How Will New U.S. Export Controls Impact China’s Semiconductor Industry?

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]

On January 16, 2025, the US announced new export controls on advanced computing semiconductors to prevent technology diversion to China. This move, part of actions before President Joe Biden leaves office, follows recent curbs on AI chip exports. Commerce Secretary Gina Raimondo stated the rules aim to strengthen controls against the People's Republic of China (PRC). The US commerce department placed 25 China-based entities on a trade blacklist, including Sophgo Technologies, for aiding military modernization and accessing restricted chips. The new regulations impose broader license requirements for foundries and packaging companies exporting advanced chips. China's commerce ministry expressed strong dissatisfaction with the US measures, vowing to protect its interests. [e2cb72cd]

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]

On December 23, 2024, the Biden administration announced a trade investigation into China's alleged use of 'extensive anti-competitive and non-market means' to dominate the global semiconductor market. This investigation, termed a 301 investigation, will assess the impact of China's practices on U.S. commerce, including tactics like state subsidies, forced technology transfers, and market access restrictions. USTR Ambassador Katherine Tai highlighted that China has nearly doubled its global share of foundational logic semiconductors in six years, with projections indicating it could reach half of the world's capacity by 2029. The probe will include a public consultation starting January 6, 2025, and a hearing on March 11-12, 2025. This announcement follows China's recent export bans on semiconductor raw materials to the U.S. in retaliation for U.S. export controls. [c81490c0][aa3a6fb1][1fa5520f][03115a69]

In response to the US investigation, China's Ministry of Commerce (MOC) urged the US to cease its probe, criticizing it as an act of unilateralism and protectionism. The MOC claimed that the investigation aims to suppress China's semiconductor industry and disrupt global supply chains. Notably, the US holds nearly half of the global semiconductor market share and provides significant subsidies to its industry, while Chinese semiconductors account for only 1.3% of the US market. The MOC vowed to defend China's rights and interests against what it termed erroneous practices by the US. [26b07459]

The investigation specifically targets legacy semiconductors, defined as chips with a manufacturing process of 28 nanometers or higher, which are crucial for many electronic devices. This move aims to protect the US semiconductor industry from the growing influence of Chinese manufacturers. The Chinese Ministry of Commerce has criticized the US for its subsidies to the chip industry, while US Commerce Secretary Gina Raimondo remarked that trying to hold China back is a 'fool's errand.' [1aa36268]

In a new development, on December 24, 2024, the Biden administration initiated a separate trade investigation specifically targeting older Chinese-made 'legacy' semiconductors. This probe aims to protect US semiconductor producers from China's state-driven chip supply. USTR Katherine Tai announced this investigation under Section 301 of the Trade Act of 1974, revealing that two-thirds of US products using chips contain Chinese legacy chips. President Biden has already imposed a 50% tariff on these Chinese semiconductors, effective January 1, 2025. The findings from this investigation will be handed over to President-elect Donald Trump on January 20, 2025, who may impose additional tariffs. China's commerce ministry criticized this probe as protectionist. [8c2c33fa]

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]

In light of the US probe into alleged dumping of older-generation chips, Korean semiconductor firms are beginning to reduce their reliance on Chinese manufacturing. The U.S. Trade Representative announced this investigation on December 25, 2024, focusing on Chinese-made foundational semiconductors used across various sectors. The U.S. claims that China seeks to dominate the semiconductor market through anti-competitive practices. As a result, Korean firms are facing increased competition from Chinese memory chip manufacturers and are being urged to strategically overhaul their operations to ensure domestic supply chain security. [0c433937]

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]

In a recent statement, the China Council for the Promotion of International Trade (CCPIT) firmly opposed the U.S. Section 301 investigation into China's semiconductor industry, labeling it as trade protectionism. CCPIT spokesperson Sun Xiao emphasized that U.S. export restrictions have harmed China-U.S. semiconductor cooperation and have negatively impacted related industries. The organization pointed out that the World Trade Organization (WTO) has ruled that U.S. Section 301 tariffs violate its regulations. The MOC reiterated that Chinese chips hold only 1.3% of the U.S. market share, while U.S. companies dominate nearly half of the global market, further criticizing the U.S. for undermining fair competition through its subsidies. [aad7d591]

Amid these tensions, mature-node foundries are facing overcapacity challenges, particularly from China, which has ramped up its production capabilities. Since 2018, many chip foundries have exited leading-edge technology, leaving them vulnerable to competition from Chinese firms. China's capacity is now able to meet over half of the global demand for mature-node chips, contributing to a global fab utilization rate below 80%. In 2024, mature-node foundry utilization dropped to 70%, while China's capital expenditure in logic and foundry segments rose by 30%. This has resulted in a 23% decline in global mature-node operating profits and a 5% drop in average selling prices. Established foundries like UMC and GlobalFoundries are now facing stiff competition from China's SMIC and others, as China focuses on mature nodes due to U.S. restrictions. Analysts predict that the tech war is likely to escalate further. [3d47eb01]

In a related move, on January 15, 2025, China's Ministry of Commerce added seven U.S. companies to its unreliable entities list due to their involvement in arms sales to Taiwan, which China views as a violation of its sovereignty. The companies, including Inter-Coastal Electronics and Anduril Industries, are now prohibited from China-related import/export activities and new investments. Senior executives from these firms will also be banned from entering China. This decision reflects China's response to U.S. arms sales to Taiwan, which it claims endanger peace in the Taiwan Straits. MOFCOM stated that only a few foreign entities threatening national security are targeted, while compliant businesses have nothing to fear. [72c98356]

On January 16, 2025, the MOC criticized the Biden administration for imposing last-minute trade restrictions, which include intensified controls on semiconductor exports and restrictions on Chinese connected vehicle software and hardware. MOFCOM expressed strong dissatisfaction, claiming these measures infringe on the rights of Chinese firms and disrupt global supply chains. The spokesperson labeled the U.S. actions as economic coercion and stated they undermine China-U.S. relations and global economic stability. MOFCOM emphasized that such suppression will only enhance China's self-reliance and technological innovation. [27f8dba0]