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US Announces More Chip Bans This Week
In the next week, the Biden administration plans to expand the October 2022 bans on AI chips and chip making equipment. We explore how this ban could be implemented.
US is Telegraphing Updated Export Controls
Exclusive: US warned China to expect updated export curbs in October - Reuters
The Commerce Department, which oversees export controls, is working on an update of export restrictions first released last year. The update seeks to limit access to more chipmaking tools in line with new Dutch and Japanese rules, other sources said, and to close some loopholes in export restrictions on artificial intelligence (AI) chips…"The PRC has been expecting an update around the one year anniversary, based on conversations with administration officials," the U.S. official said... The original rules were published Oct. 7, 2022. Reuters
The October 2022 Restrictions
The regulation set out to restrict China's access to sub-14nm equipment, any sub-14nm chips for supercomputers or AI purposes and barring any US citizens, or companies from supporting semiconductor development in China.
The October 2023 Restrictions
Huawei/SMIC announced production at the 7nm technology node which has sparked a flurry of activity. Particularly, a group of Congress committee members wrote to BIS demanding further action outlined below.
At the minimum the new restrictions will target trade leakages in AI chips, manufacturing equipment and possibly support services. It is also possible that the Biden administrations implements some of the legal whack-a-mole policies described in the letter to BIS.
The Case for the Scalpel: Strategic Sensitivity
As we have described previously Biden's apparent softness is influenced by his re-election ambitions and desire to prevent tensions from exploding prior to the election. China is well aware of this dynamic and so far has been unwilling to reciprocate with the US outreach and visits from senior officials. Based on the fact that the US administration gave Beijing warning, it seems like Biden is trying to soften the announcement for Beijing, while also pursuing national interest under pressure from Republican lawmakers.
The Biden administration warned Beijing of its plans to update rules that curb shipments of AI chips and chipmaking tools to China as soon as early October, a U.S. official said, a policy decision aimed at stabilizing relations between the superpowers. Reuters
The current tech bans have not prevented China from developing in areas of national security. However if new restrictions aimed at resolving these issues are overly expansive it could trigger a crisis and start the countdown clock on Beijing's chip stockpiles. The US is still dependent on China for critical inputs and the administration will want to see the EU take steps to de-risk from China before initiating escalatory trade action. If the US administration was perceived by the EU as triggering a crisis it would undermine the creation of a united front with US allies.
We wrote in September about the possible leverage points the US could target in order to challenge China's semiconductor and broader tech sectors. The Scalpel - high-likelihood areas for US intervention include:
Nvidia's modified AI chips: An extension of restrictions on AI chips to include NVidias chips, modified for the Chinese market. Given the prior WSJ reporting on this, there is a high probability of this being passed.
Targeted manufacturing equipment bans: Aimed at the equipment involved in the production of the specific Huawei 7nm chip, policy makers might target some of the specific masks, photoresists, metrology and etching equipment used at the high end outlined by SemiAnalysis. Such a policy would be detrimental for China's semiconductor fabs, while also affecting international equipment manufacturers.
Bans on after sales support and spare parts: These would have marginal impact on Non-Chinese companies while making operation and maintenance of SMIC’s DUV machines more difficult over time.
There is no doubt that U.S. export controls, a messy and inefficient tool being used in unintended ways, have produced more harm than benefit to its national security. In addition to pushing Chinese companies forward in the innovation cycle, the controls have also meant the progressive ‘designing out’ of U.S. technology in China.
This has already resulted in billions of dollars in lost revenue for U.S. tool makers, undercutting their R&D budgets, their future market growth, and — potentially — their competitiveness. U.S. semiconductor product companies like Nvidia, AMD, Intel, and Qualcomm have all lost market share in China, as Chinese companies favor domestic sources, and will continue to do so. Other U.S. companies like Micron have become the target of Chinese retaliation, and are also facing billions in lost revenue and market share. Even Apple has come under pressure, due to informal restrictions on government use of iPhones….
The saga so far has, then, exposed that no one in the U.S. government appears to know how to do a cost-benefit analysis of the overall impact of export controls on China, and assess the U.S.’s national security gains. That is the ultimate meaning of the Mate 60. Paul Triolo, Senior Associate, Trustee Chair in Chinese Business and Economics
The Case for the Chainsaw: No Way Out
US Companies are getting blocked from China’s market while China replaces leading foreign made chips and massively increases it production volumes of legacy chips. After Huawei/SMIC announced production at the 7nm technology node using “14nm” DUV equipment, it's becoming evident that the traditionally influential market held by western companies in China is shrinking. China has transitioned from courting the US semiconductor industry to replacing it.
