The US and its allies are increasingly restricting China’s ability to import key technologies, especially advanced semiconductors and the machines used to produce them. In the latest development, Japan is imposing controls on 23 types of chips that domestic companies can export to countries such as China. Japanese companies may not be as well known as ASML Holding NV in the Netherlands or Taiwan Semiconductor Manufacturing Co., but they dominate several stages of the chip manufacturing process. Japan’s support will strengthen the US-led blockade of China and hinder its efforts to build a domestic technology sector capable of supporting its economic and political ambitions.
1. Why is the US preventing China from buying chips?
The administration of President Joe Biden last year unveiled its chip strategy, citing what it sees as a new era in US-China relations with rising risks of economic and possibly military conflict. National Security Advisor Jake Sullivan explained that the US must do everything possible to maintain as much technological advantage as possible, abandoning previous strategies of maintaining only a relative lead. In October, the Commerce Department imposed restrictions on the export of certain artificial intelligence chips to China without a license, as well as a ban on selling equipment used to produce the most advanced silicon. The US may expand these restrictions as it finalizes them this year, including by adding limits on chips that AI leader Nvidia Corp. can sell without a license.
2. What role do allies play?
The US has sought to persuade key allies to join efforts against China, since restrictions affecting only American companies would allow Chinese firms to source technology from foreign competitors. Securing the support of the Netherlands and Japan was critical for the US, as all key companies producing equipment for the most advanced chips are based in these three countries. These include Applied Materials Inc. in the US, ASML Holding NV in the Netherlands, and Tokyo Electron Ltd. in Japan. Japanese companies also hold dominant market shares at several stages of chip manufacturing, including wafer cleaning and processing.
3. How have companies responded?
Semiconductor and chip equipment manufacturers have resisted restrictions in China, the largest market for their technologies. Executives from companies such as Nvidia and Intel Corp. say they are concerned not only about lost sales. During July meetings in Washington, Intel’s Pat Gelsinger, Nvidia’s Jensen Huang, and Qualcomm Inc.’s Cristiano Amon warned that export controls could harm US leadership in the industry. According to executives, restrictions may push China to accelerate its own investments in the semiconductor sector and do not appear to have slowed AI development in the country.
4. Why are chips so important?
Semiconductors are essential for processing and interpreting vast amounts of data, which have come to rival oil as a lifeblood of the global economy. Next-generation chips enable technologies such as virtual reality and deep learning, artificial intelligence platforms like ChatGPT, and faster data transmission over 5G wireless networks. Memory chips, which store data, are relatively simple and traded as commodities. Logic chips, which run programs and act as the “brains” of devices, are more complex and expensive. Some analysts expect the industry’s value to double this decade. US companies dominate spending on chip research and development, accounting for more than half of total global investment. The US has stated concerns that China could use advanced semiconductors to develop threatening military capabilities, as well as technologies for domestic surveillance and censorship.
5. Where are chips produced now?
The production of the most advanced semiconductors is concentrated in just two locations—Taiwan and South Korea—which together account for about three-quarters of global contract chip manufacturing capacity. This has raised concerns in Washington and beyond, as Taiwan is a disputed territory—a self-governing island that China claims as its own. Governments from the US and Europe to Japan are spending tens of billions of dollars to secure future chip supplies by developing their own manufacturing facilities. However, these efforts are proving challenging: TSMC has said it will delay production at its new Arizona facility until 2025 due to a shortage of skilled workers.
6. What explains Taiwan’s success?
The island democracy became a dominant player in outsourced chip manufacturing partly due to a government decision in the 1970s to develop the electronics industry. TSMC almost single-handedly created the business of manufacturing chips designed by others, a model that gained traction as the cost of building new fabs soared. Major clients such as Apple Inc. provided TSMC with huge volumes, enabling it to build industry-leading expertise, and the world now relies on it. The company surpassed Intel in revenue in 2022. Matching its scale and capabilities will take years and enormous investment. However, geopolitics has made this race about more than just money, as the US has made clear it will continue efforts to restrict China’s access to US-designed chips manufactured in Taiwan. China has long claimed the island, located just 100 miles from its coast, and has threatened invasion to end its formal independence.
7. Will the Biden administration’s restrictions work?
The answer may not be known for many years. Beijing is investing more money than any country in history into its domestic semiconductor industry, providing generous subsidies and support in key sectors. Local companies are not only aiming to create domestic alternatives to leading memory and logic chip manufacturers, but are also trying to develop their own chipmaking equipment and software for design and graphics processing. Meanwhile, US efforts to build a more resilient and geographically diversified chip industry are controversial, with some policymakers in Washington criticizing the shift toward industrial planning.
Source: Bloomberg