US sanctions accelerating China chip self-sufficiency
Chinese chip makers advance at expense of US and other tech exporters
while Commerce Department doubles down on national security narrative
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China's semiconductor market is increasingly being blocked from US and Western companies. Image: iStock
Tougher US tech sanctions will make things more difficult for China’s
semiconductor industry but should make it increasingly clear to the
Chinese that self-sufficiency is the only long-run solution.
In fact, Chinese chip design companies, production equipment makers
and foundries are already benefitting from the US Commerce Department’s
punitive efforts to sever their supply chains in the name of protecting
US national security.
On the other hand, tech exporters such as America’s Nvidia and the
Netherlands’ ASML stand to lose a significant percentage of their global
sales from US export restrictions while any gains from the Biden
administration’s recent attempts to ease tensions with China may have
already been erased.
On October 17, the Commerce Department’s Bureau of Industry and
Security (BIS) announced new restrictions on the export of chips used in
artificial intelligence (AI) and other advanced computing applications,
new types of semiconductor manufacturing equipment and indirect
supplies of those products to China.
Two additional Chinese companies were also added to the BIS “Entity
List” of companies and other organizations subject to US export
restrictions.
The new rules are updates to restrictions imposed in October 2022 –
officially to address national security concerns posed by the
modernization of the Chinese military but also with the effect of
hindering China’s technological and economic advance.
According to US Commerce Secretary Gina Raimondo, “Today’s updated
rules will increase effectiveness of our controls and further shut off
pathways to evade our restrictions. These controls maintain our clear
focus on military applications and confront the threats to our national
security posed by the PRC [People’s Republic of China] government’s
military-civil fusion strategy.”
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US
Secretary of Commerce Gina Raimondo at the Senate Appropriations
Committee hearing on May 16, 2023. Photo: Wikimedia Commons / DoD photo
by Chad J McNeeley, CC BY 2.0
Under Secretary of Commerce for Industry and Security Alan Estevez
added, “Export controls are a powerful national security tool, and the
updates released today build on our ongoing assessment of the US
national security and foreign policy concerns that the PRC’s
military-civil fusion and military modernization present.”
Assistant Secretary of Commerce for Export Administration Thea Rozman
Kendler said, “By imposing stringent license requirements, we ensure
that those seeking to obtain powerful advanced chips and chip
manufacturing equipment will not use these technologies to undermine US
national security.”
The intensity of these statements may be partly in response to opposition Republican members of Congress who have complained about the weakness and infectiveness of the BIS.
But they also indicate that the Commerce Department is unlikely to be
swayed by arguments from big tech company CEOs about the importance of
maintaining their sales and cash flows, which do not carry much weight
in light of this BIS statement:
“Advanced AI capabilities – facilitated by supercomputing, built on
advanced semiconductors – present US national security concerns because
they can be used to improve the speed and accuracy of military
decision-making, planning and logistics. They can also be used for
cognitive electronic warfare, radar, signals intelligence and jamming.
These capabilities can also create concerns when they are used to
support facial recognition surveillance systems for human rights
violations and abuses.”
The new restrictions require licenses, which will probably not be
granted, for the export to China of AI processors made by Nvidia, AMD
and Intel which were not covered by the BIS ruling made a year ago.
Nvidia’s A800 processor, a dumbed-down version of its A100
top-of-the-line graphics processing unit (GPU) designed specifically to
meet BIS requirements, is now on the Commerce Department’s restricted
list along with the A100 and other products.
The A800 has been a smash hit in China, with reports indicating it is
often sold out. In August, Chinese companies including Alibaba,
Tencent, Baidu and ByteDance ordered about US$1 billion worth of A800
processors to be delivered this year and another $4 billion worth to be
delivered in 2024, according to news reports.
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Nvidia’s A800 GPU is selling like hot cakes in China. Image: Facebook Screengrab
Only a fraction of these devices will likely be shipped before the new BIS restrictions take effect on November 16.
Technically, the BIS says that recent technological developments and
analysis of the effectiveness of last year’s ruling have caused it to
remove “interconnect bandwidth” as a parameter for restricting chips.
Instead, the new rules restrict the export of chips if they exceed a new
“performance density threshold” designed to preempt future workarounds.
In other words, even though Nvidia’s networked A800 is significantly
slower than the A100 (30% slower according to an estimate published by
electronics news website Tom’s Hardware), it is too efficient for the
Commerce Department’s liking.
This can be seen as a failure of the original analysis that has been
identified in the “ongoing assessment” mentioned by Under Secretary
Estevez.
The Commerce Department was also caught flat-footed by Huawei’s
release in August of its new Mate 60 Pro 5G smartphone, which came
equipped with a 7nm processor made by Chinese semiconductor foundry
SMIC. Secretary Raimondo found the news, announced while she was in
China, “incredibly disturbing.”
The Commerce Department wrongly assessed that 7nm chips could only be
made using extreme ultraviolet (EUV) lithography systems monopolized by
ASML and banned for sale to China.
