what threatens China from the new US initiative to block access to chip production

The production process of modern chips has a weak point – lithographic equipment. If for some reason this equipment is not available to the manufacturing company, then everything stops. Most manufacturers that are somehow connected with the US are doing well. But for Chinese companies, the situation is very unenviable.

All because the States impose new sanctions against chip manufacturers from the Middle Kingdom, including one of the industry leaders, SMIC. We have previously written about sanctions, but now they seem to be tightened. Details are under the cut.

What happened again?

A good question, since there are so many sanctions, you can simply get confused in them. Now the problem is that the United States is blocking access to companies from the Middle Kingdom to equipment for the production of chips 40 nm and below. Prior to this, the sanctions concerned equipment for the production of 14 nm, 28 nm chips, and now there is a new round that can become a real problem. And it lies in the fact that in the end, China may end up with a 90-nm process technology, the chips that were produced many years ago. For some industries, everything is OK, but for the production of laptops, PCs, modern smartphones, etc. is a crisis.

So far, all the sanctions that appeared relatively suddenly on the horizon have not entered into force. But if all the alleged restrictions are introduced while blocking expert licenses for the sale of advanced chip manufacturing tools to Chinese companies, then there will be many problems. More than the Celestial Empire can handle.

The fact is that China has several companies that are still working more or less smoothly, despite the sanctions. One of them is SMIC. And if it, as well as other chip manufacturers, is denied access to the production of 40 nm microcircuits, then the Chinese semiconductor industry can roll back 10 years. True, there is an additional factor in the form of damage to wafer manufacturers (WFE), but in the current situation, probably, few people pay attention to such nuances. Under the threat of side sanctions, few people pay attention to the realities in the style of “to spite my mother to get frostbite on her ears.”

At the same time, the United States hopes that Japan and the Netherlands will join the sanctions – and these are not vain hopes. For example, restrictions announced by the Dutch government last week prevent shipments of the ASML Twinscan NXT:2000i, NXT:2050i and NXT:2100i scanners, the company’s most sophisticated deep ultraviolet (DUV) lithography tools.

In addition, about 17 microchip fabrication tools are now required by US regulators for expert licenses, which are produced using American technologies. Chinese sanctions could double that number, hurting companies like Applied Materials, KLA and Lam Research.

But what about the electronics boom in China?

At the beginning of the year, it was reported that some production facilities in China were reviving, which had previously been almost closed due to US sanctions. The reason is simple – they had external orders from other countries, the flow of which dried up sharply due to the trade war between the States and China.

One such facility is the Fujian Jinhua Integrated Circuit Co. plant. (JHICC)K. It is one of the Chinese companies supplying chips to the market. At the beginning of 2022, it had several large domestic clients at once, one of which, as analysts suggest, is Huawei. This client provided not only orders, but also specialists who can help in the revival of chip production. In addition to engineers, the plant received procurement specialists who are well acquainted with the semiconductor market.

Things were going well for SMIC, as well as a number of other Chinese companies. For example, not so long ago, SMIC announced its intention to build new factories that will produce chips using the 28-nm process technology. Under pressure from sanctions, the company has already said that if problems continue to expand, large-scale production of new chips will be delayed by several quarters. Well, if the US continues to block access to older equipment, then the issue of expanding factories will have to be reconsidered or even postponed.

If SMIC loses the ability to manufacture chips in 28nm, 14nm/12nm and more advanced process technologies, hundreds of Chinese chipmakers will have to outsource production to companies such as TSMC, UMC, GlobalFoundries and Vanguard. Well, it’s not at all a fact that the latter will be able to cooperate with the former in the light of the current issues.

There is an exit?

Understanding the uncertainty of their future, Chinese chip manufacturers are gradually increasing purchases of equipment for the production of semiconductor wafers. This is done in order to ensure the normal operation of their own enterprises. It is clear that the Celestial Empire conducts such transactions covertly, so that partners and Chinese companies themselves do not once again attract the attention of US regulators.

Not one company does this, but many electronics manufacturers from China. For example, SMIC, HuaHong, Nexchip, Silan Microelectronics and other companies purchase not only whole used lithographic machines, but also individual components and spare parts for them. Buys equipment and the company Huawei, which is currently under the toughest sanctions of all Chinese electronics manufacturers.

But, of course, all this is quite strongly “suspended in the air.” If something goes wrong, then all microelectronics-dependent industries in China will suffer. For example, the release of self-driving car smartphones may slow down.

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Now in China they are producing their own processors according to the 14 nm process technology, they are planning to release 7- and 5-nm chips. Graphics cards and laptops are produced. Perhaps the Celestial Empire is developing faster than it shows to the international community. But it is still difficult to judge how the situation will develop if the sanctions become more stringent. Perhaps, in the end, China will still have to postpone the production and production of modern chips, focusing on the supply of systems of previous generations.