Semiconductor Sanctions on China

Is this the start of China’s chip self-sufficiency?

Last week, Beijing announced a cybersecurity review of Micron Technology, a top-tier U.S. chip maker. The move was characterized as a “normal regulatory measure” by Mao Ning, a Chinese Foreign Ministry spokeswoman, however many industry analysts claim otherwise. Regardless of China’s outward facing intention of the review, the event is now being discussed as China’s most significant stroke of retaliation against Washington. 

US sanctioned export controls restricting advanced computer chips sales to China have posed extraordinary obstacles to China’s semiconductor industry. Given the already strained relations between China and the Biden Administration, this latest ‘retaliation’ could be the start of an entirely new tactic in China’s drive to become self-sufficient in chip manufacturing.

Road To Chip Self-Sufficiency 

China has always been largely dependent on foreign suppliers for the production and designing of semiconductors, particularly in the case of the most modern chips. In fact, U.S. companies design more than 95% of the AI chips that are used in China, and also produce manufacturing equipment that is used in every single Chinese chip factory. 

China claims that they’ll reach a chip self-sufficiency rate of 70% by 2025. However as of 2023, self-sufficiency in producing chips hovers in the 20% range. Furthermore, IC Insights predicted that by 2025, China-made integrated circuit manufacturing will only account for 19.4% of the overall Chinese integrated circuit market.

Taking into account the massive financial support, estimated at $150 billion, China’s industrial policy of developing an advanced chip industry has so far yielded mixed results. This isn’t unusual however. In highly-competitive sectors, money doesn’t equate progress. The semiconductor sector is characterized by a high level of specialization. And with the US having leverage over several of the key bottlenecks in the production process, China is limited in its ability to secure production of high-end chips by shortages of talent. 

Maintaining trade ties 

Fortunately for China, countries essential to the semiconductor industry supply chain still have intentions to maintain trade ties. For the U.S. restrictions to be fully effective, Washington requires the buy-in from other key nations in the semiconductor supply chain, including South Korea, Japan and the Netherlands. 

Japan, as a key part of the semiconductor supply chain, announced export restrictions on 23 types of semiconductor manufacturing equipment, but interestingly enough did not specifically name China. While sanctions have made increasingly difficult for Chinese semiconductor companies to contract production outside of mainland China, maintaining or even leveraging these relationships would be key for developing the capacity of domestic producers.

Sanctions and Next Steps

Although the data clearly illustrates that China’s domestic semiconductor industry is far from self-sufficiency. While we can say with relative certainty that it won’t happen overnight, it’s still something we shouldn’t count out as a possibility down the line. For one thing, the tit for tat playground tactics employed on both sides (US and China) only promises to rock an already delicate balance.

Perhaps the state plans which saw China becoming the “leader among manufacturing powers” by 2049 may not have accounted for sanctions, however China’s ambitious chip industrial policy has certainly shown growth in its domestic high-tech ecosystem. Implicit in the US trade restrictions, is a view that cutting China off from US technology will hamper its development. While this is partially true, there is irony in the fact that these sanctions have ultimately convinced China of the need for self-sufficiency. 

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