US hits China's chip industry with new export controls

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The United States has introduced new export controls in an effort to restrict China's ability to create an advanced semiconductor industry and slow its development of artificial intelligence for military applications.

Restrictions on the export of tools critical to semiconductor manufacturing will affect both U.S. and foreign companies that use American technology in their chipmaking equipment. The United States will also prevent the export to China of advanced high-bandwidth memories (HBM), a crucial component of AI chips.

U.S. Commerce Secretary Gina Raimondo said the new controls, which follow two previous sweeping programs enacted in October 2022 and October 2023, were revolutionary and radical.

These are the strictest controls ever put in place by the United States to degrade the People's Republic of China's ability to manufacture the most advanced chips it uses in its military modernization, she said .

The Commerce Department on Monday added 140 Chinese groups to the entity blacklist that requires U.S. and other companies to apply for export licenses that are expected to be virtually impossible to obtain.

The targets included chipmakers such as Semiconductor Manufacturing International Corporation and Huawei, as well as Chinese companies that produce the equipment needed to make chips.

Meghan Harris, an export control expert at Beacon Global Strategies, a consultancy, said hitting China's chipmaking equipment industry would target an area that the Biden administration had underestimated.

Trying to hinder China's advanced semiconductor industry without addressing the acceleration of its domestic tool-making capabilities is like trying to prevent a fisherman from catching bigger fish simply by refusing him bigger fishing rods. He'll get there eventually, Harris said.

The rules restrict the export of 24 types of chipmaking tools that were not previously targeted. To make them more effective, the United States will in many cases apply an extraterritorial measure called the Foreign Direct Products Rule. [FDPR] this will affect non-American companies that have American chips in their tools, the overwhelming majority.

A person familiar with the rules said the United States had provided an exemption from the FDPR for Japan and some European allies, including the Netherlands, after agreeing to implement its own export restrictions. South Korea has not yet obtained an exemption, but it could do so later.

A U.S. official said the FDPR would make it harder for U.S. groups to circumvent existing controls by producing tools in other countries like Singapore and Malaysia for export to China.

In a recent report, Gregory Allen, an AI expert at CSIS, said major U.S. tool makers Applied Materials, KLA and Lam Research have increased efforts to expand production outside the United States.

Some critics have privately asked why the administration hasn't put more Huawei chip production facilities on the entity list. Asked how many manufacturing plants exist that are not on the list, a second U.S. official said only that the controls were focused on producing advanced chips.

People familiar with the matter said there has been intense debate within the administration over how to tackle Huawei. One person said some Huawei factories were still not operational, so it was unclear whether they would be for advanced chips. But some officials had pushed for stricter controls on the Shenzhen-based company.

In addition to compromises between different agencies, the United States has decided to take a less aggressive approach in certain areas in order to obtain cooperation from its allies on chip restrictions.

Questions have also been raised about why the administration did not add CXMT, a Chinese producer of HBM, to the entity list. Some within the administration had insisted on this, but one person said the other restrictions would have some impact on its ability to produce HBM.

Allen said there was a strange contradiction at the heart of the new controls. He said that, for example, the administration was significantly expanding the scope of the FDPR to cover almost every chipmaking tool in the world, but on the other hand, the controls would only cover certain front companies Huawei and SMIC , but not others.

What is the point of blocking HBM and AI chip sales to China while continuing to allow equipment sales to CXMT, which is one of the most likely HBM producers in China? he said.

Some analysts said privately that major U.S. toolmakers had successfully lobbied to ensure the new controls would not be even stricter.

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Shares of the three major companies were higher Monday, outperforming the S&P 500's 0.3 percent gain that had pushed Wall Street's benchmark index to a record high. Shares of Lam Research were up 6.2 percent by lunchtime in New York, making it the second-best performing stock in the S&P 500, while Applied Materials gained 5.3 percent and KLA increased by 3.3 percent.

The Chinese Embassy in the United States criticized the move and said Beijing would respond with resolute measures. He said Beijing firmly opposes the United States overextending the concept of national security, abusing export controls, and maliciously blocking and suppressing China.

An industry analyst said the new rules were extremely complex, even for experts in the field. This is a Christmas present for compliance professionals and lawyers, he said.

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