Chinese companies are successfully acquiring U.S. chipmaking equipment for advanced semiconductors, despite the Biden administration’s efforts to tighten export controls. The U.S.-China Economic and Security Review Commission’s annual report, spanning a comprehensive 741 pages, criticizes the October 2022 export curbs that aimed to restrict Chinese chipmakers’ access to U.S. tools for manufacturing advanced chips at the 14-nanometer node or below.

The restrictions, designed to prevent the flow of technology crucial for cutting-edge semiconductor production, revealed a significant loophole. Importers can claim equipment use on older production lines, complicating the verification process and rendering the restrictions less effective than intended. This raises concerns about the broader effectiveness of measures aimed at safeguarding sensitive technology.

For instance, Huawei, despite being on the trade restriction list since 2019, managed to produce a 7 nanometer chip for its Mate 60 Pro smartphone at China’s leading chipmaker, SMIC. This suggests that Chinese entities are finding ways to exploit gaps in the export controls, undermining the sanctions imposed by the U.S. government. SMIC and Huawei, both subjected to trade restrictions, seemingly managed to stockpile equipment, taking advantage of the time gap between the U.S. rules in October 2022 and similar moves by Japan and the Netherlands in July and September 2023.

Efforts to close this loophole involved the U.S. convincing Japan and the Netherlands, both with robust chipmaking industries, to announce their own export restrictions on the coveted technology. While this managed to close some gaps, the report reveals that China, between January and August 2023, imported $3.2 billion worth of semiconductor manufacturing machines from the Netherlands, marking a staggering 96.1% increase from the same period in 2022. China’s total imports of semiconductor equipment from all countries reached $13.8 billion over the first eight months of 2023, reflecting the resilience of Chinese companies in circumventing restrictions.

The U.S.-China Economic and Security Review Commission suggests a way forward. The report recommends that Congress request an annual evaluation by the General Accountability Office to assess the effectiveness of export controls on chipmaking equipment to China. Established in 2000, the Commission aims to submit an annual report to Congress on the national security implications of economic ties between the United States and China, along with recommendations for government action.

U.S.- China Tech War:

The conflict between the U.S. and China in the semiconductor industry has been ongoing, with regulators introducing new rules in October 2022 to tighten export controls. The focus shifted to high-end AI system chips and semiconductor equipment machinery in China, aiming to address loopholes in previous sanctions that failed to curb domestic manufacturing effectively. The new rules marked a shift in approach, moving away from bandwidth-based restrictions to total processing performance (TPP) to prevent evasion. The implications for China include serious limitations on graphics processing units (GPUs) and performance application-specific integrated circuits (ASICs) crucial for AI applications. The restrictions on semiconductor manufacturing equipment extended to various tools, including etching tools, EPI tools, mask-making tools, and atomic layer deposition (ALD) tools. Despite these efforts, concerns persist about potential loopholes in restrictions on “advanced fabs” and the overall effectiveness of the supply chain.

Looking ahead, the new restrictions are expected to push China to develop homegrown capabilities in the AI industry. The emphasis is on faster growth of China’s AI chip infrastructure to reduce reliance on American technology, anticipating increased investments in memory computing, analog technology, and neuromorphic computing. However, the impact on the competitiveness of advanced chipmakers like Nvidia and AMD in the ongoing technology war remains uncertain, with potential repercussions on China’s semiconductor sector and overall technological competitiveness.

Related:

• China is Investing in High-Tech Manufacturing, Ranging from EVs to Semiconductors
• China’s Chip equipment imports surge, fueling global concerns
• AMD’s Job Cuts in China: Navigating the US-China Tech War

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In a recent legal development, Chinese flash memory manufacturer Yangtze Memory Technologies Co (YMTC) has taken legal action against U.S. chip giant Micron Technology, alleging the infringement of eight patents. The lawsuit, filed on November 9th at the U.S. District Court for the Northern District of California, accuses Micron and its subsidiary of utilizing YMTC’s patented technology to gain and protect market share without fair compensation.

Micron, a key player in the production of DRAM and NAND flash memory chips, competes globally with industry leaders such as Samsung, SK Hynix, and Kioxia (Toshiba’s unit). The lawsuit comes amid increasing restrictions on exporting chipmaking technology to China by the U.S. government, citing security concerns.

YMTC contends that Micron engaged in “freeriding” practices, hindering fair competition and impeding YMTC’s progress. The legal action comes in the wake of escalating U.S. sanctions on the export of advanced semiconductor tools and services to China, affecting YMTC’s ability to acquire certain American components.

