On October 7, 2022, the US Department of Commerce announced new regulations that limit the export of semiconductors, along with the software and tools required for their production. These measures are intended to impede China's efforts in supercomputing, artificial intelligence, and the growth of its own semiconductor capabilities. Given the interconnected nature of the semiconductor supply chain, there is a consensus that these export regulations will have extensive repercussions, potentially affecting segments of the supply chain that are neither based in the US nor operated by US firms.

What do these new regulations entail, and what is their significance for the global semiconductor landscape?

Semiconductors, commonly referred to as "chips," are essential components in virtually all modern electronic devices, ranging from kitchen appliances to smartphones and automobiles. Any device that operates electronically relies on semiconductors.

These components are also crucial for national security, finding applications in areas like nuclear weapons simulation and hypersonic weapon development. The military capabilities that semiconductors enable have contributed to growing tensions between the US and China over the years. By enforcing these export restrictions, the US aims to hinder China's advancements in artificial intelligence and supercomputing—technologies deemed vital by the Chinese military.

At a high level, the US export controls are implementing several key changes:

1. Companies must obtain licenses to export high-performance chips typically utilized in artificial intelligence and supercomputing.
2. Foreign-manufactured AI and supercomputing chips developed using US-made equipment and software will also require licensing.
3. US firms will face strict limitations on exporting machinery to Chinese manufacturers for producing complex chips, specifically those utilizing 14-nanometer or, in some cases, 16-nanometer technology.

The feature length of semiconductor components is measured in nanometers and serves as an indicator of the sophistication of the chip manufacturing technology. Smaller feature lengths correspond to more advanced chips.

Many experts anticipate that these export controls will be highly effective due to the complex and global nature of the semiconductor supply chain. Key points highlighting this complexity include:

• The semiconductor manufacturing landscape is largely dominated by Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Semiconductor from South Korea, and Intel Corporation in the US.
• US firms excel in chip design, with companies like Advanced Micro Devices (AMD) and Nvidia leading the way.
• The US also hosts manufacturers of semiconductor production equipment, such as Applied Materials and Lam Research.
• ASML from the Netherlands is the only provider of extreme ultraviolet lithography machines essential for producing the most advanced chips.

Typically, a variety of tools and expertise from multiple countries contribute to creating semiconductor products. Consequently, the export controls will influence various segments of the supply chain, including those not directly managed by US firms.

If a Chinese company seeks to produce its chip design using TSMC's cutting-edge manufacturing technology, it is improbable that US tools were not involved at some stage in the process. In such cases, US export regulations would apply.

The US has previously implemented similar measures. During the Trump administration, restrictions were placed on the Chinese telecom giant Huawei due to national security concerns, particularly the risk that Huawei's devices could be employed for espionage. These regulations barred US and non-US companies from supplying items to Huawei that were derived from US technology or software, effectively cutting Huawei off from the most advanced chips produced by TSMC, which were integral to its smartphones.

The recent export controls are far more extensive than previous measures.

China's semiconductor sector is likely to face considerable challenges. The country's largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), produces logic chips essential for various electronics. The new regulations will restrict access to technologies necessary for manufacturing chips at 14-nanometer technology and beyond, and in some instances, 10-nanometer technology. Although SMIC currently produces 7-nanometer chips, it does so at limited volumes. The new rules are expected to obstruct SMIC's progress toward more advanced manufacturing processes at competitive prices.

Additionally, memory chip producers like Yangtze Memory Technologies Corporation (YMTC), China's leading memory chip manufacturer, will be affected by restrictions on equipment for producing memory chips exceeding 128 layers, which corresponds to the company's most sophisticated products.

As the export controls extend to design tools as well, many Chinese chip designers may need to rely on lower-tier domestic alternatives instead of advanced US design tools.

Recent regulations also require US citizens to secure a license if they intend to assist in the development or production of semiconductors at specific Chinese facilities, thereby effectively severing the flow of US semiconductor talent to China.

The repercussions for US companies remain uncertain, as the overall impact will hinge on the rigor of the export controls. China represents a significant market for many US chip manufacturers and equipment suppliers; for instance, Intel Corporation derives 27% of its sales from China.

Conversely, some US firms may find opportunities arising from these export restrictions. For instance, Micron, a US memory chip producer and competitor to YMTC, is likely to benefit from the situation.

Experts believe that a strong retaliation from Beijing is improbable, as it lacks the means to respond effectively. However, "improbable" does not equate to "impossible." Some analysts speculate that China could potentially restrict access to its vast consumer market for US tech giants like Apple and Microsoft.

While I understand the US's apprehensions regarding China's growing military power, my primary concern is that these new export regulations may ignite a substantial trade conflict within the tech sector. Such a scenario would yield no winners—neither the US nor China, semiconductor manufacturers, or consumers.

What are your thoughts on this situation? Please feel free to share your insights in the comments below! I will make an effort to respond to all serious inquiries.

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If you enjoyed this piece, you might find these articles interesting: 1. Nanotechnology: The Key to Continuous Computer Improvement — Understanding the science behind Moore’s Law. 2. The US Invests $280 Billion to Re-establish Chip Manufacturing — Implications for the future of the U.S. semiconductor industry. 3. The Achievement of the World’s First Quantum Computing Integrated Circuit — A simulation of an organic molecule at the atomic level; implications for quantum computing.

References: 1. Rojas, Saul. “Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC).” 2022 10 07 BIS Press Release Advanced Computing and Semiconductor Manufacturing Controls FINAL, https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3158-2022-10-07-bis-press-release-advanced-computing-and-semiconductor-manufacturing-controls-final/. 2. “How the US Chip Export Controls Have Turned the Screws on China.” Financial Times, 22 Oct. 2022, https://www.ft.com/content/bbbdc7dc-0566-4a05-a7b3-27afd82580f3. 3. Kharpal, Arjun. “America’s ‘Once Unthinkable’ Chip Export Restrictions Will Hobble China’s Semiconductor Ambitions.” CNBC, 11 Oct. 2022, https://www.cnbc.com/2022/10/12/us-chip-export-restrictions-could-hobble-chinas-semiconductor-goals.html. 4. Kang, Cecilia, and David E. Sanger. “Huawei Is a Target as Trump Moves to Ban Foreign Telecom Gear.” The New York Times, 15 May 2019, https://www.nytimes.com/2019/05/15/business/huawei-ban-trump.html.