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US restrictions on microchips could worsen tech war with China

Chinese leader Xi Jinping’s effort to “win the battle” on key technologies and bolster China’s position as a tech superpower could be severely hampered by Washington’s unprecedented measures to limit the sale of advanced chips and chip-making equipment to the country, analysts say.

On October 7, the Biden administration released a broad set of export controls that prohibit Chinese companies from purchasing advanced chips and chip-making equipment without a license.

The rule also restricts the ability of “US persons” – including US citizens or green card holders – to provide support for the “development or production” of chips at certain factories in China.

“U.S. moves are a major threat to China’s tech ambitions,” said Mark Williams and Zichun Huang, analysts at Capital Economics, in a recent research report.

Analysts pointed out that the global semiconductor industry is “almost entirely” dependent on the United States and countries aligned with it for chip design, the tools that make them, and manufacturing.

“Without that,” the analysts said, “Chinese companies will lose access not just to advanced chips, but the technology and inputs that may, over time, have allowed domestic chipmakers to climb the ladder and compete at the forefront.” They added: “The US has cut the steps.”

Chips are vital to everything from smartphones and self-driving cars to advanced computing and weapons manufacturing. US officials spoke of the move as a measure to protect national security interests.

It also comes as the United States looks to bolster its domestic chip-making skills with heavy investment, after the chip shortages at the start of the pandemic highlighted the country’s dependence on imports from abroad.

Arthur Dong, a professor at Georgetown University’s McDonough School of Business, described the recent US sanctions as “unprecedented in modern times”.

Previously, the US government banned the sale of certain technology products to specific Chinese companies such as Huawei.

It also demanded that some major US chip-making companies halt their shipments to China.

But the last movement is much broader and more significant.

It not only prevents the export to China of advanced chips made anywhere in the world with US technology, it also blocks the export of the tools used to manufacture them.

With its Made in China 2025 roadmap, Beijing has set a goal for China to become a global leader in a wide range of industries, including artificial intelligence (AI), wireless 5G and quantum computing.

At the Communist Party Congress earlier this month, where he secured a historic third term, Xi stressed that the country will prioritize technology and innovation and increase its pool of talent to develop domestic technologies.

“China will seek to join the ranks of the world’s most innovative countries by 2035, with great self-confidence and strength in science and technology,” Xi said in the party’s congress report, released on Oct.

Dong said the latest US sanctions will make it harder for China to move forward in AI and 5G, given the role advanced chips play in both industries.

“Under any circumstances,” said Williams of Capital Economics, “China would find it difficult to achieve global technology leadership.”

A dramatic and potentially disruptive aspect of the rules is the ban on US citizens and legal residents working with Chinese chip companies.

Dane Chamorro, a partner at Control Risks, a London-based global risk consultancy, said such measures are usually “only enacted against ‘rogue regimes’” such as Iran and North Korea.

The decision to use this against China is “unprecedented,” Chamorro said.

Many executives working for Chinese companies may now have to choose between keeping their jobs or acting as legal US residents. “You can’t do both,” Chamorro said.

The ban could lead to a mass layoff of top executives and research teams working at Chinese chip companies, which will hit the industry hard, said Dong of Georgetown University.

So far it is unclear exactly how many American workers there are in China’s domestic chip industry. But an examination of the company’s records indicates that more than a dozen chip companies have senior executives with US citizenship or green cards.

At Advanced Micro-Fabrication Equipment China (AMEC), one of the country’s largest semiconductor equipment manufacturers, at least seven executives, including founder and chairman Gerald Yin, hold US citizenship, the company’s latest documents show.

Other examples include Shu Qingming and Cheng Taiyi, who currently serve as vice president and vice general manager, respectively, at GigaDevice Semiconductor, an advanced memory chip company.

The Financial Times report said in a recent report that Yangtze Memory Technologies has already asked American employees in key technology positions to leave, citing anonymous sources. But it is unclear how many.

AMEC, GigaDevice Semiconductor and Yangtze Memory Technologies did not respond to requests for comment.

If these senior executives leave, “it will create a technological and leadership vacuum in China’s chip-making industry,” Dong said, as the country loses executives with years of chip-making experience in an industry with “one of most complex manufacturing processes known to mankind.”

While much of the world’s chip manufacturing is centered in East Asia, China relies on foreign chips, especially for advanced processors and memory chips and related equipment.

It is the world’s largest importer of semiconductors and has spent more money buying them than oil. In 2021, China purchased a record $414 billion worth of chips, or more than 16% of the value of its total imports, according to government statistics.

But some Western suppliers have already begun preparing to halt sales to China in response to US export restrictions.

ASM International, a Dutch supplier of semiconductor equipment, said on Wednesday that it expects export restrictions to affect more than 40% of its sales in China. The country accounted for 16% of ASML equipment sales in the first nine months of this year.

Lam Research, which provides semiconductor equipment and services, also signaled last week that it could lose between $2 billion and $2.5 billion in annual revenue in 2023 as a result of restrictions on US exports.

The party congress, which ended recently, has slowed China’s response to the latest US export controls, analysts said.

But as Beijing begins to assess the significance of the measures, it may retaliate. Xi is “concerned” about US plans to bolster domestic chip production as his government moves to restrict China’s ability to produce them, US President Joe Biden said in a speech on Thursday. 27).

“This conflict is just beginning,” Chamorro said.

Chamorro said the most valuable “card” in China’s hand could be the supply of processed rare earth minerals, which Beijing could embargo. Rare earth minerals are important materials in the production of electric vehicles, battery manufacturing and renewable energy systems.

“They are not easily or quickly replaced and China dominates the processing and supply chain,” Chamorro said.

Meanwhile, the Biden administration is also considering further restrictions on other technology exports to China, a senior US Commerce Department official said Thursday, according to the New York Times.

If either country takes these steps, it could shift the technological arms race between the United States and China to a whole new level.

Source: CNN Brasil

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