For background information on the Huawei/SMIC 7nm production and the Apple bans see our previous article here.
While it will take time for tech giants like Nvidia and Qualcomm to be designed out by China, older technologies, such as catalogue components, are at risk of being replaced by domestic options. This is a shift in the semiconductor landscape, with China transitioning from seeking US expertise to actively replacing it, and semiconductor equipment sales to China potentially jeopardizing US and international tech firms. With some US companies losing out in the Chinese market it could hint at diverging industry perspectives where the US semiconductor industry may have less cohesion in lobbying against the "Chip Choke".
All this threatens the foreign companies that have advocated stabilizing trade ties between China and the west. As recently as July, US semiconductor chief executives made pilgrimages to Washington to argue against new restrictions on China. Now their market share is at stake. If the Chinese market looks lost, American companies have no reason to lobby for access to it.
And as their chips are replaced by local versions, they may question whether the west’s decision to keep supplying China with chipmaking tools and chemicals is really in their interest.” Chris Miller, author of Chip War
US Companies Getting Blocked From China’s Market
China banned its government officials from using iPhones and other foreign devices at work, aiming to decrease dependence on foreign tech and boost cybersecurity. This move could hit up to 5% of Apple's iPhone sales in China, potentially costing the company around $4 billion in revenue. China is Apple’s third-largest market, accounting for 18% of total revenue last year. The ban poses a significant hurdle for Apple in one of its primary markets.
State Subsidies Replaces Foreign Chips in the leading edge
SMIC, under sanctions, has been providing 7nm chips to Huawei, another sanctioned company, actions that are well over the line. Despite early indications that SMIC's production efficiency for these chips is subpar, it may represent China's symbolic message that "US sanctions are ineffective".
to produce Huawei’s chips, SMIC has used DUV lithography machines rather than more advanced EUV tools, which it is barred from buying. Foreign chipmakers such as TSMC and Intel learnt how to produce 7nm chips with DUV machines years ago, before turning to more efficient EUV tools. SMIC’s manufacturing costs are thus probably only competitive because the Chinese state is footing the bill. The company’s 7nm chip is, then, far from an unprecedented breakthrough. Chris Miller, author of Chip War
State Subsidies Increase Production Volumes of Old Chips
China is making non-market driven purchases in stockpiling chip making equipment, as the country did in 2017 after the ZTE bans, and before the Huawei bans. That would be the natural response if Beijing saw large restrictions coming.
China Expanding Production of Older Tech. In retaliation to the US sanctions, China has fortified its older technology chip production. Beijing's $140 billion investment and SMIC's strategic refocus are evidence of this. While their main revenue streams come from older technology chips, SMIC has witnessed significant growth, with its revenue soaring past $7 billion in 2022. SMIC's revenue is a mere tenth of TSMC's, while the difference in wafer shipments is only half: 7.1M wafers for SMIC compared to 15.2M for TSMC. This indicates a lower average selling price for SMIC and a predominance of older chip technology sales. While the global chip industry (except for AI) is experiencing a cyclical downturn in sales Chinese fabs are buying Western chip making equipment like there’s no tomorrow. Zen on Tech
Chip Chainsaw Massacre: Coming to a Theatre Near You
Post-election, the president will have more room to maneuver to enact tighter restrictions on national security grounds. However, given the pressures outlined in this article, the Chip Choke could soon evolve into the Chip Chainsaw Massacre. Those familiar with our writing will recognize our perspective on the cycle of escalation that will be difficult to escape.
Should China manage to circumvent current restrictions on AI chip and manufacturing technology, their success could alter the global power dynamics substantially. Such advances would, in turn, likely prompt the US to escalate its technological restrictions on China, leading to a cyclical pattern of tensions between the two nations. China’s Options for Chip Security
Even if stringent bans aren't declared in the current phase, we expect them to materialize eventually:
Ban all manufacturing equipment and software for 28nm and below: The would be an expansion of the October 2022 bans. This would severely impact revenues and valuations for US and Japanese equipment makers given they obtain a large portion of their revenue from older equipment sales to China. This has been advocated for by prominent voices in US think tanks.
Ban Chinese-produced chip exports: This would be harder to target, as the older chips that are made in China are mostly sold within China, however a ban could target Western products that have Chinese chips assembled into them.