Last October, construction plans for a colossal semiconductor factory of a major state-backed company in central China went haywire. The Biden administration had escalated the trade war over technology, depriving China of access to the Western tools and skilled workers it needed to build the most advanced semiconductors.
Some employees with US nationality have left the company. Three U.S. equipment suppliers stopped shipping and services almost immediately, and Europe and Japan are expected to do the same soon.
The facility was owned by Yangtze Memory Technologies Corporation, or YMTC, a memory chip company that China’s president Xi Jinping has hailed as a standard-bearer in China’s race to self-reliance. Now the chipmaker and his colleagues are hurriedly reviewing supply chains and rewriting business plans.
Nearly seven months later, US trade barriers have accelerated China’s push for a more independent chip sector. Western technology and money have retreated, but government funding is pouring in to cultivate homegrown alternatives to produce less sophisticated but still lucrative semiconductors. And China hasn’t given up on making high-quality chips: manufacturers are trying to work with older parts from abroad that aren’t blocked by US sanctions, as well as less sophisticated equipment domestically.
The harsh US restrictions stemmed from concerns over what officials in Washington perceived as the threat posed by China’s use of its tech companies to upgrade its military arsenal. Jake Sullivan, the national security adviser, recently characterized the sentiment as part of a “new consensus” in Washington that decades of economic integration with China had not been entirely successful, adding that the new controls were “carefully tailored” to protect China’s most cutting edge. edge semiconductors.
Under the October rules, U.S. companies and citizens are no longer allowed to help Chinese companies build chip technology that meets a certain threshold of sophistication. The controls went beyond the Trump administration’s trade restrictions that targeted specific companies like Chinese telecom giant Huawei.
During those earlier trade tensions, Beijing mobilized huge sums to cultivate homegrown alternatives for Western chip makers. But foreign components were readily available and of higher quality, making many Chinese companies unwilling to make the switch.
Those reservations about using materials from China seem to be diminishing. Chinese tech companies up and down the supply chain are assessing how to replace Western chips and related components, even those unaffected by US controls. Guangzhou Automobile Group, a state-owned electric vehicle maker, said in February it planned to eventually buy all of its roughly 1,000 chips in its cars from Chinese suppliers. It currently buys 90 percent of its chips from abroad.
“The goal in China now is to de-Americanize supply chains in many areas,” said Paul Triolo, the senior vice president for China at Albright Stonebridge Group, a strategic firm.
Dozens of Chinese chip companies are finalizing plans to raise money through public offerings this year. They include China’s second largest chip maker, Hua Hong Semiconductor, as well as a chip tool maker backed by Huawei.
The technology clashes between the world’s two largest economies show no sign of abating. The Biden administration has drafted, but not yet released, new rules that would limit US venture capital investment in advanced chip companies in China. Foreign investment in China’s semiconductor sector has already fallen to $600 million this year, the lowest point since 2020, according to data from PitchBook, which tracks private financing. And officials are considering stricter controls on technologies such as quantum computing or chip-making equipment.
US restrictions have led Beijing to activate a state fund that has been dormant due to waste and bribery: The government’s “Big Fund” injected about $1.9 billion into YMTC in February to bolster its response to US restrictions. According to state media reports, the fund has also recently invested in chip equipment and material suppliers.
The new subsidies aim to remove Western components from China’s supply chains. The southern city of Guangzhou has earmarked more than $21 billion this year for semiconductor and other tech projects, including those seeking to replace Western chip equipment suppliers. According to company reports and press statements, purchase orders for Chinese-made equipment have surged in recent months.
Mr Xi has been outspoken about what he sees as an attempt by Western countries to force a “general containment” on China. At a key legislative session in March, the Chinese president interrupted remarks made by a delegate from a Chinese crane manufacturer. The exchange was widely covered by state media: “The chips in your taps, are they sourced locally?” asked Mr. Xi. Yes, said the deputy.
According to estimates by Yole Group, a market research firm, less than 1 percent of all semiconductors in China so far belong to the top of the industry and are subject to US controls. The rest are less advanced or “mature” semiconductors, found in everyday consumer electronics and cars, and make up “the vast majority of the business,” said Jean-Christophe Eloy, the CEO of Yole Group. Those chips, largely untouched by the Biden administration’s checks in October, are now seeing a wave of investment, he added.
China’s two largest chipmakers, the state-backed Semiconductor Manufacturing International Corporation, or SMIC, and Hua Hong Semiconductor each announced billions of dollars this year to expand production into mature chips, according to public announcements.
But in the long run, China’s lack of access to world-class tools needed to make chips could hinder progress in many advanced industries such as artificial intelligence and aerospace, according to Handel Jones, the CEO of International Business Strategies, a consulting firm.
Last August, YMTC had targeted tripling its share of global chip production to 13 percent by 2027, which the Yole Group estimates has challenged incumbent chipmakers such as US-based Micron Technology. The Chinese memory chip maker is having trouble building its second factory and is expected to drop to just 3 percent of the market by 2027.
International companies that had previously invested in China’s semiconductor industry are shifting their investments elsewhere. Korea and Taiwan’s leading chip makers, Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC, are investing billions of dollars in new manufacturing in the United States. The Taiwanese chip maker is applying for US subsidies for its Arizona factory, forcing it to limit its investment in China for a decade.
At the same time, experts said, the weakening of foreign influence on China’s chip sector is creating opportunities for domestic companies. Last month, a semiconductor equipment manufacturer went public in Shanghai. Shares of the company, Crystal Growth & Energy Equipment, are up 30 percent since debut.
“The sanctions have now opened up space in the market,” said Xiang Ligang, a director of a Beijing-based technology consortium that has advised the Chinese government on technology issues. “Now we have the chance to develop.”
The recent burst of state coffers could boost China’s share of global production of cheaper chips. According to a jointly written report by Rhodium Group, a consulting firm, and Stiftung Neue Verantwortung, a Berlin-based think tank, China could account for about half of the world’s production capacity for a class of mature semiconductors in the next decade.
That could create new supply chain vulnerabilities for foreign companies, said Jan-Peter Kleinhans, a co-author of the report.
“Putting all your eggs in one basket is a stupid idea,” he explained. “This is a bottleneck that can be exploited.”
Anne Swanson reporting contributed.