Despite being blacklisted by the U.S. in December and facing a cybersecurity review by Beijing in April, YMTC has persevered. The company has adapted by forging closer ties with domestic suppliers like Naura, aiming to replace U.S. components in its manufacturing process. This resilience is notable, considering that companies like Lam Research and KLA Corp withdrew staff from YMTC after it was added to the U.S. Entity List.

YMTC’s technological prowess is emphasized in the lawsuit, where the company claims to have manufactured the “world’s most advanced” 3D NAND memory chip in a consumer device. Referring to itself as a “key player in the global 3D NAND market,” YMTC positions the lawsuit as a measure to protect its intellectual property against Micron’s alleged attempts to hinder its progress.

The market dynamics reveal YMTC’s role as China’s response to global NAND memory chip makers. The company unveiled its first 232-layer 3D NAND chip in August last year, showcasing its commitment to innovation. The U.S. trade restrictions have prompted Chinese businesses, including YMTC, to strengthen ties within the semiconductor supply chain, reducing reliance on American technologies.

Financially, YMTC received a significant boost in March with a $7 billion capital injection from state-backed investors, including the “Big Fund.” This injection aimed to enable YMTC to continue producing NAND memory chips without dependence on American suppliers, showcasing the strategic support from the Chinese government.

As for market share projections, YMTC’s global share in the NAND sector is anticipated to decline to 5.7% this year from 6% in 2022. Similarly, Micron’s share is forecasted to decrease to 10.9% from 11.3%, reflecting the challenges both companies face amid geopolitical tensions and evolving market dynamics.

Micron declined to comment on the pending litigation, but the legal battle between YMTC and Micron adds a new chapter to the ongoing semiconductor industry saga, marked by global competition, technological advancements, and geopolitical challenges.

Related:

• Global Chip Titans like Micron, Samsung Navigate Tensions and Tech at Shanghai’s CIIE
• Major US Chip Developer, Micron Technology is Looking to Partner with Chinese Chipmakers
• Xiaomi’s Singles day (11.11) sales in China reach a staggering $3.11 billion across all platforms

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The US Commerce Department has proposed rules and policies to stop China and other foreign nations of concern from benefitting from the $52 billion fund of the US Semiconductor Manufacturing and Research program. The proposed rules will affect countries like China, Russia, North Korea, and Iran. 

Companies that receive grants under the federal semiconductor fund will not be allowed to invest or expand their semiconductor business in countries like China and Russia. Moreover, they will also not be allowed to engage in joint research or share technology related to semiconductors with these nations. For the next 10 years, the companies who receive the grant will be barred from building or expanding semiconductor manufacturing factories in countries that come under the list of foreign entities of concern. 

The US Commerce Department has also classified the chips according to their importance and designated some advanced chips including the quantum chips and military use chips as ‘critical to national security’. These chips will be subject to tighter restrictions as they play a critical role in the technological advancement of the country.

Commerce Secretary Gina Raimondo said that the tighter restrictions cover chips used in current-generation, mature-node chips used for quantum computing, chips used in radiation-intensive environments, and other specialized military capabilities. She further added that these restrictions would help to ensure that the US stays ahead of its adversaries in the coming decades.

What is the US Semiconductor Manufacturing and Research Fund?

The US Semiconductor Manufacturing and Research Program is a specially designed fund under the CHIPS and Science Act of 2022. The Biden administration created the $52 billion fund to encourage the domestic manufacture of semiconductor chips, as well as continued research in the field. 

On Tuesday the Commerce Department released the proposed rules and regulations for the use of these funds. From late June, the department plans to start accepting applications for a $39 billion manufacturing subsidy program. The law also creates a 25% investment tax credit for building chip plants estimated to be worth $24 billion. 

The application will be a five-step process where companies will have to submit a workforce plan that includes an outline of workforce needs. Companies that are accepted and receive more than $150 million in direct funding will have to comply with additional rules and regulations. These companies for instance will be required to share with the US government a portion of any cash flows or returns that exceed the applicant’s projections by an agreed-upon threshold. 

The companies will get somewhere around 5% to 15% of project capital expenditure as direct funds and the total amount of an award including a loan or loan guarantee, will not exceed 35% of project capital expenditures. All recipients of the fund will be required to sign an exclusive agreement accepting restrictions on the expansion of semiconductor manufacturing capacity in foreign countries of concern like China for 10 years after winning the funding. 

Related:

• China Sees Sharp Fall in Semiconductor Imports: US Sanctions Taking a Toll on the Industry
• China Said to Use Whole Nation Approach to become Self Reliant in Semiconductors and Combat US
• China creates its first refrigerator for quantum chips

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