China's shift to local chips accelerates thanks to latest US export controls

China has finally said out loud what was once only discussed behind closed doors: The country must get rid of American chips.

Four government-backed industry associations, representing the bulk of China's semiconductor demand, issued coordinated statements this week urging member companies to rethink their purchases of U.S. silicon that three of them consider to be insufficient. more secure or reliable.

Be careful when buying U.S. chips, the four associations said, urging their members to seek Chinese or foreign suppliers instead.

The directives come amid a latest salvo of retaliation between Beijing and Washington over fundamental technology, an exchange that has laid bare their growing competition and provided impetus for the development of increasingly separate international supply chains.

In an unusually swift response on Tuesday, Beijing banned the shipment of key minerals and metals to the United States, just hours after American officials unveiled new export controls intended to degrade the country's capacity. China to manufacture the most advanced chips.

The latest U.S. controls include tighter restrictions on shipping semiconductor manufacturing tools to China and a ban on exports of advanced memory chips needed for artificial intelligence hardware.

In response, China banned the export to the United States of gallium, germanium, antimony and ultra-hard materials, and imposed stricter controls on graphite.

His action demonstrates a new desire by Beijing to directly oppose American efforts to cut the country off from cutting-edge technologies. In talks with President Joe Biden last month, Chinese leader Xi Jinping linked Washington's technology controls to hindering China's right to development, calling it a red line for the first time.

Beijing is increasingly frustrated with U.S. technology controls and has indicated it is prepared to respond in ways that create economic pain for U.S. businesses and the U.S. economy, said Paul Triolo, a technology expert at Albright Stonebridge Group.

Chinese restrictions on materials for manufacturing semiconductors, batteries and military hardware will cause headaches for the U.S. Department of Defense and U.S. companies already scrambling to find other suppliers and substitutes for critical materials in Beijing-controlled supply chains.

The country is the world's leading supplier of gallium and germanium. The US Geological Survey estimated in October that a complete ban on exports of these two products would reduce US GDP by $3.4 billion.

Accelerated efforts to phase out U.S. chips could hurt a wide range of U.S. semiconductor groups. An executive at a European chip design company said he has already received calls from nervous Chinese customers wanting to confirm they were not American.

This is the first time private companies have been ordered to remove U.S. chips, the executive said. This is not a direct order but it will have a deterrent effect.

Chinese President Xi Jinping, right, linked Washington's technology controls to hindering China's right to development during a meeting with U.S. President Joe Biden last month. Leah Millis/AP

Bernstein analysts estimate that Chinese groups have the power to influence sourcing decisions for the roughly 40 percent of the global smartphone market they control and the 23 percent of the computer market supplied by companies including the world's largest PC manufacturer, Lenovo.

Customers in China, for example, contributed 27% of sales last year to Intel, America's traditional chip champion. Artificial intelligence chip giant Nvidia generated 17% of its sales in the country. Arizona-based Onsemi estimates its chips are in half of China's electric vehicles. Mobile processor maker Qualcomm gets about half of its $39 billion annual revenue from China.

The risks of such concentration are exacerbated by [US-China] trade and national security tensions, Qualcomm warned investors.

But Wall Street has largely dismissed concerns that U.S. chips could be designed from Chinese devices. Lin Qingyuan, an expert on China's semiconductor autonomy program at Bernstein, said that in the short to medium term, investors need not worry. If China was capable of getting rid of American chips, it would have done so by now, he said.

Even though government directives have accelerated localization efforts, companies will continue to prioritize performance, Lin said, noting that the latest speeches from industry associations were very likely to change purchasing behavior for mature chips.

Nonetheless, China's localization campaign has expanded, with government and public groups urged to buy computers without Intel and AMD processors.

Even foreign companies are increasingly turning to local semiconductors, with German auto parts supplier Bosch showcasing its localized chip solution for a steering system at a supply chain show in Beijing on last month. It is our local product for the local market, said a sales manager.

Chinas State Grid proudly displayed electrical equipment powered by Chinese central processing units and microprocessors. The new products all use local semi-trailers, an engineer said.

Analysts said it was too early to assess the impact of new U.S. controls on China's chip industry. Before the bans, months had been spent building up stocks of equipment and high-bandwidth memory (HBM) chips needed for AI processors.

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Tilly Zhang, a semiconductor analyst at Gavekal, said no Chinese company had been able to mass produce HBM chips, although memory group CXMT was trying.

Companies have made significant progress replacing U.S. tools in recent years thanks to previous export controls, said Bao Linghao, an analyst at Trivium. Piecemeal controls will help China build a more robust chip supply chain in the long term.

Bernstein's Lin agreed that the impact on Chinese semiconductor equipment makers could be limited. They have been working to de-Americanize their supply chains for more than three years, he said.

Chinese equipment makers have already turned to Japanese and European component suppliers offering equivalent products that would not be affected by export controls, he said. Lin did not expect major U.S. allies to reveal controls as tight as Washington's, if at all.

We expect [switching to other non-US suppliers] continue until local suppliers can catch up, he said.

Additional reporting by Tina Hu in Beijing

Video: The race for semiconductor supremacy | FT films

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