Editor’s note: The latest round of US chip sanctions against China will further disrupt an electronics supply chain that has not recovered from the Covid-19 pandemic and a two-year semiconductor shortage. The following article first published on EETimes, looks at the impact on equipment manufacturers, China’s chip industry and some of the US’s economic allies.
The last one American volley in the chip war against China will set its domestic chip makers back generations, while global semiconductor and fab tool suppliers will suffer billions of dollars in lost sales due to a huge drop in demand outside China, analysts told the EE Times.
US President Joe Biden’s administration has strengthened Cold War measures from more than 40 years ago. In their new rivalry, the US is seeking to freeze China’s progress on a new front: chip technology, which is critical to economic development and military superiority.
Based on the Cold War era Wassenaar Agreementincluding more than 40 nations, recent US regulations ban the export of Nvidia and AMD GPUs intended for supercomputers to China, as well as sales of chip-making tools and design software.
So far, U.S. export rules have likely hindered China’s chip industry’s progress, Brett Simpson, senior analyst at Arete Research, told EE Times.
“Sanctions put a temporary checkmate on China, which is developing its foundry industry to more advanced nodes,” he said. “China’s primary solution or response is to build its own ecosystem of equipment, which will require mastering decades of Western R&D, particularly in areas such as materials science and lithography. It’s going to be a long and hard road, but that’s always been the primary decision, and restrictions don’t change that.”
The latest US measures are likely to set SMIC, China’s largest chip maker, back years.
While there has been some “chatter” that SMIC can produce 7-nm chips without EUV lithography, the cost/benefit ratio is not compelling and SMIC’s lead generation scope will be limited, Mehdi Hosseini, senior equity research analyst at Susquehanna International Group (SIG), wrote in a report to investors obtained by EE Times.
“We remind investors that SMIC has been trying for more than 20 years to catch up with the likes of TSMC and UMC, with little or no success.”
Hosseini covers chipmakers such as Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung, as well as chip tool suppliers such as ASML, for SIG, a privately held trading and technology firm.
Multinational chipmakers currently operating in China, such as TSMC, Samsung, and Intel, have permission from the US to continue manufacturing there for about a year. After that, they will likely be forced to cease operations in China, said Paul Triolo, senior vice president at Dentons Global Advisors.
“Ultimately, non-Chinese multinationals manufacturing in China that are given short-term reprieve will find it difficult to maintain their operations in China,” Triolo said. “Without the ability to continue to move up the technology curve, China-based facilities will ultimately become less competitive, serving a gradually shrinking market.”
China will have to rely more on Taiwan-based foundries like TSMC to maintain capacity, Simpson said.
Impact on global supply chains
“These restrictions will only create more challenges for global supply chains – where China is a key cog,” he said. “We expect inventory levels to remain high in China. At this stage, there seems little chance of an agreement being reached.”
Analysts interviewed by EE Times also predicted that global semiconductor and factory tool suppliers would suffer billions of dollars in lost sales due to a huge drop in demand from China. And the details that confirm those predictions are already trickling in: Equipment maker Applied Materials Inc. told reporters last week that it was cutting its fourth-quarter sales forecast by about $400 million, citing restrictions as a key factor.
SIG estimates the risk of wafer fab equipment impairment from US chip sanctions in the range of $8 billion, “or 8% of our average annual wafer fab equipment forecast for 2022-2025,” Hosseini wrote . “On the supercomputer side, we see approximately 10% downside risk to our estimates for TSMC, the main GPU manufacturing partner.”
The US also banned its “people” from working in China’s semiconductor industry without a license. The measures will cost the global industry nearly $10 billion over the next three years due to lost sales of goods and services in China, he added.
Some American and European firms were caught in the crossfire
While the American chip sanctions will have the biggest impact on Chinese chipmakers such as Yangtze Memory Technologies Corp (YMTC), ChangXin Memory Technologies (CXMT,) and Semiconductor Manufacturing International Corp. (SMIC), US and European chip tool suppliers such as ASML, Applied Materials, Lam Research and KLA will be caught in the crossfire, Triolo said.
“ASML will also lose significantly, although the company said this week that losses will be low because they have such a large backlog for customers like TSMC, Samsung and Intel.”
ASML, a Dutch company that serves as the world’s sole supplier of extreme ultraviolet (EUV) lithography tools used to make the most advanced chips, did not estimate the size of its potential losses. After announcing quarterly earnings this week, company officials told analysts and reporters that it expects to continue exporting less advanced, deep ultraviolet (DUV) equipment to China.
