Eyes focus on China’s response to new US trade curbs on chips and tools

Chip trade observers are anxiously awaiting how China will respond specifically to US sanctions on the Chinese semiconductor sector two weeks after the US Commerce Department promulgated its updated policy designed to protect national security and foreign policy interests.

“Geopolitics moves quickly, and retaliatory measures from the Chinese government may be put in place,” analysts at IDTechEx wrote in a note on Tuesday. “Many will be watching the follow-up to China’s party conference very closely.” That conference ends Saturday Oct. 22.

China’s foreign ministry previously warned that the US chip export restrictions would backfire in a news conference on Oct. 8, one day after the US rules were first announced.

“In order to maintain its sci-tech hegemony, the US has been abusing export control measures to wantonly block and hobble Chinese enterprises,” Chinese Foreign Ministry spokesperson Mao Ning told reporters, according to a UPI account.

“Such practice runs counter to the principle of fair competition and international trade rules. It will not only harm Chinese companies’ legitimate rights and interests, but also hurt the interest of US companies,” she added. “[By] politicizing tech and trade issues and using them as a tool and weapon, the US cannot hold back China’s development but will only hurt and isolate itself when its action backfires.”

The new US sanctions cover nine new rules of which two stand out. Some are expected to have a strong effect on Chinese companies but also impact US companies and companies such as the Dutch ASML, which operate in countries allied to the US.  One rule restricts US persons, including foreign nationals living in the US, from supporting production of chips at China-based fabs without a license.

Since that restriction on US persons was implemented on Oct. 12, it has caused “a wave of mass withdrawals of American workers, including the resignations of high level management personnel from Chinese semiconductor companies,” IDTechEx said. These withdrawals reportedly include American workers at Chinese fabs Yangtze Memory Technologies Co. (YMTC), ChangXin Memory Technologies (CXMT), Shanghai Semiconductor R&D Center Jiading Factory and Hangzhou HFC Semiconductor Corp.

Also, US-based suppliers of chip equipment have stopped their services and support in China and have withdrawn their US workers from China. These include Applied Materials, KLA Corp. and Lam Research.  Applied last week said it could feel an impact from the regulations of nearly $1 billion in sales in the fourth quarter and first quarter of 2023.

RELATED: Biden’s clamp down on chips, tools to China is already working—and hurting Applied in US too

IDTechEx said many CEOs, senior managers in R&D and engineers at top Chinese chip companies hold American green cards or US citizenship.  In one example, the founder of Advanced Micro-Fabrication Equipment Inc. (AMEC), a Chinese supplier of chip equipment, is a US citizen.  Six others in senior management are Chinese Americans. The CEO of Kingsemi Co, a supplier to TSMC, holds an American green card. An estimated 43 American CEO level executives work at 16 chip companies listed on the Chinese stock exchange. Financial Times reported 200 people with US passports are employed by Chinese chip companies.

“The US has forced individuals to make a choice: they must choose between their nationality and their profession..The short-term talent drain and disruption is inevitable,” IDTechEx added. “The semiconductor business, particularly in the advanced fab, depends heavily on talent….Without a doubt, this ban is a major blow to China’s advanced semiconductor sector, which is already struggling to be at the leading edge of the semiconductor industry.”

The other important rule promulgated by the US restricts the supply of equipment and tools to any fab in China that makes logic chips of 16nm or 14nm or below, as well as DRAM memory chips of 18nm or less and NAND flash memory chips with 128 layers or more.  Companies wishing to sell such equipment must get a license from the Department of Commerce Bureau of Industry and Security.

As a result, silicon development will be more difficult for at least three Chinese companies: Semiconductor Manufacturing International Corp (SMIC), YMTC and CXMT. “The consequences will be enormous,” IDTechEx said.

Conversely, Applied, KLA and Lam Research, all toolmakers in the US, will be restricted, as well as ASML, based in the Netherlands, with US offices and many US employees. ASML immediately told its US staff to freeze interactions with Chinese customers, according to an internal letter obtained by The Washington Post.

On Wednesday, ASML CEOPeter Wennink said as a result of an initial assessment of the new US restrictions, "we expect the direct impact on ASML's overall 2023 shipment plan to be limited." ASML shares rose 6% higher at market close. 

While many observers have been concerned about restrictions on hardware sold into Chinese fabs, IDTechEx said software could also be affected. “The borders of certain software applications are not well defined,” the analyst firm said. “A lot of manufacturing equipment uses the same set of software for 14/28nm production, resulting in the supply or servicing of such devices being halted, affecting several 28nm fabs.”

IDTechEx also cited sources saying Apple abandoned plans to use YMTC 3D NAND flash memory. Apple had hoped to take advantage of a 20% lower price than that of competitors due to China’s subsidy to YMTC.

The disruptions from the new sanctions will not be felt in only one direction, the analysts said. “All these US-born/US-allied players involved in the advanced semiconductor business will be somehow disrupted,” IDTechEx concluded.

While the impact on various semiconductor companies and their workers may be a primary concern, some supply chain experts see broader, unintended economic implications.  Limiting China’s capability to make advanced chips could cause it to produce even more low-end chips, driving down prices and making it harder for the US and Western factories to compete in the low-end segment. As a result, Western buyers of low-end chips might turn to Chinese suppliers.

“The thing you worry about is collateral damage,” Willy Shih, a professor at Harvard Business School focused on technology and manufacturing, told The Washington Post.