Image source: Jeremy Waterhouse

The Biden Administration’s substantial strict restrictions on the semiconductor industry in China hit the Chinese semiconductor industry hard. Though China has already been progressing toward semiconductor sufficiency, it will have to invest more in front-end manufacturing.

By Fiona Fang

On Oct. 7, 2022, Biden Administration imposed substantial strict restrictions on the semiconductor industry in China. The Department of Commerce considered that the threat of China building or acquiring high-end chips for military purposes was too urgent and it had to impose new export controls to address U.S. national security and foreign policy concerns. High-end chips are essential to the creation and application of artificial intelligence, and a massive AI-driven Chinese attack could overwhelm U.S. defense. The new order imposes restrictions on the following: chips, semiconductor production equipment and U.S. persons. The first part of restrictions, effective on Oct. 7, 2022., is on chip-making equipment. The DOC required a license from DOC with a presumption of denial to ship semiconductor production equipment that is below 14-16 nanometers or less to China or produce certain NAND memory chips and certain DRAM chips, two types of memory chips that store information. Memory chips are important in enabling the functions of semiconductor applications, from new smartphones to factory automation, and artificial intelligence. The second part of the ban, effective on Oct. 12, 2022, restricts U.S. persons from engaging in business related to semiconductor development or production within China unless with a license. In other words, U.S. citizens, green card holders, and US companies are prevented from delivering items used to develop or produce advanced chips and producing the chips at plants in China. The third part, effective on Oct. 21, 2022, limits the shipments of advanced chips, like high-end GPUs, which are widely used in supercomputers and artificial intelligence.

It is crucial to know how semiconductors are made and China’s place in the global semiconductor industry to understand the power of the new set of regulations on China’s semiconductor industry. The semiconductor industry can be divided into four major phases, in which most semiconductor companies focus only on one of the four supply chain segments: designing integrated circuits, fabricating the ICs, assembling ICs into a chip, and companies that assemble manufacturing equipment used by the companies in the other three segments.

The design and manufacturing sectors of the Chinese semiconductor industry will be affected by the new ban the most. China is one of the largest semiconductor importers. China mainly purchases advanced chips designed by Nvidia and AMD, and two U.S. companies, Intel and TSMC, use advanced U.S.-designed equipment produced by three U.S. companies – KLA, Applied Materials and Lam Research – and these two manufacturing companies would be subject to the new restriction. Thus, this set of new restrictions will cut off China’s access to these tools, potentially damaging the country’s chipmaking process. As some of China’s most advanced supercomputers depend on these advanced chips, this new set of regulations will slow China’s development of supercomputers and artificial intelligence.

However, the new restriction gave the Chinese semiconductor industry room to grow. Though U.S. government officials have ordered Nvidia to stop exporting its A100 and H100 GPUs to China, Nvidia said, that the U.S. government will allow it to continue developing its H100 artificial intelligence chips in China on Sept. 1, 2022.

Though China can import chips from South Korea and Japan — the global leaders in manufacturing DRAM and NAND chips — in the short run, China needs to increase its R&D expenditure and develop its own chips in the long run. Only Micron, Samsung, and SK Hynix are able to produce DRAM chips, and the latter two South Korean chipmakers obtained a one-year waiver to continue to use semiconductor equipment containing American technology in China. However, it’s unclear whether China can rely on those countries in the long run; among the six main global manufacturers of NAND memory chips, Samsung Electronics and SK Hynix are South-Korean companies and Kioxia is a Japanese manufacturer. As Japan and South Korea are long-standing American allies, these chip supplies to China remain unreliable, further pushing China to increase its R&D expenditure and develop its own.

China is on the way to self-sufficiency in the semiconductor industry. In October of last year, Semiconductor Manufacturing International Corporation developed a 7-nm process, which shares similarities with Taiwan’s TSMC’s 7nm technology. The 7nm chips can lower the cost of ownership and are widely used in AI, cloud computing, and 5G in business and the military. The biggest difficulty the SIMC now faces is the high cost. With the restriction of the ban, SMIC is thought to be producing the chips using deep ultraviolet lithography systems, a generation behind the extreme ultraviolet lithography systems used by cutting-edge chipmakers. However, using DUV machines will incur a lower yield rate and a higher cost compared with EUS lithography systems. Thus, chips are implausible to be massively produced with DUV machines. With these challenges, the Chinese government works to support the semiconductor industry. The National Integrated Circuits Industry Development Investment Fund, otherwise known as Big Fund, was established in 2014. Until July 2021, Big Fund has allocated $39 billion dollars to China’s semiconductor industry, of which 69.7% has been for front-end manufacturing. 

In all, the new set of strict regulations will most likely slow the development of the Chinese semiconductor industry. Though the new ban will strike hard on the Chinese semiconductor industry, China has already taken a few steps in semiconductor sufficiency and will invest more in front-end manufacturing. However, these efforts may not be enough, and China may need to build new partnerships in each stage of the supply chain of advanced chips. □