U.S. export bans on chip equipment to China are likely to result in its “Sputnik” moment, causing Chinese chipmakers to seek creative engineering solutions and chart their own path even if it may not thrive commercially in the longer term, experts said.
Under sweeping new regulations introduced by the Biden administration on Oct. 7, U.S. companies must stop supplying Chinese chipmakers with equipment that can build relatively advanced chips unless they first get a license.
The measures are placed to weaken China’s efforts to set up its own chip industry aimed at curtailing its reliance on foreign-made chips. China uses more than three-quarters of the semiconductors sold globally, which reached $556 billion last year, but produces almost 15% of global output.
“The tech decoupling could serve as China’s Sputnik moment in innovation, forcing it to take a top-down and self-reliance approach, especially in semiconductors,” Citi economists said in a note, comparing it to the increase in spending and research seen in the United States after the Soviet Union’s launch of the world’s first satellite.
These restrictions also come just ahead of the upcoming Communist Party Congress in Beijing, in which President Xi Jinping is expected to acquire an unprecedented third term. The importance of technological self-sufficiency, already a prime concern for Xi in the past decade, will likely spring up as a core issue for this year’s Congress.
Boston Consulting Group determined in 2021 that a country would require at least $1 trillion in incremental upfront investment to develop fully “self-sufficient” local chip supply chains.
The new curbs are likely to prompt Chinese chipmakers to attempt producing advanced chips by using creative engineering solutions with older technologies not affected by the sanctions, experts said.
This is something that China’s leading contract chipmaker Semiconductor Manufacturing International Corp (SMIC) (0981.HK), has tried before. In late 2020 Washington banned it from acquiring an advanced chipmaking tool called a EUV machine from Dutch firm ASML (ASML.AS) which is vital for building chips using 7 nanometer process nodes.
While the sanctions are expected to hinder SMIC from making advanced chips, some analysts have found signs that SMIC has nonetheless succeeded in producing 7 nm chips by tweaking simpler DUV machines it could still buy freely from ASML.
Experts say such efforts, however, are unlikely to result in commercially viable products for mass production.
“You can tweak certain tools. People are creative. But what will the yields be? How can they achieve commercial volumes? These are the questions,” says Marco Mezger, a consultant in Taiwan who tracks the global memory chip sector.
Experts say China’s own equipment makers trail four to five years behind their overseas counterparts, making them not fit to be instant substitutes for equipment lost from U.S. suppliers such as Applied Materials (AMAT.O), KLA Corp (KLAC.O), and Lam Research (LRCX.O).
Two other top Chinese chipmakers likely to be hit are DRAM maker Changxin Memory Technologies Inc (CXMT) and NAND memory chipmaker Yangtze Memory Technologies Co Ltd (YMTC).
CXMT and YMTC are both state-backed companies founded about a decade ago and China’s best chance for launching into the global market, going neck and neck with top players such as Micron Technology (MU.O) and Samsung Electronics (005930.KS).
But neither company has realized mass production at the forefront, though they have made progress – with YMTC asserting to have built 232-layer NAND, and CXMT purportedly advancing towards mass production of 10nm DRAM.
CXMT, YMTC, and SMIC failed to respond to requests for comment.
Winter Is Coming
Foreign toolmakers will likewise experience painful hits to their bottom line as China’s efforts to advance its domestic chip industry have been a boon to most of them. KLA, Lam Research, and Applied Materials each obtain almost 30% of their revenue from China, which ranks as their biggest geographic market and the fastest growing.
Applied Materials said on Wednesday that export curbs to China would lead to a $250-$550 million loss in net sales in the quarter ending Oct. 30, with a similar impact predicted in the next three months.
“Until we see some $10 billion fab set up in Ohio or Oregon, I see a big concern for our revenue next year,” one source at an equipment company told reporters, pointing at the CHIPS Act that gives $52.7 billion subsidies for U.S. chip production and research.
Sources at toolmaking firms also said they are struggling to conform to the new export curbs, with some companies applying for a broad supply ban to refrain from bending the rules, which they say are unclear.
Buy Crypto Now“If we go by the letter of the bill, the equipment companies might have to close their doors,” said one seller of chip equipment, who requested not to be named due to the sensitivity of the matter.
Washington is also struggling to deal with unforeseen consequences of its new export curbs, people with knowledge of the matter said.
Hours before the new restriction came into effect, South Korea’s SK Hynix (000660.KS) said it got U.S. approval to take delivery of goods for its chip production factories in China without additional licensing imposed by the new rules.
Yet business at toolmaking firms servicing Chinese customers has already slowed significantly, leaving their staff with minimal work to do but presenting an opening for Chinese equipment makers attempting to catch up with western rivals, sources said.
“Our top management team has told us to relax for a couple of months – we can still come to work but it’s not mandatory,” said one source at an overseas equipment company based in China.