In a fictional TV drama, a Chinese private technology firm takes on a state project to make a laser device for a deep ultraviolet lithography machine, equipment which is essential for advanced chip production and currently subject to strict US export restrictions. The plot thickens when the firm’s boss is detained by a foreign government, and his wife – who has taken temporary control of the business – says the enterprise is on the brink of collapse.
Although the company’s chief researcher is tempted to cash out and make a quick market profit, the company’s management presses ahead. The wife remortgages her home to raise funds and sells equity stakes, while the research team continues to overcome technical difficulties. Without giving away the entire plot, due to internet leaks we know there is a happy ending to the drama, entitled The Best Chip, or My China Chip. The 24-episode production was originally scheduled to run on Chinese video streaming site Youku on July 10 but its release was postponed at the last minute due to “scheduling adjustments”. However, the leaked photos and plot giveaways have invited much online derision, as most netizens are aware that far from a ‘happy ever after’ scenario, the country currently finds itself on the hard side of a technology war with the US, a battle that is casting a shadow over its national rejuvenation ambitions.
As the US and its allies have escalated chip export restrictions on China, Beijing has been forced to respond with calculated retaliatory measures in place of the usual chest-thumping. These include a sales ban on certain products from memory chip maker Micron and restrictions on the export of rare earth metals gallium and germanium, critical to the manufacture of semiconductors. Yu Xiekang, chairman of the China Semiconductor Industry Association, told the annual World Semiconductor Conference Expo (WSCE) in Nanjing that China faces protracted industry disruption due to US trade sanctions.
Nevertheless, the country’s “national strategy to develop a robust digital economy and fast-growing domestic market provide a strong chance for China’s chip industry to shift into a higher gear and upgrade its technologies,” he said on Thursday. While Beijing is determined to address its technological choke points, it has also been preparing for protracted rivalry with the US. One change seen in China’s domestic semiconductor industry has been closer collaboration between upstream and downstream players.
As foreign equipment firms such as Lam Research have withdrawn services to certain Chinese clients to comply with Washington’s updated export controls, Chinese chip makers such as Yangtze Memory Technologies Corp (YMTC) have had to resort to local equipment suppliers for help.
YMTC chairman Chen Nanxiang said at industry forum SEMICON China 2023 in June that the company was finding it difficult to secure spare parts for its imported equipment.
“We can’t get the spare parts for the equipment that we’ve already bought legally,” Chen said. He said foreign equipment suppliers should “buy back” the equipment if they cannot deliver after-sales services, indicating that much of this imported machinery may be idle.
One industry source, who declined to be named due to the sensitivity of the matter, told the Post that YMTC has turned to local equipment vendors due to US suppliers not being able to offer basic customer service, asking them to tailor-make components for Lam Research etching tools that are still used in its memory chip production.
“It is unheard of in China’s semiconductor industry that an end-user asks a different company for tailored parts for another company’s machine,” the source said.
The block on China’s imports of advanced chip equipment is set to continue as the Netherlands and Japan have joined the US to control certain essential items.
From this Saturday, the Japanese government will officially require a licence to export 23 types of semiconductor tools and materials to China, placing a de facto ban on the mainland’s access to Japanese products such as photoresists, despite public protestations from Beijing.
Japan’s new export controls tighten the chokehold on China’s role in the global semiconductor supply chain, even if it can de-Americanise certain supplies. Japan has been one of the biggest alternative procurement sources for China when importing chip-making tools, with China’s own customs data showing that chip tool imports from Japan grew 2.66 times from 2019 to reach a record US$4.8 billion in 2022.
“[Japan’s new controls] will really hinder China’s ability to manufacture chips at non-leading edge nodes below 20-nanometre,” Richard Windsor, research director at large at Counterpoint Research, wrote in a note in April. Faced with a worsening situation, China has retaliated with the Micron sales ban and restrictions on rare earth metals, materials where China accounts for the bulk of global supply if not refining capacity.
