HomeAsia'De-Americanize': How China is remaking its chip business

‘De-Americanize’: How China is remaking its chip business

Last October, plans to build a huge semiconductor factory owned by a major state-backed company in central China fell apart. The Biden administration had escalated the trade war over technology, cutting off China’s access to the Western tools and skilled workers it needed to build the most advanced semiconductors.

Some employees with US citizenship have left the company. Three US equipment suppliers almost immediately halted shipments and services, with Europe and Japan expected to follow suit soon.

The facility belonged to Yangtze Memory Technologies Corporation, or YMTC, a memory chip company that Xi Jinping, China’s president, has hailed as a standard bearer in China’s race toward self-sufficiency. Now the chipmaker and its peers are scrambling overhauling supply chains and rewriting business plans.

Nearly seven months later, US trade barriers have accelerated China’s push for a more independent chip sector. Western technology and money have withdrawn, but state funding is pouring in to cultivate local alternatives to produce less advanced but still lucrative semiconductors. And China hasn’t given up on making high-end chips: Manufacturers are trying to work with older parts from abroad that aren’t blocked by US sanctions, as well as less-advanced equipment at home. country.

The tough US restrictions arose out of alarm over what officials in Washington saw as the threat posed by China’s use of its technology companies to improve its military arsenal. jake sullivanThe national security adviser recently characterized the sentiment as part of a “new consensus” in Washington that decades of economic integration with China were not entirely successful, adding that the new controls were “carefully designed” to go after the most Chinese avant-garde. semiconductors

Under the October rules, US companies and citizens can no longer help any Chinese companies build chip technology that meets a certain sophistication threshold. The controls went beyond the Trump administration’s trade restrictions that went after specific companies like Chinese telecommunications giant Huawei.

During those earlier trade tensions, Beijing mobilized vast sums to cultivate local alternatives to Western chipmakers. But foreign components were readily available and of higher quality, so many Chinese companies were unwilling to make the switch.

Those reservations about using materials from China appear to be waning. Chinese tech companies throughout the supply chain are evaluating how to replace Western chips and related components, even those unaffected by US controls. Guangzhou Automobile Group, a state-owned manufacturer of electric vehicles, saying in February that it aimed to eventually buy all of its 1,000 or so chips in its cars from Chinese suppliers. It currently buys 90 percent of its chips abroad.

“The goal now in China in many areas is to de-Americanize supply chains,” said Paul Triolo, senior vice president for China at Albright Stonebridge Group, a strategy firm.

Dozens of Chinese chip companies are finalizing plans to raise money through public offerings this year. They include China’s second-largest chipmaker, Hua Hong Semiconductor, as well as a chip tool maker backed by Huawei.

Tech disputes between the world’s two largest economies show no signs of abating. The Biden administration has drafted, but has not yet published, new rules that restrict US venture capital investments in advanced chip companies in China. Foreign investment in China’s semiconductor sector this year has already plummeted to $600 million, its lowest point since 2020, according to data from PitchBook, which tracks private financing. And officials are considering tighter controls on technologies like quantum computing or chip-making equipment.

The US restrictions have caused Beijing to activate a state fund that had been dormant due to scraps and grafts: The government’s “Grand Fund” pumped roughly $1.9 billion into YMTC in February to bolster its response to US restrictions. The fund has also recently poured money into chip equipment and material suppliers, according to state media reports.

The new subsidies are aimed at removing Western components from China’s supply chains. The southern city of Guangzhou has allocated more than $21 billion this year for semiconductors and other tech projects, including those trying to replace Western chip equipment providers. Purchase orders for Chinese-made equipment have skyrocketed in recent months, according to corporate reports and press releases.

Mr. Xi has been outspoken about what he sees as an effort by Western countries to enforce a “full containment” of China. During a major legislative meeting in March, the Chinese president interrupted comments by a delegate from a Chinese crane manufacturer. The exchange was widely reported by state media: “The chips inside your cranes, are they locally sourced?” asked Mr. Xi. Yes, said the delegate.

So far, less than 1 percent of all semiconductors in China are at the high end of the industry and subject to US controls, according to estimates by the Yole Group, a market research firm. The rest are less advanced or “mature” semiconductors, found in cars and everyday consumer electronics, and are “the vast majority of the business,” said Jean-Christophe Eloy, chief executive of Yole Group. Those chips, largely untouched by the Biden administration’s October checks, are now seeing increased investment, he added.

China’s two largest chipmakers, the state-backed Semiconductor Manufacturing International Corporation, or SMIC, and Hua Hong Semiconductor have each announced billions of dollars this year to expand production to mature chips, according to public announcements. .

However, in the long run, China lack of access to world-class tools needed to make chips could hinder their progress in many advanced industries such as artificial intelligence and aerospace, according to Handel Jones, chief executive of International Business Strategies, a consulting firm.

Last August, YMTC aimed to triple its share of global chip production to 13 percent by 2027, challenging chip holders such as US-based Micron Technology, according to Yole Group estimates. Facing trouble building its second factory, the Chinese memory chip maker’s output will decline, falling to just 3 percent of the market by 2027.

International companies that had previously invested in China’s semiconductor industry are diverting their investments elsewhere. Major Korean and Taiwanese chipmakers Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC, are pouring billions of dollars into new production in the United States. The Taiwanese chipmaker is requesting US subsidies for his Arizona factory that force him to limit his investment in China for a decade.

At the same time, the experts said, the weakening of foreign influence in China’s chip sector is creating opportunities for domestic companies. Last month, a semiconductor equipment maker went public in Shanghai. Shares in the company, Crystal Growth & Energy Equipment, are up 30 percent since its debut.

“It is because of the sanctions that there is now space in the market,” said Xiang Ligang, head of a Beijing-based technology consortium that has advised the Chinese government on technology issues. “Now we have the opportunity to develop.”

The recent burst of state cash could boost China’s share of global low-end chip production. In the next decade, China could account for about half of the world’s production capacity for a class of mature semiconductors, according to a report co-authored by the Rhodium Group, a consulting firm, and Stiftung Neue Verantwortung, a think tank in Berlin.

That could create new supply chain vulnerabilities for foreign companies, said Jan-Peter Kleinhans, a co-author of the report.

“Putting all your eggs in one basket is a stupid idea,” he explained. “This is a bottleneck that can be exploited.”

ann swanson contributed reporting.

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