How the US Chip War Is Hemming in China
It has been going on a long time and progress is slow but visible.
The United States crackdown on chip technology in China is having significant effects. This fight isn't new. It's more than ten years old. In October 2012, the US House issued a bipartisan report accusing ZTE and Huawei of stealing intellectual property and threatening US national security because of ties to the Chinese government and its military. ZTE made the "entity list" in 2016 and Huawei made it in 2019. Those lists require a license to sell them certain tech. A license you weren't likely to get. ZTE had its restrictions eased but Huawei still labors under them, having had to spin off its consumer phone unit, Honor in order to survive. Honor's doing much better now.
The fight with Huawei and ZTE wasn't about phones, it was about networking equipment. That fight has now expanded from networking chips to include most of China's domestic chip-making industry. The US now requires a license in order to export a long list of advanced chip-making hardware and software to a long list of entities in China. The license requirement not only applies to US companies but also to companies outside the US who are using US-owned intellectual property in their chip-making. So, for example, if Taiwan's TSMC is using a US-designed piece of equipment to build a part, it can't sell that part to restricted entities without a license from the US.
These rules have exceptions. For example, Korea's Samsung and SK Hynix can continue to have their chips made at plants in China. Apple can continue to make its iPhones, and even sell those iPhones in China. The restrictions are meant specifically to stop Chinese companies that may have connections to the Chinese government, from using US tech to make and develop its own chips.
The Wall Street Journal notes that this works, because the US still dominates the design and development of chip tech. Nvidia, Qualcomm, AMD and Intel are all US companies that make up 67% of the logic chip design market. China has HiSilicon and others, that make up 5%. Chip design software is also dominated by US companies like Cadence and Synopsys, with 74% of the market. China has 3%. The US even owns the plants. The US has fabricators like Applied Materials and KLA which make up 41% of the market. China has 2%. (Others come from Taiwan, Korea, Japan and Europe) China's advantage is location. It's the place where the factories are located. China has 14% of chip fab locations. Less well known but possibly more important is that China has 46% of assemblers, packagers and testers, where the chips come together into parts. The US has 2% of those. So in summary, the US chip export regulations let companies continue to build and assemble things in China but they hinder the ability of Chinese companies to develop technologies and make chips for themselves.
And the new rules don't stop at hardware and software either. They prevent US persons from supporting China's chip development and production without a license. Dozens of Chinese chip company executives will have to either give up US citizenship or quit their jobs. China's leading domestic chip maker YMTC has asked all US citizens working for it to resign. YMTC Chief executive Simon Yang, who has a US passport, stepped down as CEO last month and may give up his remaining role as deputy chair.
These US policies have been building slowly over the decades and they are having an effect. For example, Biren Technologies makes a general purpose GPU that some think can outperform the Nvidia A100. You'd think that was a bright spot for China, since the Nvidia A100 is heavily restricted from export to China. China has a homegrown replacement and can carry on without worrying about Nvidia. Right?
Not so fast. Biren designed the chip. It doesn’t make it. Taiwan's TSMC does, using equipment and software from the US. So TSMC has halted production of the Biren GPU. If the chip performs well enough to beat the Nvdia A100, then it probably falls under US restrictions, and TSMC can’t make it for Biren anymore.
That's just one example. The numbers are bad for China overall. China's chip imports fell 12.4% in September. Domestic chip output also fell 16.4% in September. China's bringing in fewer chips and making fewer chips. Some of this is because of the current economic trends of course, but not all of it.
And none of it bodes well for China's goal of achieving chip self-sufficiency. is all that pressure going to make China change something? Probably not. China's President Xi Jinping was just confirmed for a third term as leader of the Communist party, the first person to get a third term since Mao. He will be elected to a third term as President in March. Xi also created a central committee of loyalists, moving anyone from other factions out. So don't look for any moderating forces there. In his address to the party congress last week, Xi called for the country to "win the battle" in core technologies.
And all of this is going on while we try to unsnarl the supply chain mess caused by COVID lockdowns in 2020. Part shortages are slowly teetering toward easing. But every time it does something like a war— shooting or trade— seems to complicate matters and extend the drought.