US chip export restrictions could hinder China’s semiconductor goals

China’s ambitions to boost its domestic chip industry are likely to become more difficult and expensive after the United States launched some of its most comprehensive technology-related export controls against Beijing.

The US Commerce Department on Friday imposed sweeping rules aimed at barring China from sourcing or manufacturing key chips and components for supercomputers, in what is seen as a huge escalation in technology tensions between Beijing and Washington.

America claims that such advanced semiconductors could be used by China for advanced military capabilities.

“There is no going back to the way things were,”[ads1]; Abishur Prakash, co-founder of the Center for Innovating the Future, a consulting firm, told CNBC.

“With the latest action, the gap between the US and China has now widened to the point of no return.”

Here are some of the highlights of the new US rules:

• Companies require licenses to export high-performance chips, typically designed for artificial intelligence applications, to China.
• Even foreign-made chips related to AI and supercomputing, which use American tools and software in the design and manufacturing process, will require a license to be exported to China.
• American companies will be severely restricted in exporting machinery to Chinese companies that produce chips of a certain sophistication.

“The latest chip rules are a sign that Washington is not trying to rebuild its relationship with Beijing. Instead, the United States is making clear that it is taking this competition more seriously than it has ever done and is willing to take steps that were once unthinkable ,” Prakash said.

Semiconductors are some of the most important technology products. They go into everything from smartphones to cars and refrigerators. But they are also seen as key to military applications and advancing artificial intelligence.

As geopolitical tensions between China and the US have increased in recent years, technology, and particularly sensitive areas such as chips, have been drawn into the fray.

Artificial intelligence, quantum computing and semiconductors are all areas China has identified as “frontier” technologies it wants to boost its domestic capabilities in. But the new US rules will make that extremely difficult, especially when it comes to chips.

“The US has formally shifted its goal from surpassing China in the semiconductor industry to actively denying it access to advanced chips,” Pranay Kotasthane, chair of the high-tech geopolitics program at the Takshashila Institution, told CNBC.

“China’s homegrown chip sector will be hampered by these sweeping controls.”

The reason US export controls can be so effective is how they can touch multiple parts of the semiconductor supply chain, even those not directly based in America or controlled by US firms.

It comes down to the global nature of the chip supply chain, but also how power and expertise are controlled by very few companies.

Although the US is strong in many areas of the market, it has lost its dominance in manufacturing. Over the past 15 years or so, Taiwan’s TSMC and South Korea’s Samsung has come to dominate the production of the world’s most advanced semiconductors. IntelThe US’s largest chip maker fell far behind.

Taiwan and South Korea account for approximately 80% of the global foundry market. Foundries are facilities that produce chips that other companies design.

However, the US still has strong companies in design tools, many of which are used by other companies in the supply chain. For example, it is unlikely that advanced chips produced by TSMC will not have used American tooling somewhere along the way. In this case, US export restrictions to China would apply.

Washington has used this so-called foreign direct product rule before on the poster child for Trump-era tech tensions between the US and China – Huawei. Under these rules, Huawei was cut off from the most advanced chips that TSMC produced and which were designed for their smartphones. Huawei, once number one in the smartphone market, saw its handset business crippled.

But never has such a rule been used so much by the United States

Meanwhile, other countries may be under pressure not to send certain pieces of equipment to China. For example, the latest rules mean companies must obtain licenses to send machinery to Chinese foundries if those facilities make certain memory chips or logic semiconductors at 16 nanometers, 14 nanometers or smaller.

The nanometer number refers to the size of each individual transistor on a chip. The smaller the transistor, the more of them can be packed on a single semiconductor. Generally, a reduction in nanometer size can result in stronger and more efficient chips.

China’s most advanced chip maker, Semiconductor Manufacturing International Co. or SMIC, currently makes 7nm chips, but not on a large scale. It is generations behind the likes of TSMC and Samsung that have a roadmap for making 2nm chips.

But to make chips of this sophistication at scale, with lower costs and more reliability, SMIC and other Chinese foundries must obtain a specific piece of kit called an extreme ultraviolet lithography machine. The Dutch firm ASML is the only company in the world capable of making this critical part of the machine.

If it falls under US export restrictions or comes under pressure from Washington not to sell to Chinese companies, this could hamper progress among the country’s chipmakers.

ASML underlines the complexity of the semiconductor supply chain.

“Semiconductor manufacturing is a hyper-globalized supply chain. Being cut off from this engine will mean Chinese companies will have to ‘reinvent the wheel’ domestically. China’s semiconductor industry will need much higher capital and talent inflows to absorb this shock,” Kotasthane said.

But this will be an uphill climb.

Kotasthane said China will be able to make advanced chips even without ASML’s machinery “but the yield will be far lower, which means higher costs and lower reliability.”

Meanwhile, Chinese firms will have to rely on “inferior” domestic alternatives for design tools, Kotasthane said, which they would normally have obtained from American and Japanese firms.

Washington’s latest rules also require all “US persons” to obtain a license if they want to support the development or production of semiconductors at certain China-based manufacturing facilities. This effectively cuts off an important pipeline of American talent to China.

“Reinventing the wheel will be far more expensive now,” Kotasthane said.