Chip on Your Shoulder: The US’ struggle to keep down Chinese semiconductors

May 22, 2022

3 min read

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What's going on here?

The US Government is looking for ways to keep the most advanced semiconductor technology out of China.

What does this mean?

Found in thousands of electronic products, a semiconductor – also known as semi or chip – is a material that conducts electricity more than an insulator but less than a pure conductor. As semiconductors reduce in size, they become faster, require less power and become cheaper to produce. This makes them extremely popular to the extent that they now find widespread use in almost all industries.

From a manufacturing perspective, this creates fierce competition in the semiconductor industry. Under constant pressure to come up with something better and even cheaper than what defined state-of-the-art only a few months before, an increasing number of chipmakers are therefore delegating more of the production process to others in the industry, to the extent that chip production now resembles “a gourmet restaurant kitchen, where chefs line up to add just the right spice to the mix” (Investopedia).

The main issue, however, that is caused by this lack of a streamlined production process is that the necessary equipment must be acquired from separate firms. In China, these firms include Applied Materials, Tokyo Electron, ASML, KLA and Lam Research. As the country ramps up its domestic production, the five main toolmakers’ revenues are getting tied up with the country – moving from $3.3bn (10%) in 2014, to around a quarter of global revenues today.

In December 2020, the US placed SMIC, China’s leading chipmaker, on an export blacklist. To trade with SMIC, companies had to obtain a licence. Yet, the effect of this did not match expectations. Whilst the US tries to curb Chinese semiconductor industry development, other countries are not following suit and tools have continued to flow into China. Having presence in the country is crucial as China is the world’s largest market, accounting for $29.6bn of industry revenues, which is a 58% increase from 2021.

What does this mean? Sophisticated semiconductor tools can be used to bolster various areas of the economy. At the moment, the US has the best offering on the market. However, by exporting it to the Chinese market, it is sharing with a key rival. It also impacts the success of US-based tool producers as they are losing out on revenue if they do not export to China.

What's the big picture effect?

What’s the impact on the industry? As China buys up more equipment, non-Chinese chipmakers are deprived of crucial equipment. As a result, their capacity to manufacture chips is hit. For example, TSMC had to inform its two key clients, Apple and Qualcomm, that due to the “tool delivery problem” they might not be able to meet the demand in 2023 and 2024. 

How is the industry responding? Well, American toolmakers formed a coalition last year – the Coalition of Semiconductor Equipment Manufacturers. They are working with American law firm Akin Gump to liaise with the US Government for some leeway in the way they trade. The coalition is suggesting that the Government should allow the sale of less advanced technology whilst only banning the sale of more advanced tools.

The fight for chip dominance, or at least self-sufficiency, has intensified throughout the globe. We have seen the EU pledge a €43bn investment in the industry, whilst the US is looking to introduce the Bipartisan Innovation Act which includes a provision of $52bn in government subsidies. All the while it is trying to convince its allies, especially Japan and the Netherlands, to impose export controls on their own toolmakers. If the US is successful, China would find itself struggling to catch up with the West. In its goals to suppress Chinese semiconductor development, America is heavily reliant on global support – but is it in the interests of its partners?

Report written by Monika Sakyte

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