as strategic and important.

“I have made it clear that the United States is not seeking a wholesale separation of our economies,” Yellen said during a roundtable discussion with American companies operating in China. “We seek to diversify, not to disconnect. A decoupling of the world’s two largest economies would be destabilizing for the global economy, and it would be practically impossible to implement.”

The Biden administration is poised to begin investing heavily in American semiconductor manufacturing to lure factories out of China. Later this year, the Commerce Department is expected to begin handing out funds to help companies build U.S. chip facilities. That money comes with strings attached: Companies that take funds must refrain from expanding high-tech manufacturing facilities in China.

The administration is also weighing additional curbs on the chips that can be shipped to China, as part of a push to extend and finalize sweeping restrictions it issued last October.

Those measures could include potential restrictions on sales to China of advanced chips used in artificial intelligence, new restrictions on Chinese companies’ access to US cloud computing services and restrictions on US venture capital investment in the Chinese chip sector, according to people familiar with the plans.

The administration has also considered halting the licenses it has extended to some US chipmakers that have allowed them to continue selling products to Huawei, the Chinese telecom company.

Japan and the Netherlands, which are home to companies that make advanced chip-making equipment, have also imposed new restrictions on sales to China, in part because of calls from the United States.

China has issued its own restrictions, including new export controls on minerals used in tile production.

Amid tighter regulations and new incentive programs from the US and Europe, global chip companies are increasingly looking outside China when choosing locations for their next big investments. But these facilities will likely take years to build, meaning any changes in the global semiconductor market will unfold gradually.

John Neuffer, the president of the Semiconductor Industry Association, which represents the chip industry, said in a statement that the ongoing escalation of controls poses a significant risk to the global competitiveness of the US industry.

“China is the world’s largest market for semiconductors, and our companies simply need to do business there to continue to grow, innovate and stay ahead of global competitors,” he said. “We urge solutions that protect national security, avoid unintended and lasting harm to the chip industry, and avert future escalations.”