How China is Responding to the US Chip Embargo

The chip war between the US and China continues to escalate. Some companies are now also affected. But analysts doubt the strategy.

The technology conflict between the USA and China is widening. Washington wants to isolate the People’s Republic technologically and cut it off from the latest generation of semiconductors. To do this, it is putting massive pressure on its western allies. After Japan, the Netherlands, South Korea, and Taiwan.

Export controls tightened in May 2019 when Donald Trump put the Huawei group on the blacklist of companies that cannot be supplied. Joe Biden not only continued this policy but massively expanded it with the CHIPS and Science Act passed in August. Since October 2022, Americans have added more technology companies from the Middle Kingdom to the index every month. The reason given by the US government is that China must be prevented from increasing its military capabilities and modernizing the surveillance of the population. The USA obviously feels threatened by its hegemony.

At the end of January, Japan and the Netherlands joined the US embargo. Your companies should no longer supply the strategic competitor with modern machines that are required for the production of chips. Details should be kept under wraps because of the sensitive nature of the talks with the US, reports the Financial Times.

Hit the mole

The measures hit the Middle Kingdom hard. Chips and computer components worth US$186.5 billion were traded in China in 2021, according to the state-run China Daily. Of this, only 31.2 billion US dollars were accounted for by Chinese in-house production. The embargo also hit China’s largest memory chip maker Yangtze Memory Technologies (YMTC) last October. The company had ordered machines for chip production from US suppliers. The company immediately demanded back the advance payments made. Talks with Apple about supplying discounted memory chips for iPhones are on hold.

The embargo affects various types of semiconductors: Structure widths of 16 nanometers and below are taboo for logic chips. DRAM memory is limited to 18 nanometers and NAND memory cannot have 128 layers or more. According to the market researchers from TrendForce, YMTC must therefore withdraw from the market for NAND flash products.

The shock is clearly noticeable in the newly penalized companies. A day after chipmaker PXW was blacklisted along with 35 other companies, a Financial Times staffer said, “Most of the team leaders and managers are in an emergency meeting right now.” An engineer at Hefei Core Storage, who was also affected, admitted: “This is a nasty surprise. Nobody expected us to appear on the radar.” For Douglas Fuller, a China expert at the Copenhagen Business School, it’s a game of smashing the mole: “Every time Washington imposes sanctions, new projects come up that they then try to block again.”

Those who have been on the index for a long time are meanwhile relaxed. Huawei boss Eric Xu coolly stated in a letter to the workforce in December: “The US restrictions are now our new normal and we are going back to business as usual.” The turnover of his company last year was around 91.6 billion US dollars. It remained stable year-on-year as Huawei opened up new businesses with other industrial customers that are less vulnerable to pressure from the US.

Sign of weakness

The state organ China Daily sees the attacks from overseas as an incentive. On February 1, it confidently headlined: “Sanctions will not slow down China’s high-tech rise.” The US practice contradicts “the principles of the market economy” and tramples “the basic rules of international trade”. It shows “how desperate Washington is now”. The embargo is a sign of weakness. If the US economy were strong enough, it could compete with China in free competition.

China Daily also warns that “the building of a technological wall means that the US itself remains trapped within it”. Should the US continue to weaponize technology, it would “harm not only China but also its partners, itself and the world”.

Despite the embargo: China’s Tiangong space station runs entirely on chips from its own production.(Image: Jin Liwang/XinHua/dpa)

New Alliances

Two days after the American Inflation Reduction Act (IRA) came into force on January 1, 2023, Chinese economics professor Zhao Yongsheng made an offer to other countries: “If Europe joins forces with China and other emerging countries, they can react effectively to the USA in the short and medium term “They could force Americans, for example, to allow exemptions for electric and other green-powered vehicles. In the longer term, China and the EU must become the driving forces behind the reshaping of world trade rules,” Yongsheng told the Global Times, the mouthpiece of the more nationalist forces within the CCP.

Washington also sees the danger of new alliances against the United States. Former Secretary of State Condoleezza Rice recently warned the Biden administration: “The quickest way to lose friends is to say: Either you vote for us or for China!” This also applies to German companies such as Carl Zeiss and Trumpf. They cooperate closely with ASML from the Netherlands, the world’s largest manufacturer of lithography systems for semiconductor production. ASML boss Peter Wennink pleads in the FAZ for “reasonable” export controls that “do not have a major impact on industries that are completely dependent on these semiconductors”.

Even sharper criticism comes from Japan. NEC CEO Takayuki Morita doubts the long-term effectiveness of the measures: “I personally believe that the technology dispute between the USA and China over chips can slow down China’s technological progress, but will not change the general trend. [. ..] In the long run, China will be one of the forces we have to reckon with.”

China is catching up

Market researchers at the International Data Corporation estimated that China is currently three to four chip generations behind. However, within ten years the country could catch up with the United States. By 2025, Beijing wants to invest a total of 1,400 billion US dollars in high technology, a large part of it specifically in the semiconductor industry. In contrast, Biden’s much-lauded $52.7 billion Chips and Science Act to boost domestic chip production is “a drop in the ocean,” analyst Stanley Chao told the Hong Kong-based South China Morning Post. China has learned from the best technology companies in the world. Both in the new Chinese space station Tiangong and in the Mars rover that landed on the red planet two years ago,

Stephan Roach, former Asia boss of the investment bank Morgan Stanley, does not believe that the USA can maintain its technological lead either. The reason he gives is that the Chinese invest significantly more in basic research than the Americans.

Transition phase

Until China has caught up with the USA, the Middle Kingdom will rely on proven technology. High hopes rest on the contract manufacturer Hua Hong. This was long overshadowed by the national chip champion SMIC because it used older semiconductors. However, as the Financial Times reported at the end of December 2022, “Hua Hong’s lack of cutting-edge technology has recently turned out to be more of a blessing than a disadvantage”. Compared to the manufacturer SMIC, which has already been able to produce 7 nm chips in the laboratory, Hua Hong is successfully optimizing its less miniaturized chips. These are used in the Internet of Things, in fifth-generation telecommunications, and in electric vehicles.

Another trump card in the competition with the United States could be China’s huge treasure trove of data. Sony’s technology chief Hiroaki Kitano is convinced: “The driving force for AI in China is access to very large data sets.” By 2025, China’s share of global data volume will rise to more than a quarter, predicts the International Data Corporation. China Daily confidently stated, “China has the largest amount of data in the world.” Without data from China, no company would be able to lead an AI application to the top of the world. The newspaper therefore optimistically recalled an old saying: “What doesn’t kill you makes you stronger.”


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