‘De-Americanize’: How China Is Remaking Its Chip Business

Last October, plans to build a massive chip factory owned by a state-owned giant in central China stalled. The Biden administration had intensified a trade war over technology, cutting off China’s access to the Western tools and skilled workers needed to make cutting-edge semiconductors.

Some U.S. national employees have left the company. Three U.S. equipment suppliers halted shipments and services almost immediately, with Europe and Japan expected to do the same soon.

The facility was owned by the Yangtze River Memory Technology Corporation (YMTC), a memory chip company hailed by Chinese President Xi Jinping as a standard-bearer in China’s race to independence. Now, the company and its peers are rushing to overhaul their supply chains and rewrite their business plans.

Nearly seven months later, US trade barriers are fueling China’s push for a more independent chip sector. Western technology and money have withdrawn, but state money is pouring in to foster domestic alternatives to make less advanced but still lucrative semiconductors. And China hasn’t given up on making high-end chips. Manufacturers are trying to use older parts from overseas that aren’t blocked by U.S. sanctions, as well as less advanced domestic equipment.

The tight U.S. restrictions stemmed from caution over what Washington officials viewed as a threat posed by China’s use of its own technology companies to build up its military. National Security Advisor Jake Sullivan recently characterized this sentiment as part of Washington’s “new consensus” that decades of economic integration with China have not been entirely successful. He added that the new regulations were “carefully calibrated” to force China’s most radical policies. – Edge semiconductors.

Under the October rule, American businesses and citizens will not be able to support Chinese companies developing chip technology that meets certain standards of sophistication. The restrictions went beyond the Trump administration’s trade restrictions on certain companies, such as Chinese telecom giant Huawei.

During the early trade disputes, the Chinese government mobilized billions of dollars to foster domestic alternatives to Western chipmakers. However, many Chinese companies were reluctant to switch because foreign-made parts were readily available and of high quality.

Reluctance to use Chinese materials seems to be easing. Chinese tech companies up and down the supply chain are looking at ways to replace Western chips and related components, including those unaffected by U.S. regulations. Guangzhou Automobile Group, a state-owned electric car manufacturer, Said In February, the company said it was aiming to eventually buy all of the roughly 1,000 chips in a car from a Chinese provider. The company now buys 90% of its chips from abroad.

“In many areas, what China is now looking to do is de-Americanize its supply chain,” said Paul Triolo, senior vice president of China at strategy firm Albright Stonebridge Group.

Dozens of Chinese semiconductor companies have finalized plans to raise capital through public offerings this year. Among them are Huahong Semiconductor, China’s second largest chip maker, chip tool manufacturers Backed by Huawei.

The technology dispute between the world’s two largest economies shows no signs of abating. The Biden administration has drafted, but has yet to publicize, new rules restricting US venture capital investment in China’s advanced chip companies. Foreign investment in China’s semiconductor sector has already fallen to $600 million this year, the lowest level since 2020, according to data from Pitchbook, which tracks private capital. And authorities are considering tightening controls over technologies such as quantum computing and chip-making equipment.

Due to US regulations, the Chinese government has activated state funds that had been dormant due to waste and grafting. The government’s “Big Fund” injected about $1.9 billion into the YMTC in February to help it meet U.S. regulations. The fund has also recently invested in chip equipment and material suppliers, according to state media reports.

The new subsidies aim to keep Western parts out of China’s supply chain. Guangzhou, a city in the south, $21 billion This year, it covers semiconductor and other technology projects, including those seeking to replace Western chip equipment suppliers. Orders for Chinese equipment have surged in recent months, according to company reports and press releases.

Xi has been outspoken about his view that the West is seeking to “totally contain” China. During a key legislative session in March, the Chinese president interrupted a representative of a Chinese crane manufacturer.exchanges were extensive report State media: “Is the chip in the crane locally sourced?” Mr. Xi asked. Yes, said the representative.

So far, less than 1% of all China’s chips are top-of-the-line chips subject to U.S. regulation, according to estimates by market research firm Yol Group. The rest are less-advanced or “mature” semiconductors, used in everyday consumer electronics and automobiles, which are “a big part of the business,” said Yoll Group chief executive Jean. Christophe Eloy said. The chips have been largely unaffected by the Biden administration’s October regulations, but investment is now skyrocketing, he added.

China’s two largest chip makers, state-owned Semiconductor Manufacturing International Corporation (SMIC) and Huahong Semiconductor, have announced this year that they will spend billions of dollars to ramp up production on mature chips, according to a public announcement.

But in the long term, China’s lack of access to the world-class tools needed for chip manufacturing will lead to a decline in the number of industries such as artificial intelligence and aerospace, according to Handel Jones, chief executive of consulting firm International Business Strategies. China’s progress in many advanced industries could be hampered.

In August last year, Yol Group estimated that YMTC would triple its share of global chip production to 13% by 2027, surpassing incumbent chip companies such as U.S.-based Micron Technology. I had a goal to compete with. The Chinese memory chip maker’s output is expected to drop to just 3% of the market by 2027 as it struggles to build a second factory.

International companies that previously invested in China’s semiconductor industry are diverting their investments elsewhere. South Korean and Taiwanese semiconductor giants Samsung and Taiwan Semiconductor Manufacturing Company (TSMC) are investing billions of dollars in new production in the United States. Taiwanese chip makers have applied for US subsidies for their Arizona factories, which will limit their investment in China for a decade.

At the same time, experts said weakening foreign influence on China’s semiconductor sector is creating opportunities for domestic companies. Last month, a semiconductor equipment maker went public in Shanghai. Shares of Crystal Growth and Energy Equipment have risen 30 percent since going public.

“The sanctions have created space in the market,” said Shan Ligang, director of a Beijing-based technology consortium that advises the Chinese government on technology issues. “Now we have an opportunity to grow.”

A recent surge in state funding could cause China’s share of global production of low-end chips to soar. Over the next decade, China will account for about half of the world’s capacity for some mature semiconductors, according to a joint report by consulting firm Rhodium Group and Berlin-based think tank Stiftung Neue Werandwertung. there is a possibility.

This could create new supply chain vulnerabilities for foreign companies, said Jan-Peter Kleinhans, co-author of the report.

“Putting all your eggs in one basket is a stupid idea,” he explained. “This is a chokepoint that can be exploited.”

Anna Swanson Contributed to the report.

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