Economic cold war looms as Chinese chipmakers feel sting of US trade restrictions

The question is: how severe will the Middle Kindgom's response be?

Analysis The Biden administration's efforts to stymie China's semiconductor industry appear to have got the attention of chipmakers.

This week Bloomberg reported that China's Ministry of Industry and Information called an emergency meeting, inviting some of the country's largest chipmakers to voice their concerns. Many, including Yangtze Memory Technologies Co., reportedly painted the Biden administration's trade bans as extremely harmful to their businesses. YMTC has since denied the reports.

While China may be an economic powerhouse, its domestic semiconductor industry remains years behind those of South Korea, Taiwan, or – for the moment at least – the US.

To date, we've seen evidence that China's Semiconductor Manufacturing International Co. possesses the ability to produce chips on 7nm processes. That's an impressive feat and suggests it could manufacture sophisticated products China can use to fulfil its ambitions for massive use of AI and the Internet of Things. But outside China, Taiwan Semiconductor Manufacturing Co. and Samsung Electronics are preparing 3nm chips for volume production, and IBM has shown off chips produced at its Albany research fab as small as 2nm.

However, the White House's latest round of trade bans – which bar the export of advanced semiconductor manufacturing equipment – haven't been without consequence for US companies. During its Q1 earnings call Wednesday, Fremont, California-based Lam Research warned the administration's latest round of bans could cost the company as much as $2.5 billion in lost revenue in 2023.

Lam Research produces equipment essential to high-end semiconductor manufacturing for foundry operators. However, the ban on export of the company's tech to China has put a damper on the company's prospects for the region.

Similarly, Applied Materials, another US supplier of chipmaking kit, warned investors the Biden crackdown on Chinese chipmakers could cost the company between a quarter and half a billion dollars in sales in Q4.

The change in US policy also appears to have scared Apple away from its plans to use YMTC's memory modules in China-bound iPhones.

Don't expect US trade bans to go unanswered

The situation could get much worse for US companies that do business in China, or rely on Chinese firms if – make that when – Xi Jinping's government takes retaliatory action. "I was expecting China to respond forcefully to the Biden trade actions. Clearly, the new trade restrictions have much more far reaching and industry wide impact," CCS Insights analyst Wayne Lam told The Register.

According to Lam, the emergency meeting in China is telling because it shows Biden administration's actions struck a chord, and the trade restrictions could be difficult for the Middle Kingdom to overcome. The damage is severe enough that Lam believes the US needs to consider whether it's triggered an economic cold war with China.

"Expect China's full response after they have reviewed their options and that will tell us how serious this will be," Lam said. "The Biden policy is quite significant, and it will be hard for China to roll over and take the new restrictions. The question will be how severe is their response?"

The bans are bad enough that some have speculated that China could attempt to seize the technology it needs to compete on the global semiconductor stage by invading Taiwan and capturing TSMC's facilities. However, the director-general of Taiwan's National Security Bureau, Chen Ming-tong, has downplayed these concerns. He argued that TSMC's facilities would be essentially useless if China seized them, because other nations would respond by cutting off supplies of materials supplies, intellectual property, electronic design software, and manufacturing equipment.

US keeps pressure on

Washington has steadily stepped up pressure on Chinese chipmakers in the months since Congress approved the $280 billion CHIPs and Science Act, which funds manufacturing on US soil, amid bipartisan efforts to end US reliance on foundries located in the Asia-Pacific region. Its most recent measures banned the export of US semiconductor equipment and software to 31 Chinese chipmakers and institutions. The administration has also gone as far as to ban US persons and green card holders from working for Chinese firms or risk losing their citizenship.

That said, there's no reason to believe the trade ban will actually stick – especially if the Commerce Department hasn't changed its tack. A Wall Street Journal report from August showed the Commerce Department approved the vast majority of license requests to export controlled goods to China. Assessing the effectiveness of the USA's restrictions will therefore be difficult for some time.

Meanwhile, it looks like Beijing may be prepared to loosen its purse strings even further if it means ending reliance on US chip tech, at least according to a recent Bloomberg report. Of course, that's if the government has managed to clean up its own Big Fund that finances Chinese chip startups to help them compete against offshore rivals.

While the Big Fund has spent plenty, it has a poor record of success. And in recent months multiple high-ranking executives at companies managed by the Fund were accused of misconduct by the nation's anti-corruption agency. ®