China Responds to Chip Export Controls
"We cannot return to the old ways."
After last week’s seismic shift in the semiconductor world, the response from China has been surprisingly muted so far. Partly, of course, it is due to timing: the National Party Congress began on Sunday and will remain in session until the end of this week. The discourse so far has been interesting nonetheless.
Some observations:
Official statements are focused on rebuking the central thesis of the Biden administration: justifying expanded export controls with national security. They highlight the potential negative impacts of these regulations on the global market rather than China exclusively.
As usual, there is a wolf-warrior stream, but they sound almost tepid. There has not been a coordinated propaganda campaign, nor have negative comments been especially monitored on social media.
This entire discourse comes in the context of the ongoing Party Congress, and in this moment its in no-one’s interest in China to highlight a setback for a core Party goal. See:
Many independent media commentators are quite frank about the possibly devastating impacts of the new policies. Most also see a path forward domestically for the industry within the limitations imposed by the Biden administration.
However, a tepid response today does not mean a tepid response tomorrow. For instance, during the Trump administration, firms’ September 2020 statements of concern followed by a January 2021 ban on importing products from Xinjiang did not metastasize into an online frenzy and major state media-fueled push to spotlight the issue until April 2021.
Then again, semiconductors are still a pretty obscure subject —a trending Weibo video last year showed an interviewer asking young people what a semiconductor is, most of whom had no idea. Banning advanced lithography tools is much less resonant than a brand that you have an emotional attachment to saying your government is using slave labor in a province you visited for vacation last year. It’s a little tricker, though certainly not impossible, to squeeze patriotic fervour out of semiconductor export controls. After all, Xi did it during the trade war, and believed it to be successful enough to feature China’s trade war performance performance in its struggle with Trump during his most prominent ‘campaign video’ just this month.
Official Channels
China Semiconductor Industry Association (excerpted from CSIA’s suggested translation of the statement):
... we are troubled with applying the concept of national security and and foreign policy interest to each action of the discriminating trade policy. Not only such unilateral measure [sic] will further harm the global supply chain of the semiconductor industry, more importantly it will create an atmosphere of uncertainty, which will negatively affect the trust, goodwill, and spirit of cooperation that the players of the global semiconductor industry has carefully cultivated over the past decades.
Mao Ning 毛宁, Chinese Ministry of Foreign Affairs spokesperson, speaking at an October 14th press conference:
China firmly opposes the US’s overstretching of the national security concept and abuse of export control measures to wantonly hobble Chinese enterprises. The global industrial and supply chains come into shape as a result of both the law of the market and the choices of businesses. Arbitrarily placing curbs for political purposes destabilizes the supply and industrial chains, hurts others and backfires on oneself. It will only further weaken the already fragile world economy.
... We will work with the international community to oppose unilateralism, protectionism and bullying practices in sci-tech, uphold the principle of openness, fairness and non-discrimination, jointly safeguard the stability of the system, rules and foundation of the world economy, and promote the steady recovery of the world economy.
Industry Observations
Semiconductor Bellweather 半导体风向标, a top semiconductor-related public account on WeChat, identifies four future trends for China’s semiconductor industry:
Return to mature node manufacturing: [the market share of] new-generation 90/55nm chips is much bigger than [that of] old-generation 7nm chips. Once a company is on the entity list, realistically mature node manufacturing with domestic machinery makes much more sense than manufacturing 7nm chips with American tools. The primary contradiction of the Chinese semiconductor industry has gone from the lack of leading-edge technological knowledge to the lack of breakthroughs in domestic manufacturing equipment.
Return to expanding production capacities: previously [Chinese] fabs spent most of their energy on reaching breakthroughs in cutting-edge technologies, but now they should take advantage of the critical period facing domestic mature node manufacturing and expand production aggressively. Mainland-funded wafer fabs are 5% of global production and the market gap is as high as 700%. Expansion of capacity domestically to support mature node fabless downstream processes is the most urgent priority.
Continue increasing external circulation: Europe, the US, Japan, and Korea are not four sides of the same coin; each of them has its own interest calculations. The future progress of domesticization will evolve alongside two trend indicators in Chinese wafer fab developments: process-side expansion (45/28/14) and geopolitical developments. However, currently Japan and Europe remain as intermediate circulators.
Avoid falling into America’s honey trap: wafer fabs have to set supporting Chinese-made materials and equipment as their top goal when it comes to mature node processes outside the parameters of these regulations. We cannot return to the old ways, because our learning curve entirely depends on coordination between downstream wafer fabs. Only via mature node breakthroughs can we find growth in advanced node.
Social Media Hot Takes
Larry Hsien Ping Lang, controversial Hong Kong-based economist:
In 1985 the US destroyed Japan’s semiconductor industry, because at the time America had 55% of the global market and the market could inevitably destroy technologies. Of course, the success of that operation has stayed with the Americans: this October, they’ve once against imposed the most severe export controls with the goal of annihilating China’s semiconductor industry. However, today’s China has 73% of the global market; does America want to destroy the market with technology this time? Using technology to challenge market forces results in a temporary victory at most. Only when the market itself develops technologies can final victory be won.
Top comments below this post:
“If I may ask, can our market produce technology?”
“By your logic, since China is obviously the biggest market for any applied technology, we should be leading in every field by now.”
“Professor, are you kidding me”
Finally, Hu Xijin, former Editor-in-Chief of Global Times:
... Honestly, America is running out of moves when it comes to containing China. They’ve made some trouble for us, but those problems have not resulted in the kind of material restraints on China’s development that they were hoping for. As China gets familiar with, and accustomed to, America’s same-old routine, these containment measures aren’t that big of a deal.
... What is the US most afraid of? China’s steady development. Why did they say that “the next ten years are critical”? Because they’re afraid that China could overtake them in total GDP in the next ten years. Which makes China’s response to the US’s containment strategy extremely straightforward: we’ll simply keep doing what we’re doing and concentrate wholly on development. Ensuring that we overtake America in economic growth in the long term and continuously strengthening our science and technology abilities are the best answers to America’s containment.
Good overview. I like that wall graphic. Thanks Jordan