Implications for international companies in the Chinese market
In early October 2022, the United States (US) issued nine new rules, detailing export controls on advanced chips, transactions for supercomputer centres, and transactions involving certain companies on its Entity List. In addition, these new rules also impose new controls on certain semiconductor manufacturing equipment and on transactions for certain integrated circuit end uses. US citizens and green-card holders will also be banned from working on certain technologies for Chinese companies and entities. Since then, the US has joined forces with Japan and the Netherlands in trying to deepen restrictions on China. In this article, Daniel Berger from EAC Consulting provides details on the most pertinent elements of those rules and explains how they may affect European companies operating in the Chinese semiconductor market.
The impact is spreading
The new US controls are finely calibrated and apply to most cutting-edge chips, as a licence is required to export, reexport or transfer “logic [integrated circuits (ICs)] using a non-planar transistor architecture or with a ‘production’ technology node of 16/14 nanometres (nm) or less”, “NOT AND (NAND) memory ICs with 128 layers or more” and “dynamic random-access memory (DRAM) ICs using a ‘production’ technology node of 18 nm half-pitch or less”. These chips power smartphones, supercomputers, autonomous vehicles, medical imaging, drug discovery, climate modelling, artificial intelligence (AI) systems and many other high-technology applications. The US ruling intends to isolate the design and manufacturing capabilities of China’s advanced chips from people, equipment, parts and materials. Immediate effects are:
- According to expert opinions, China’s own equipment-makers remain four to five years behind their overseas counterparts, making them unsuitable as instant substitutes for equipment lost from US suppliers such as KLA Corp, Applied Materials and Lam Research. Therefore, the current production capacity of advanced chips can no longer be guaranteed.
- In the US, semiconductor companies—which count China as their largest single market—are facing potentially severe damage to their revenues. Other companies that manufacture high-end products in China must take note that the regulations ban US citizens from working on at Chinese semiconductor fabrication facilities, unless they apply for a licence.
- Internationally, large chipmakers such as Taiwan’s TSMC, South Korea’s Samsung as well as Netherlands-based ASML, which makes chip manufacturing equipment, are evaluating their business with China as they explore how deeply the new rules will cut into their sales.
The direct impact is more evident in China’s semiconductor value chain:
- IC design companies, domestic graphics/computer processing unit-makers and AI brands (such as Huawei Hisilicon) that need advanced chips of 14 nm or less will fall under the regulations’ remit.
- Advanced chipmakers like SMIC and Yangtze Memory with chips of 16/14 nm or less are highly impacted, as the unavailability of core manufacturing equipment and critical spare parts will make it difficult to maintain current manufacturing capacity.
- Mature chipmakers with chips of 28 nm or above are not heavily impacted, as China capacity expansion is mainly in this area. These chips are also in high demand for the manufacture of domestic equipment, parts and materials. Mature chipmakers have unlimited access to equipment from all over the world, including from the US.
According to the State Council, China’s chip self-sufficiency rate will reach 70 per cent by 2025. Despite the direct impact of the US rules on certain industries, China is expected to accelerate industry upgrading and increase its self-sufficiency rate, which will create demand for the research and development (R&D) of high-technology products.
- Demand exposure: China’s ability to build a mass production line for pure domestic 55 nm equipment (with imported parts) remains uncertain, even if domestic equipment already supports 55 nm chips. The most urgent need will be to increase self-sufficiency in this area.
- Past success: China-made mature equipment is already adopted in the domestic production of mature chips (28 nm or above), mainly due to the long delivery time and high price of corresponding foreign equipment, as well as the capacity expansion of mature chip production abroad.
- On-going investment: in August 2022, SMIC International announced that it will build a 12-inch wafer factory in Tianjin with a planned construction capacity of 100,000 chips per month to produce 28–180nm chips. The project is worth about US dollars (USD) 7.5 billion (about Chinese yuan (CNY) 51.5 billion)
Although China has made progress in the development of mature chips, its road towards reaching the same level in advanced chips is still difficult. The Chinese Government is actively promoting R&D in this field, as evident from State Council announcements of new related policies:
- “Focus on R&D of advanced chips, integrated circuit equipment and process technology, key integrated circuitmaterials, integrated circuit design tools, basic software, industrial and application software…”
- “In the fields of advanced storage, advanced computing, advanced manufacturing, high-end packaging and testing, key equipment materials, new-generation semiconductor technology, etc., promote the construction of various innovation platforms in combination with industry characteristics…”
In 2021, the scale of the IC market in Mainland China reached USD 186.5 billion (domestic consumption), while the actual output value of chips manufactured in Mainland China that year was only USD 31.2 billion, with a self-sufficiency rate of about 16.7 per cent. Unlike high-end chips of below 14nm, which are utilised by a small number of industries—for example, high-end consumer electronics, AI devices, application processors, to name but a few—28nm chip products can be applied to new energy vehicles, automatic driving, home appliances, communications, as well as Internet of Things equipment, routers and other fields – representing 90 per cent of market demand. This indicates that domestic production capacity, especially for chips below 28 nm, will be further improved to reduce dependence on imports and improve localisation rates.
Implications for multinationals operating in China
The new US regulations mean that economic and technological decoupling between the US and China becomes inevitable. The new restriction may accelerate industry upgrading in China and lead to a broader market for non-American high-end technology and products.
On the other hand, these unprecedented steps are likely to create a less stable world where globalisation lives on but is transformed by limited free trade, increasing protectionism and an accelerated technology race as well as potential high-technology embargoes. European and multinational companies operating in China are urged to re-balance and prepare their China strategy for de-risking while also ensuring they can stay in the game. Considering the importance of the Chinese market and its production capabilities, different China-specific scenarios with corresponding countermeasures should be developed and deployed to prepare for an increasingly divided world.
Berger is partner at Euro Asia Consulting (EAC). EAC is one of the
leading management consultancies for strategy, M&A, and operational
excellence in emerging markets for over 30 years. We support our clients in the
realization of growth strategies and the optimization of international value
chains. Our firm has grown organically and now with four offices worldwide:
Shanghai, Munich, Mumbai and Kuala Lumpur. Our experts have shared their
expertise and experience gained from numerous projects and market analyses to
our globally committed teams.
 Entity List, Bureau of Industry and Security (BIS), US Department of Commerce, viewed 8th March 2023, <https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/entity-list>
 Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC), BIS, US Department of Commerce, 7th October 2022, viewed 8th March 2023, <https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3158-2022-10-07-bis-press-release-advanced-computing-and-semiconductor-manufacturing-controls-final/file>
 China’s New Semiconductor Policies: Issues for Congress, Congressional Research Service, 20th April 2021, viewed 8th March 2023, <https://crsreports.congress.gov/product/pdf/R/R46767>