‘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 large state-owned company in central China fell through. The Biden administration has intensified the technology trade war, cutting off China’s access to Western tools and the skilled workers it needs to build the most advanced semiconductors.

Some employees with US citizenship have left the company. Three US equipment suppliers almost immediately stopped their shipments and services, and Europe and Japan are expected to do the same soon.

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

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 Western technology and money have been withdrawn, but state funding is coming in to cultivate domestic alternatives to produce less advanced but still profitable semiconductors.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

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 upgrade its military arsenal. Jake Sullivan, the national security adviser, recently characterized the sentiment as part of a “new consensus” in Washington that decades of economic integration with China have not been entirely successful, adding that the new controls were “carefully tailored” to semiconductors. cutting edge.

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

During these earlier trade tensions, Beijing mobilized large sums to cultivate domestic alternatives to Western chip makers. But foreign components were readily available and of superior quality, leaving many Chinese companies reluctant to make the switch.

These reservations about using materials from China appear to be easing. Chinese tech companies across the supply chain are weighing how to replace Western chips and related components, even those unaffected by US controls. Guangzhou Automobile Group, a state-owned maker of electric vehicles, said in February it intends to buy all of the roughly 1,000 chips in its cars from Chinese suppliers. It currently buys 90% of its chips from abroad.

“The goal right 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 chip maker, Hua Hong Semiconductor, as well as a Huawei-backed chip tool maker.

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

US restrictions prompted Beijing to activate a state fund that had been dormant because of waste and bribery: the government’s “Big Fund” pumped some $1.9 billion into the YMTC in February to bolster its response to US restrictions. USA. The fund has also recently put money into chip equipment and material suppliers, according to state media reports.

The new subsidies aim to remove Western components from China’s supply chains. The southern city of Guangzhou has earmarked more than $21 billion this year for semiconductor and other technology projects, including those trying to replace western suppliers of chip equipment. Orders for Chinese-made equipment have soared in recent months, according to corporate reports and press releases.

Xi has spoken openly about what he sees as an effort by Western countries to impose “total containment” on China. During a key legislative meeting in March, the Chinese president interrupted comments from a delegate from a Chinese crane manufacturer. The exchange was widely reported by state media: “Are the chips inside your cranes locally sourced?” asked Mr. Xi. Yes, said the delegate.

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

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

However, in the longer term, China’s lack of access to the world-class tools needed to make chips could impede its progress in many advanced sectors such as artificial intelligence and aerospace, according to Handel Jones, chief executive of International Business Strategies. , a consulting firm.

Last August, YMTC was targeting a threefold increase in its share of global chip production to 13% by 2027, challenging chip operators such as US-based Micron Technology, according to Yole Group estimates. Struggling to build its second factory, the Chinese memory chip maker’s output is set to decline, falling to just 3% of the market in 2027.

International companies that had previously invested in China’s semiconductor industry are shifting their investments elsewhere. Korea and major Taiwanese chip makers Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC, are investing billions of dollars in new production in the United States. The Taiwanese chipmaker is seeking US subsidies for its Arizona factory, forcing it to limit its investments in China for a decade.

At the same time, experts say, weakening foreign influence over 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% since its debut.

“It’s because of the sanctions that there is now room 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 a chance to evolve.”

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

This can create new supply chain vulnerabilities for foreign companies, said Jan-Peter Kleinhans, 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.”

Anna Swanson contributed reports.


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