Trade Barriers on Chips Alter China’s Supply Chain
Semiconductor Manufacturing International Corporation in Shanghai is expanding.
Last October, construction plans for a hulking semiconductor factory owned by a state-backed company in China fell into disarray. The Biden administration had escalated the trade war over technology, severing China’s access to the Western tools and skilled workers it needed to build the most advanced semiconductors.
Some employees with U.S. citizenship left the company. Three U.S. equipment suppliers almost immediately halted their shipments and services, and Europe and Japan are expected to do the same soon.
The facility belonged to Yangtze Memory Technologies Corporation, or YMTC, a memory chip company that Xi Jinping, China’s president, has extolled as a flag-bearer in China’s race toward self-reliance. Now, the chip maker and its peers are hurriedly overhauling supply chains and rewriting business plans.
Nearly seven months later, the U.S. trade barriers have accelerated China’s push for a more independent chip sector. Western technology and money have pulled out, but state funding is flooding in to cultivate homegrown alternatives to produce less advanced but still lucrative semiconductors. And China has not given up on making high-end chips: Manufacturers are attempting to work with older parts from abroad not blocked by the U.S. sanctions, as well as less advanced equipment at home.
The tough U.S. restrictions stemmed from alarm over what U.S. officials viewed as the threat posed by China’s use of its technology companies to upgrade its military arsenal.
American enterprises and citizens can no longer aid any Chinese companies building chip technology that meets a certain threshold of sophistication. The controls went beyond Trump administration trade curbs that went after specific companies like the Chinese telecom giant Huawei.
During those earlier trade tensions, Beijing mobilized vast sums to cultivate homegrown alternatives to Western chip makers. But foreign components were readily available and of higher quality, leaving many Chinese firms unwilling to make the switch.
Now Chinese tech companies up and down the supply chain are assessing how to replace Western chips and related components, even those unaffected by U.S. controls.
“The goal now in China in a lot of areas is to de-Americanize supply chains,” said Paul Triolo, an executive at Albright Stonebridge Group, a strategy firm.
Dozens of Chinese chip companies are finalizing plans to raise money through public offerings this year. They include China’s second-largest chip manufacturer, Hua Hong Semiconductor, as well as a chip tool maker backed by Huawei.
U.S. restrictions have caused Beijing to activate a state fund that had been dormant because of waste and graft: The government’s “Big Fund” injected roughly $1.9 billion into YMTC in February to bolster its response to the U.S. restrictions. The fund has also recently put money into chip equipment and material suppliers, according to state media reports.
So far, less than 1 percent of all semiconductors in China are at the industry’s top end that are subject to U.S. controls, according to Yole Group, a market research firm. The rest are less advanced, or “mature” semiconductors, found in everyday consumer electronics and cars, and are “the vast majority of the business,” said Jean-Christophe Eloy, the chief executive of Yole Group.
China’s two largest chip manufacturers, the statebacked Semiconductor Manufacturing International Corporation, or SMIC, and Hua Hong Semiconductor have each announced billions of dollars this year to expand production into mature chips.
China’s lack of access to world-class tools needed to make chips could stymie its progress in advanced industries like artificial intelligence and aerospace, according to Handel Jones, an official at International Business Strategies, a consulting firm.
International companies that had previously invested in China’s semiconductor industry are diverting their investments elsewhere. Korea and Taiwan’s leading chip manufacturers, Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC, are investing billions of dollars into new production in the United States. The Taiwanese chip-maker is applying for U.S. subsidies for its Arizona factory that force it to cap its investment into China for a decade.
In China, the weakening of foreign influence over its chip sector is creating opportunity for some. Last month, a semiconductor equipment maker went public in Shanghai.
“It’s because of the sanctions that there’s now space in the market,” said Xiang Ligang, a director of a Beijing technology consortium. “Now we have a chance to develop.”