Xie Feng, the Chinese ambassador in Washington, told the Aspen Security Forum this week that Beijing will respond further if Washington imposes more curbs on China. The Biden administration is reportedly considering a move to put more chips on its export control list to slow down China’s artificial intelligence push.
“The Chinese government cannot simply sit idly by. There’s a Chinese saying that we will not … make provocations, but we will not flinch from provocations,” he said. “But definitely it’s not our hope to have a tit-for-tat. We don’t want a trade war, technological war, we want to say goodbye to the Iron Curtain as well as the Silicon Curtain.”
China is getting some support from US chip firms, who are worried that an intensification of US trade sanctions against China may harm the entire industry’s ecosystem.
With US hawks in Washington pushing for stricter export controls on national security grounds, US chip firms including Nvidia and Intel have moved to provide tailor-made products to meet China’s expanding demand for advanced chips.
Intel CEO Patrick Gelsinger concluded a low-key trip to China last week, his second China trip in three months, to promote its Gaudi2 processors to clients, including New H3C Group, one of the leading server makers in China.
Meanwhile the US Semiconductor Industry Association publicly voiced its concerns over “the [current] direction of trade policymaking by the US government”, with the China Semiconductor Industry Association also opposing additional US restrictions on China’s chip industry.
Beijing has also been adjusting its own industry strategy.
Tilly Zhang, a researcher with consultancy Gavekal Dragonomics, wrote in a note this month that China is turning “a relatively freewheeling venture-capital model” to boost the local semiconductor industry into “a more top-down system focused on the single mission of overcoming the US technological blockade” under a “new whole-nation system” arrangement.
Zhang noted that China’s new regime for chip development has been featured by high-level political leadership, with more focus on fundamental research and more cooperation between the public and private sectors. However, the jury is still out on whether China can pull it off when it comes to “not just achieving a few well-defined technical goals, but also having success in commercial markets and production at scale”.
China’s chip self-sufficiency drive has also been tarnished by corruption scandals. A number of executives at the state semiconductor investment fund, known as the Big Fund, have been arrested on allegations of corruption. Meanwhile the country’s efforts to develop domestic lithography systems have yet to show meaningful results. Another noticeable change in China’s strategy has been less transparency on current chip projects to avoid pings on the US sanctions radar. Toasting technological breakthroughs was once a favourite topic of corporate announcements in the sector.
For example, YMTC has not updated its corporate news section since October 2022, and telecoms equipment giant Huawei Technologies has kept mum on its current thinking about advanced chips. And China’s top foundry Semiconductor Manufacturing International Corp removed mention of 14-nm processing from its website earlier this year, fanning speculation about whether it is hiding the current state of its technological progress from public view. Most semiconductor experts speaking at this week’s WSCE appeared to accept that US sanctions will intensify, while China’s self-sufficiency drive in advanced chipmaking will be an increasingly tough fight, requiring huge capital support.
China’s semiconductor sector remains a key target for investment despite the threat of increased US restrictions. Hu Yingping, a partner at Hua Capital, said during an investment panel at WSCE that China has “entered a deeper stage of its [semiconductor] self-sufficiency drive”, which would not have occurred without the US pressure. He added that his fund intends to invest in more early stage chip start-up companies.
A Beijing-based semiconductor venture capitalist who focuses on hardware technologies and spends most of his time on visits to semiconductor start-ups, told the Post that the latest Japanese restrictions are not a major concern for people in his circle.
“Whether Japanese or American, and whether sanctions land soon or later, it reaffirms our belief that domestic replacement is where we should lay our bets,” he said, requesting anonymity due to the sensitivity of the matter. “In a way, China’s domestic market has baked in these sanctions,” he said, adding that it would galvanise companies to accelerate their “domestic replacement” efforts. Nevertheless, the entire process could take at least five to 10 years to bear fruit and will still be subject to an enormous risk of failure, he added.
Xiang Ligang, founder of Beijing-based telecoms-focused information portal CCTime.com, said “television dramas like The Best Chip not only fall short in promoting the industry’s development, they also fail to portray the real situation.”
Additional reporting by Lilian Zhang