But semiconductor industry executives and observers knew that 7nm
chips can be made with previous generation deep ultraviolet (DUV) ArF immersion lithography
systems made by ASML or Japan’s Nikon that the Chinese chip makers had
already widely purchased. In fact, ArF immersion lithography can produce
chips at 5nm, a capability openly advertised on Nikon’s website.
In September, Reuters reported that Raimondo told a US Congressional
hearing that “We don’t have any evidence that they [the Chinese] can
manufacture 7nm (chips) at scale.” In October, Nikkei Asia reported that
Huawei is planning to roughly double its smartphone sales to 60-70
million units in 2024 and that SMIC’s 7nm production capacity might
reach half that amount.
The Netherlands and Japan have stopped shipments of advanced DUV
lithography systems to China in line with US export restrictions. That
means that there is now a limit on how many 7nm or 5nm chips the Chinese
can make, although the precise figure is unknown.
This is also true of the etching systems and other equipment now
under US sanctions. It all means that the Chinese are now in a race to
develop their own semiconductor production equipment before they reach
full capacity at high yields using imported machines.
The Chinese are making, or trying to make, the entire range of
semiconductor production equipment but still face serious lithography
bottlenecks.
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EUV
lithography tools, pictured here, are on the Commerce Department’s
restriction list. Photo: Wikipedia / Lawrence Livermore Laboratory
Shanghai Micro Electronics Equipment (SMEE), China’s leading chip
lithography equipment maker, is now expected to deliver its first 28nm
capable ArF immersion lithography system by the end of this year.
Founded in 2002, SMEE currently makes i-line (280nm), KrF (110nm) and
ArF dry (90nm) lithography systems.
Taiwan’s TSMC, the world’s leading chip maker founded in 1987,
introduced 90nm process technology in 2004, 28nm in 2011 and 7nm
technology in 2019. That means SMEE, and thus its customers, are at
least 12 years behind at 28nm but making progress. Using imported
equipment, however, SMIC is only four years behind TSMC at 7nm.
Chinese makers of other types of semiconductor production equipment
are also reportedly making gains. Advanced Micro-Fabrication Equipment
(AMEC), which reported a 32% year-on-year increase in sales of its
etching systems in the first half of 2023, now sources most of its
components in China.
At Naura, which makes etch, deposition, cleaning and other types of
equipment, sales were up 55% in the six months to June. Cleaning
equipment maker ACM reported a 47% increase over the period. For
full-year 2023, the China Electronic Production Equipment Industry
Association (CEPEA) is forecasting a 38% increase in sales of
semiconductor equipment made in China.
One Chinese industry source told Reuters, “Before the sanctions, top
Chinese foundries would use a small amount of machines from Chinese
suppliers, but they would really only experiment with new equipment when
they would add new capacity. Now, foundries are testing out
Chinese-made equipment for every foreign machine they own and if they
find that it meets their needs, they replace all of them. They want as
few foreign machines as feasible.”
Western tech CEOs have advised their governments and stated publicly
that this import substitution was likely to happen in response to the
bans, warnings that Raimondo’s Commerce Department has chosen to ignore.
In September, Digitimes summarized a TV broadcast by ASML’s Peter
Wennink who “stated that if Europe and the United States are unwilling
to share technology, China will do it on its own. With a population of
1.4 billion, many of whom are highly intelligent, they are coming up
with solutions that Western businesses have not yet considered. The
restrictive policies of Western governments are compelling China to
become highly innovative.”
In July, Intel CEO Pat Gelsinger told the Aspen Security Forum that
“Right now, China represents 25% to 30% of semiconductor exports… if I
have 25% to 30% less market, I need to build less factories, right? You
can’t walk away from 25% to 30% and the fastest-growing market in the
world and expect that you remain funding the R&D and the
manufacturing cycle.”
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Intel CEO Pat Gelsinger is losing sales. Photo: The Next Platform
In May, Nvidia CEO Jensen Huang told the FT that “If [China] can’t
buy from . . . the United States, they’ll just build it themselves.”
Huawei’s Ascend AI processors are approaching Nvidia standards,
according to certain analysts and users of the devices in China.
In a Form 8-K filed with the US Securities and Exchange Commission
(SEC) on October 17, Nvidia said this about the new BIS restrictions:
“The licensing requirement may impact [Nvidia’s] ability to complete
development of products in a timely manner, [and] support existing
customers of covered products…[Nvidia] may seek a license for the
customer but has no assurance that the [US government] will grant any
exceptions or licenses, or that the USG will act on the request in a
timely manner.”
The same day, SEMI, the US-based industry association, issued this statement:
“We recognize and appreciate that sustaining a robust US
semiconductor sector is central to the administration’s national
security objectives. However, given the risks of unilateral and broad
controls, we will continue to evaluate the consequences of these export
controls and communicate to the administration the impacts to the global
and US semiconductor supply chain.”
At the same time, Secretary Raimondo told NBC’s “Meet the Press” that
“We are trying to choke their [China’s] military capacity. So if they
feel that, that means our strategy’s working. Certainly on my watch, we
are not going to sell the most sophisticated American chip to China that
they want for their military capacity.”
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