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Is US After China's Semiconductor Industry?

© AP Photo / Ng Han GuanIn this Aug. 19, 2019, photo, a guide is silhouetted in an exhibition promoting Huawei's 5G technologies at the Huawei Campus in Shenzhen in Southern China's Guangdong province
In this Aug. 19, 2019, photo, a guide is silhouetted in an exhibition promoting Huawei's 5G technologies at the Huawei Campus in Shenzhen in Southern China's Guangdong province - Sputnik International
The United States wants to impose restrictions on SMIC, China’s largest chip maker. The US Department of Commerce has banned companies from supplying SMIC with components and equipment without a special license. The department sent a letter about the new policy to the largest US suppliers. Earlier, similar restrictions were imposed on Huawei.

A number of American media outlets have got hold of the Department of Commerce's letter, which stressed that the Chinese Semiconductor Manufacturing International Corporation (SMIC) was being allowed to produce dual-use products.

Back in April, the US authorities revised export restricting rules. If earlier the United States restricted only a few categories of exports, for example, military aircraft engines, according to the new rules, any products, components or software that the military-industrial complex could theoretically use may be subject to restrictions. Washington has justified the restrictions claiming that the United States shouldn't in any way contribute to its rival's military enhancement.

SMIC denies any association with the Chinese military-industrial complex. The company also noted that it hadn't received any official notification regarding supply restrictions from the American side. However, the US has previously used the pretext of "national security" to impose restrictions on Chinese companies without bothering to provide any concrete evidence. The new rules restricting dual-use technology exports are so vague that almost any product could be affected by them.

Chinese tech giant Huawei has been the first victim of US restrictions: the company was banned from 5G construction in the United States. Moreover, under Washington’s influence, many American allies followed suit. In addition, the US has limited chip supplies to Huawei, which apply to products manufactured not only in the United States, since most manufacturers somehow use American technologies and equipment to produce chips.

As in the case of Huawei and dozens of other Chinese companies sanctioned by the United States, SMIC's problem is not at all related to the military-industrial complex or to the threat to other countries' national security.

The main issue is that the United States wants to maintain its monopoly in the semiconductor market, as well as in other high-tech markets. According to Wang Yiwei, director of the Institute of International Affairs at Renmin University, this gives Washington powerful levers of control.

"The so-called US security has nothing to do with national security. Here we are talking about the security of the US position as a hegemon. If US allies' military systems use key technologies and communications equipment furnished by non-American companies, the United States will lose control over its allies."
© REUTERS / Dado RuvicA smartphone with the Huawei and 5G network logo is seen on a PC motherboard in this illustration picture taken January 29, 2020
Is US After China's Semiconductor Industry? - Sputnik International
A smartphone with the Huawei and 5G network logo is seen on a PC motherboard in this illustration picture taken January 29, 2020

"Moreover, China's rise poses major challenges for the United States. China is not an ally of the West, but it has got involved common rules development in the Industry 4.0 era and even occupied leading positions in some industries. The United States cannot accept this. This is inconceivable for the West as a whole. Therefore, the United States started to consistently suppress Huawei, TikTok, and now SMIC. Their main goal is to preserve the dominant position of the United States and the West in the industrial revolution process, creating rules and regulations, and maintaining control over the course of events."

SMIC is a leading Chinese chip maker that could offset the negative effects of US sanctions against Huawei. SMIC products are still lagging behind today's most advanced chips in terms of manufacturability: the company uses a 14nm process technology while leading manufacturers TSMC and Samsung produce 5nm chips. The thinner the chip, the better its performance and energy efficiency.

However, 14nm chips are quite competitive, and many Chinese electronics manufacturers use the company's products. After being sanctioned by the US, Huawei started purchasing a significant part of its chips from SMIC. According to the Chinese chipmaker, Huawei accounts for up to 20% of the company's orders. US restrictions on SMIC will hit the Chinese tech industry as a whole, as Chinese electronics manufacturers had high hopes for SMIC, Wang Yiwei said.

"This will undoubtedly have a serious impact since globalisation is based on the American system. Even the achievements that China has made since the launch of its reform and opening-up policy can be described as growing crops on American soil. We know that in the age of informatisation, chip production is the key technology. Huawei is the undisputed leader in key 5G technologies. SMIC aims to help Huawei and other Chinese companies break their dependence on American chips. And this is exactly what the United States cannot accept."

Even in the 14nm manufacturing process, SMIC, as well as other chip manufacturers throughout the world, depend on American technology. The problem is not in organising advanced chip production, but in the fact that the equipment and software required to produce them is mainly American. Cadence Design Systems, Synopsys, Ansys have nearly a monopoly position in the market for chip production software. The companies supplying the necessary equipment are also American: Applied Materials, KLA, ASML.

Therefore, restrictions on supplying these products will inevitably affect SMIC's competitiveness and performance. After the US Department of Commerce announced the new restrictions, SMIC shares on the Shanghai Stock Exchange fell by 6%, and by 5% in Hong Kong.

In the long term, US obstacles to China’s technological development will help China achieve independence and build up its own scientific and technological potential, Wang Yiwei said.

"History shows that despite all US restrictions, China eventually succeeds in its own independent research and development. Cooperation slows down China’s scientific and technological progress. You can recall two bombs and a satellite, or the Sino-American cooperation back in the 1970s to develop their own passenger aircraft. I think the sanctions will make China stronger and more independent. However, it's worth noting that although the prospects are bright, the path is still winding."

The advantage of globalisation and the international division of labour is that countries can specialise in producing what they do best. But this doesn’t mean that a technologically developed country cannot create competencies in some area. It's just a matter of costs.

When the US banned Google from supplying its services for Huawei products, it seemed that the company's smartphones would turn into a pumpkin without Android OS and Google Play. However, in a few months, Huawei managed to present its own Harmony OS as well as the Huawei Mobile Service ecosystem.

Of course, chip production is a much more knowledge-intensive process. But here, too, China can quickly create conditions to accelerate import substitution. The country's authorities have set a task to meet their own needs for chips and semiconductors by 70% by 2025, as well as to achieve complete import substitution in this area by 2030.

To do this, the so-called China integrated circuit industry investment fund was created in 2014, which has already accumulated more than $30 billion; it may attract the same amount of money in the near future. The fund is aimed at supporting the development of China’s own equipment manufacturers: Naura, Advanced Micro-Fabrication Equipment, Hwatsing, ACM Research, Mattson Technology and Shanghai Micro Electronics Equipment. The Chinese media reported in summer that the latter had promised to start supplying its own equipment by 2022, at least for the 28nm production process.

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