China Implements Export Restrictions on Raw Materials
In a move widely seen as retaliation in the ongoing “chip war,” the Chinese Ministry of Commerce has announced the implementation of export controls on gallium and germanium, citing the need to safeguard national security interests. The announcement has caused a surge in the prices of essential raw materials, leading companies to scramble for supplies. These regulations are set to be enforced starting from August 1. We will further delve into the details of the curbs announced by China and the potential implications for various countries.
The Chinese Ministry of Commerce has ordered that export operators must now obtain a specific license to export the two raw materials Gallium and Germanium. The primary concern lies with the application process, which requires operators to provide a list of importers, end-users, and the intended end-use of the materials. Additionally, the countries must produce the original export contract. Violating these export controls will result in administrative penalties and may even be deemed a criminal offense, holding the exporter “criminally responsible.”
These export controls have raised concerns for the countries due to the vital role gallium and germanium play in various industries. Gallium is crucial in the production of gallium arsenide, which serves as the core substrate for semiconductors used in integrated circuits, mobile and satellite communications (chipsets), LEDs, automotive and lighting, and sensors in avionic and defense systems. Approximately 80% of gallium production occurs in China, according to the European industry body, Critical Raw Materials Alliance (CRMA). Chinese dominance in gallium production has limited the output of low-purity gallium from other producers.
Germanium, on the other hand, is used in fiber optic cables, infrared imaging devices employed by enforcement agencies for surveillance and reconnaissance, and optical devices that enhance the ability to operate weapon systems in challenging conditions. It is also utilized in solar cells for its ability to withstand heat and achieve higher energy conversion efficiency. China commands 60% of the total global production of germanium. The European Commission has recognized both gallium and germanium as “critical raw materials” due to its import dependency on China, standing at 71% for gallium and 45% for germanium.
Countries around the world have responded to China’s export controls with varying degrees of concern. The United States has firmly opposed these measures and plans to consult with its partners and allies to address the issue. The U.S. The Commerce Department stated the need to diversify supply chains and build resilience in critical supply chains. The European Commission has also expressed concerns about this development and doubts whether it is genuinely related to security. Japan and the Netherlands have followed suit this year, implementing similar measures due to national security grounds.
China has denied the allegations, with a spokesperson at the Chinese Foreign Ministry stating that the export measures are not targeted at any specific country. Beijing claims to be committed to keeping global industrial and supply chains secure and stable while implementing fair and reasonable export control measures. However, former Vice Minister of Commerce, Wei Jianguo, suggested that these measures are just the beginning of China’s countermeasures, indicating a potential escalation if restrictions become stricter in the future.
India, which heavily relies on imports for gallium and germanium, is expected to experience short-term impacts from China’s export controls. The disruption in immediate supply chains may lead to increased prices, affecting the cost and availability of chips and potentially impacting India’s chipmaking plans. However, the long-term consequences will depend on various factors such as alternative supply sources, domestic semiconductor production capabilities, and strategic partnerships like the India-U.S. Initiative on Critical and Emerging Technology (iCET). These factors will be crucial in ensuring a reliable supply chain for India’s semiconductor industry.
Rajib Maitra, Partner at Deloitte India, sees this scenario as an opportunity for India. He suggests focusing on waste recovery from zinc and alumina production, as gallium and germanium are byproducts of these processes. Exploring available substitutes like indium and silicon could also be considered, with attention towards converting high-quality silica feedstock into metallurgical-grade silicon at lower power rates.
China’s implementation of export controls on gallium and germanium has raised concerns globally. The impact on India’s chipmaking plans and industries is expected to be short-term, with potential supply chain disruptions and increased prices. However, long-term consequences will depend on alternative supply sources, domestic production capabilities, and strategic partnerships. As tensions in the chip war continue to escalate, countries are evaluating their supply chain dependencies and seeking ways to diversify and build resilience in critical industries.