The US and its allies are increasingly restricting China’s ability to import key technologies, especially advanced semiconductors and the machines that make them. In the latest development, Japan is imposing controls on 23 types of chip technology that domestic companies can export to countries such as China. Japanese companies are not as prominent as the Netherlands’ ASML Holding NV or Taiwan Semiconductor Manufacturing Co., but they dominate several stages of the chip-making process. Japan’s support will fortify the US-led blockade of China, thwarting its efforts to build a domestic technology industry that can support its economic and political ambitions.
1. Why is the US blocking China from buying chip technology?
President Joe Biden’s administration unveiled its chip strategy last year because of what it sees as a new era in the US-China relationship, with rising risks for economic and perhaps military conflict. National Security Advisor Jake Sullivan explained the US must do whatever it can to ensure the country has as large a technological advantage as possible, a break from earlier strategies of maintaining a relative advantage. In October, the Commerce Department slapped a ban on exporting certain artificial intelligence chips to China without a license, as well as prohibitions on selling chipmaking equipment for the most advanced silicon. The US may expand those restrictions as it finalizes them this year, including by adding limits on the chips that AI leader Nvidia Corp. can sell without a license.
2. Where do the allies fit in?
The US has tried to persuade key allies to join the effort against China because a prohibition on American companies alone would allow Chinese companies to turn to foreign competitors for supply. Winning over the Netherlands and Japan was critical for the US because all the key companies that produce chipmaking equipment for the most sophisticated chips are based in those three countries. They include Applied Materials Inc. in the US, ASML Holding NV of the Netherlands and Tokyo Electron Ltd. of Japan. Japanese companies also hold dominant market share at several stages of the chipmaking process, including wafer cleaning and development.
3. How have the companies reacted?
The companies that make semiconductors and chipmaking equipment have resisted the restrictions on China, the biggest market for their technologies. Leaders of companies like Nvidia and Intel Corp. say they’re not just worried about lost sales. During meetings in Washington in July, Intel’s Pat Gelsinger, Nvidia’s Jensen Huang and Qualcomm Inc.’s Cristiano Amon warned that export controls risk harming US leadership in the industry. The restrictions may compel China to accelerate its own investments in the semiconductor industry, and don’t appear to have helped slow China’s AI development, the executives said.
4. Why are chips so critical?
Semiconductors are necessary to process and understand the mountains of data that have come to rival oil as the lifeblood of the global economy. The latest generation of chips enables technologies such as virtual reality and deep learning, artificial intelligence platforms such as ChatGPT and faster data transfers over fifth-generation wireless networks. Memory chips, which store data, are relatively simple and are traded like commodities. Logic chips, which run programs and act as the brains of a device, are more complex and expensive. Some analysts expect the industry will double in value this decade. Spending on research and development for chips is dominated by US companies, with more than half the total. The US has said that it’s concerned China may be able to use advanced semiconductors to develop daunting military capabilities, as well as technologies systems for domestic surveillance and censorship.
5. Where are chips made now?
Production of the most advanced semiconductors is concentrated in just two places, Taiwan and South Korea, which account for about three quarters of global contract chipmaking capacity. This has raised concerns in Washington and beyond because Taiwan is disputed territory, a self-governing island that China claims as its own. Governments from the US and Europe to Japan are spending tens of billions of dollars to secure future chip supplies by developing their own chip factories. But those efforts are already proving complicated: TSMC said it will delay the start of production at a new facility in Arizona until 2025 because of a shortage of skilled workers.
6. What explains Taiwan’s success?
The island democracy emerged as the dominant player in outsourced chipmaking partly because of a government decision in the 1970s to promote the electronics industry. TSMC almost single-handedly created the business of building chips designed by others, one that was embraced as the cost of new plants skyrocketed. Big customers like Apple Inc. gave TSMC the massive volume to build industry-leading expertise, and now the world relies on it. The company overtook Intel in terms of revenue in 2022. Matching its scale and skills would take years and cost a fortune. Politics have made the race about more than money, though, with the US signaling it will continue efforts to restrict China’s access to American-designed chips made in Taiwan’s foundries. China has long claimed the island, just 100 miles off its coast, as its own territory and threatened to invade to prevent its formal independence.
7. Will the Biden administration curbs work?
We won’t know the answer to that for years. Beijing is investing more money than any country in history in its domestic semiconductor industry, with rich subsidies and support in key sectors. Local companies are not just seeking to build domestic alternatives to the leading memory and logic chip manufacturers, they’re also trying to develop their own chipmaking machines and software for design and graphics processing. In the meantime, US efforts to build a more robust, geographically diverse chip industry are proving controversial, with some Washington politicians decrying the move toward industrial planning.
–With assistance from Thomas Pfeiffer.
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