How Are US Sanctions Reshaping China's Semiconductor Landscape?

In a significant escalation of the ongoing US-China tech war, the US Commerce Department has recently strengthened its export controls, adding 140 companies to its entity list, primarily targeting Chinese tech firms. This update, which took effect on December 1, 2024, includes firms based in China as well as Chinese-owned entities operating in Japan, South Korea, and Singapore. The restrictions are designed to prevent the transfer of advanced technology, particularly high-bandwidth memory chips that are essential for artificial intelligence applications. [786656cd]

Following this, the US plans to issue a new rule by the end of December 2024 aimed at curbing Chinese companies' access to advanced AI chips sourced from third-party countries. This measure is expected to control global shipments of powerful GPUs critical for AI training, and is being drafted with the involvement of US Secretary of Commerce Gina Raimondo and National Security Adviser Jake Sullivan. [81831db3]

This decision comes on the heels of Japan's opposition to stringent measures that previously affected companies like ChangXin Memory Technologies (CXMT). Despite the exemptions for CXMT from earlier export restrictions, the broader US measures continue to significantly impact China's access to advanced semiconductor technology. Commerce Secretary Gina Raimondo stated that the intent behind these actions is to obstruct China's military ambitions, reflecting deep-seated concerns over espionage and human rights violations linked to Chinese firms. [e59291f2]

Following the announcement, shares of Japanese chip manufacturers surged, while affected companies such as Naura Technology Group experienced declines. The Chinese government has condemned these actions as 'economic coercion' and is heavily investing to close the technology gap, indicating a fierce competition for technological supremacy between the two nations. [786656cd]

In a related development, Empyrean Technology, China's leading chip design tool maker, ceded control of its board to the state-owned China Electronics Corporation (CEC) after being blacklisted by the US. This move signals increased government oversight in the semiconductor sector and follows the US Department of Commerce's addition of Empyrean to the Entity List, restricting its business with US firms. Following this announcement, Empyrean's stock rose 9% to 134 yuan. Four directors resigned, allowing CEC to secure six of the 11 board seats, with a shareholder meeting set for later this month to approve these changes. CEC has been on a US Department of Defense list since 2021 due to alleged military ties. [da689c4]

CXMT has reported a remarkable surge in sales, with a 64% increase to 813 billion yen (approximately US$5.42 billion) in 2024, underscoring the importance of the Chinese market for its operations. However, only 35% of semiconductor-manufacturing equipment in China is locally produced, raising concerns about potential supply shortages in the short term, as predicted by Chen Li from Anbound. He anticipates some easing in 3-5 years as localization rates for critical processes remain low. [1745c7b1]

Amid these tensions, two US citizens, Ni Tuqiang and Yang Wei, recently resigned from their positions at Advanced Micro-Fabrication Equipment (AMEC), China's leading chip equipment manufacturer, due to the tightening grip of US trade restrictions. AMEC's chairman and CEO, Gerald Yin Zhiyao, expressed confidence in the company’s ability to maintain its competitiveness despite these challenges. [fd86edec]

Additionally, a delegation of US tech executives, including Apple Inc. Chief Operating Officer Jeff Williams and Micron Technology Inc. President Sanjay Mehrotra, visited Beijing to discuss collaboration opportunities with Chinese officials. However, they reported receiving mixed signals regarding the future of US-China relations, complicating the landscape for American companies operating in China. [d5a7ad51]

Chinese firms may attempt to circumvent these sanctions through third-party purchases, but they face high compliance risks. In retaliation, Beijing has banned exports of rare earth minerals to the US and launched an antitrust investigation into Nvidia, indicating a potential escalation in trade tensions. Further restrictions on chemicals and US companies operating in China are anticipated, highlighting the complexities of the semiconductor market amid rising geopolitical tensions. [1745c7b1]

As the US continues to navigate its trade policies, the implications for companies like CXMT and AMEC underscore the challenges and opportunities within the semiconductor supply chain, where the US currently holds over 80% of the electronic design automation software market. [14410c76]