“The fact that we’re a European company with limited American technology in it, of course, creates this situation where the direct impact on us is quite limited,” ASML CFO Roger Dassen said in the earnings call. “We can continue to supply non-EUV lithography tools from Europe to China.”
At this point ASML still cannot meet global demand, according to Dassen. If ASML can no longer supply certain tools to certain customers in China, demand outside China will still offset the potential loss of sales, he added.
The US aims to offset the short-term financial impact of the sanctions against China with the recently enacted ones CHIPS and Science Actincluding a $52 billion investment stimulus package.
While this new law and similar legislation in the EU will help finance the construction of foundries outside China and cushion the blow from US chip sanctions, the stimulus measures cannot replace the heavy losses in the Chinese market, Triolo said. “This has the potential to be a multi-billion dollar blow to multiple US technology leaders in the sector, including GPU manufacturers and leaders in semiconductor equipment manufacturing.”
Triolo noted that California-based Lam Research this week estimated that sales losses in China would be to $2.5 billion in 2023.
The “watershed moment” is complicated
The U.S. export rules, announced Oct. 7, represent a key moment, bolstering the argument that the U.S. is in a new Cold War with China, Hosseini said.
“Although it appears that the US has only just begun consulting with allies, there is no doubt in our view that more semiconductors will be produced outside of China.”
Still, the U.S. is “joined at the hip to China,” Hosseini added, noting the U.S.’s dependence on trade with China. “We expect this tipping point to remain very complex and difficult to navigate, resulting in continued uncertainty without a clear path to quantify the risk of deterioration and the eventual outcome.”
“There will be a continued disengagement from China over the next five to 10 years,” Dan Hutcheson, an analyst at TechInsights, told EE Times.
International companies should, he said, “prepare for the real possibility that business with China will go to zero in the next five to 10 years.”
“Our allies are not on board”
The sanctions are likely to strain U.S. ties with allies like Japan that rely on trade with China, Hutcheson said.
“What we often see is that our allies are not on board,” he said. “They have equipment companies in their countries that do not comply with these regulations. Biden tried a multi-pronged approach, but the Japanese government still allows a lot of things to go to China.
As the EE Times reported last month, the US is pushing for the creation of a Chip 4 Alliance. with chip-making nations Japan, South Korea and Taiwan to share information and tighten controls on exports to China. The plan is still in the preliminary stage.
The complications for China are outlined
Chinese manufacturers will still get the technology they need — at a higher price, Hutcheson said. “It stunts their growth. It also slows their ability to dominate the world. China’s game is to build too much capacity, flood the market, and then drive all competition out of business.”
China’s efforts to build domestic supplies of semiconductor tools will be difficult, Triolo said.
“The ability of Chinese semiconductor toolmakers to ‘catch up’ will be very problematic,” he said, noting the large technology gap that separates them from industry leaders such as ASML. “The restrictions also include imports for domestic Chinese toolmakers, which will delay their ability to move to higher technology levels.”
With China’s chipmakers affected by the sanctions, that nation’s domestic toolmakers have nowhere to grow and compete in both the domestic and international markets, he added.
Extending the lead
Last month, the US national security adviser Jake Sullivan said the US must “reexamine the longstanding premise of maintaining relative advantages over competitors in certain key technologies.”
Under the Wassenaar Agreement, the US tried to stay several generations of technology ahead of its rivals.
“That’s not the strategic environment we’re in today,” according to Sullivan. “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we need to maintain as much of a lead as possible.”
Will China change course?
Analysts are waiting to see how China will respond.
“It’s still an open question what the Chinese government’s policy response will be,” Jordan Schneider, a China technical analyst at research firm Rhodium Group, told EE Times. “The State Council has reportedly expressed disappointment at the level of progress” after decades of efforts to build a domestic chip industry.
“Will they understand that the leading advantage is going to be incredibly expensive and maybe even impossible even within a 10-year horizon?” These firms have huge state investments and their priorities are very much dependent on what Beijing wants,” he said. “Look at China’s efforts in the past 10 years: the majority of semiconductors in China by 2025 should be made in China. They’re not even close.
“Eventually, you may see these firms instead doubling down on lagging nodes and trying to capture market share,” Schneider added. “Will Beijing agree to take one step back to take two forwards?”
— Barbara Jorgensen, EPSNews editor-in-chief, contributed to this article.