A Look at China’s IC Expansion

China is expanding its IC capabilities at all costs, and the “game” is playing out internationally. The stakes are high for all involved, especially China and the U.S.

Addressing what it views as a significant threat, the U.S. government established export control regulations specifically aimed at China’s artificial intelligence (AI) and semiconductor industries on October 7, 2022.

Under the new policy regulations, American enterprises and citizens may no longer aid any Chinese companies building chip technology based on the sophistication of that technology. The policy restricts, for example, exports of advanced computer chips for AI, as well as what is required to design and manufacture AI chips. The technology took a different approach than previous policies. The restrictions included China as a whole and not just the intended military end-use or prohibitions, including end users. In the past, restrictions enabled the U.S. to maintain its lead by controlling the pace of China’s advances. Certain advanced semiconductor performance thresholds benchmarks will be held constant for China, preventing performance growth over time.

Policy reactions were swift, including

  • China’s access to tools and skilled workers slammed shut. Plans to build a major semiconductor factory in central China were withdrawn. U.S. citizens left the company, and equipment suppliers stopped their shipments. Some employees with U.S. citizenship departed the company. Three U.S. equipment suppliers almost immediately halted their shipments and services.
  • China filed a suit against the U.S.
  • China initiated a cybersecurity review of Micron, a U.S memory chip producer
  • China is assessing how to replace Western chips, including those unaffected by U.S. controls. For example, EV manufacturer Guangzhou Automobile Group announced it will eventually purchase all 1,000 chips in its cars from Chinese providers–90 percent of its chips are now purchased overseas.
  • Beijing reactivated its “Big Fund,” injecting roughly $1.9 billion to fund chip equipment and material suppliers with billions in cash from the government and investors targeting homegrown supply chains, while Guangzhou announced $21 billion for semiconductor and other tech projects, attempting to replace Western chip equipment suppliers. China also expanded government grants, tax breaks, equity investments, and low-interest loans. Estimates are that direct and indirect subsidies are worth more than $50 billion.
  • So far, less than 1 percent of all semiconductors in China are at the industry’s top end and are subject to U.S. controls; the rest less advanced semiconductors, found in everyday consumer electronics and cars, and are most of the business
  • China’s two largest chip manufacturers, Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Semiconductor, announced billions of dollars to expand production of mature chips.

While October 7 was a turning point and a more pointed call to action by China, they had already identified their precarious semiconductor position years before. What looked like a strategic shift in 2020, the Chinese State Council’s Document No. 8 already indicated that China wanted unlimited support for semiconductor projects. Local governments were tasked to do whatever it took to promote the sector. They adopted a greater self-reliant mindset, saying: “We must bring into full play the obvious advantage of China’s socialist system, namely its ability to focus effort on undertaking daunting tasks and do a good job in the fierce battle for key and core technologies.”

The challenges it faced, however, became more pronounced after October 7, 2022.

China’s Semiconductor Challenges

While China can enunciate long-term semiconductor self-sufficiency goals, achieving them will be more difficult. Challenges include:

  • China lacks access to world-class tools, especially those used in artificial intelligence and defense
  • International companies that invested in China’s semiconductor technology are taking their funds elsewhere–Samsung and TSMC are spending billions on production facilities in the United States
  • The U.S., Taiwan, and South Korea are working more closely together
  • The U.S., Dutch, and Japanese control nearly all types of advanced chipmaking equipment, including etching, lithography, deposition, and metrology
  • EUV lithography equipment involves multiple countries—self-reliance involving all components would be very difficult to achieve
  • If China creates an advanced AI chip company, international foundries will not likely fabricate the designs still covered by the Foreign Direct Product Rule
  • China still lacks the precision and reliability necessary for advanced semi manufacturing
  • They also lack the expertise required previously provided by the Dutch and Japanese
  • Finally, if they innovate the chipmaking equipment, who internationally will risk buying it?


So, what’s happened since the policy change? There has been international fallout including:

  • China’s state-backed chip investment fund invested $1.99 billion in a memory chip company called Changxin Xinqiao
  • Nvidia’s stock dropped approximately 5% following a Wall Street Journal report that the company may be forced to cancel up to $5 billion worth of advanced chip orders to China in compliance with new U.S. government restrictions
  • In 2022, Apple was planning to buy advanced NAND memory chips from China’s YMTC, but cancelled the order because of the export controls
  • Qualcomm was hit particularly hard by the release of Huawei’s Mate 60 Pro based on advances in China’s chipmaking technology. Reports showed that the phone is powered by a new domestic Kirin 9000s processor. According to TF International analyst Ming-Chi Kuo, Qualcomm may face the most significant impact. According to Kuo’s report, Huawei will likely use the Kirin processors in new models starting from 2024. Analyst estimates that Qualcomm’s shipments of SoCs to Chinese smartphone brands in 2024 will decrease by at least 50-60 million units compared with 2023
  • Nvidia has released reduced interconnect variants of its top AI chips that can legally be exported to China, with a performance penalty of less than 10%

China is in retaliation mode. It is using its anti-trust enforcement regime to slow or block all mergers and acquisitions involving U.S. semiconductor industry firms. Its cybersecurity review of Micron found that Micron’s products have serious network security risks affecting China’s national security,’ according to the Cyberspace Administration of China, but does not reveal what risks it found nor which Micron products were affected. At stake is a potential revenue loss of $3.3 billion annually for Micron.


There’s even more at risk. Should China invade or blockade Taiwan, there will likely be a complete chip embargo on China. It seems China is willing to inflict pain on the U.S., no matter the consequences. It also holds an important card—rare earth metal dominance.

China is also likely to evade new controls, attempt to acquire technology via industrial espionage and talent recruiting, when possible, create a wedge between the U.S. and its allies, and continue its retaliation wherever possible.

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