America’s Aggressive Chip Strategy Forces China Into a Corner

(Bloomberg Businessweek) -- China’s government is protecting some of its chipmakers by spending lavishly to shore them up, just as weak demand is making it hard for chip manufacturers across the globe. But China’s semiconductor industry also faces a problem that its counterparts elsewhere don’t have to worry about: unremitting hostility from the US government. Beijing could try to spend its way out of that problem, too, but there may be things about cutting-edge semiconductor production that money can’t buy.

China’s chip industry has always lagged behind the US’s, and it has relied on Western technologies for the most advanced semiconductors, chipmaking equipment and knowledge. After years of mounting tension, the Biden administration spent much of  2022 coming up with ways to cut off China from such technology, as it attempted to slow down its advancement in chips, artificial intelligence applications and military tech. The effect could be to “freeze in place” the country’s semiconductor industry, according to Reva Goujon, director at Rhodium Group LLC. “The US is basically creating a new playbook here,” she says.

Before the policies were announced, some Chinese companies had begun to close the gap on the world leaders. Yangtze Memory Technologies Co., a supplier of flash memory chips that are key to China’s plans to build a global chipmaking business, was in talks to supply Apple Inc., a deal that would’ve been a major validation of the company’s increasing prowess. In October the US announced export restrictions that hampered the ability of many Chinese companies, including Yangtze, to gain access to production machinery. Then on Dec. 15, Yangtze was one of 36 companies added to the so-called entity list, requiring that anyone supplying it with US technology get a license from Washington. This essentially killed Yangtze’s chance of supplying Apple anytime soon.

The US’s effort to keep advanced tech out of Chinese hands increases pressure on President Xi Jinping’s government to build up China’s chipmaking capabilities. “They are really concerned about this chip embargo,” says Barry Naughton, a professor at the University of California at San Diego. “Their long-run response is that they will nurture their own chip industry.”

Xi has evoked a Soviet-style “whole nation” system to encourage state-owned enterprises, research institutes and startups in the private sector to come up with replacement technologies. One effort aims to foster a semiconductor architecture called RISC-V, which would replace the need for chip blueprints made by British semiconductor company Arm Ltd. that are now used in most smartphones and other devices. China has also poured money into chipsets known as third-generation chip technologies—based on the use of new materials such as silicon carbide and gallium nitride—that foreign countries don’t yet dominate. Some executives are focusing on research into advanced packaging, which promises more capable semiconductors by combining older chips in new ways.

It’s possible that US policies could backfire by giving China a useful political foil while only delaying the inevitable when it comes to the technology itself. “They can make life difficult for three or four years,” says one venture investor in China, who requested anonymity out of concern for retribution from either Beijing or Washington. “But it’s penny-wise and pound-foolish. They will lose the market in China.”

But China has been trying to build an advanced semiconductor industry for many years, with significant stumbles along the way. The billions of dollars sloshing around the industry have led to criminal corruption probes into bureaucrats and influential semiconductor executives, including the manager of the largest state-backed chip fund and the former chairman of local chipmaking giant Tsinghua Unigroup, neither of whom responded to requests for comment at the time the investigations were made public. That antigraft probe will spill over into 2023 and has soured Xi on a strategy based on huge subsidies. His administration is now looking at ways to support the industry with fewer handouts, in part because Covid-19 has taken such a heavy toll on the government’s finances.

In the end, the struggle between the US and China over advanced technologies is an endurance game. The US will have to keep its own fractious political class pulling in the same direction while also persuading Japan, the Netherlands and other key allies to continue to go along with its plans. The geopolitics could be tricky going forward. China, meanwhile, has generally demonstrated an ability to stick to a long-term plan even when it entails periods of discomfort. On chips, Xi is betting he can afford to be patient. —

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