USA vs China – Turn of the screw pt. II

The USA goes beyond semis in its war on Chinese technology.

• The USA is about to ramp up the pressure still further on China’s semiconductor industry which marks a departure from just targeting semiconductors to targeting the other technologies where China, until now, has been doing very well.
• The US Department of Commerce is expected to publish new guidelines which look to me like a wholescale widening of restrictions on semiconductors as well as a move to target other parts of China’s technology industry and limit its development.
• It will not be lost on anyone that these measures come right before the 25^th National Congress of the CCP which kicks off on October 16^th and where President Xi is almost certain to win a 3^rd term in office.
• The new restrictions are likely to include:
  • First, 14nm and below: Instead of restricting just leading-edge manufacturing, the new rules look set to target 14nm and everything beyond.
  • This will include equipment, hardware tools and software tools that are used to manufacture silicon chips.
  • This represents a substantial increase in aggression as 14nm is 3-4 nodes behind what is leading-edge today and will do real damage to the fledgling Chinese semiconductor industry.
  • The restrictions on leading-edge prevented it from catching up with the rest of the industry but this expansion will also put the brakes on the technology it already has.
  • 36.5% of all semiconductors are consumed in China but just 6.6% of that is made by Chinese companies.
  • This new rule is likely to mean that that number falls further and increases China’s dependency on imported silicon chips.
  • Second, the Foreign Direct Product Rule: which was what finally sank Huawei.
  • This rule means that suppliers to anyone on the list for this rule cannot sell products that use US technology to manufacture them to those customers without a licence.
  • It was this rule that forced TSMC to stop selling leading edge wafers to Huawei because it is dependent on US equipment in its fabs to provide the foundry service.
  • This looks like it might be widened to other Chinese technology companies and, if they use semiconductors, they are likely to suffer similar problems to Huawei.
  • Third, Other chip categories: Nvidia and AMD have already received notice that they can no longer sell their advanced AI chips in China without a licence and these new guidelines are likely to put this in formal writing.
  • AI, robotics, autonomous driving, supercomputing and the Metaverse are all areas where China competes head-to-head with the USA and I expect that the USA is going to take steps to hobble and slow China’s development as much as it can.
  • These new guidelines might not call out other sub-sectors of technology beyond AI at this time, but I suspect that they will over time.
• These new guidelines will be justified by the need to ensure that US technology does not end up in the hands of the Chinese military and given how much technology is helping the Ukrainians in their war against Russia, this is an entirely justifiable position to take.
• However, I think the real goal here is to ensure that China is never in a position to challenge the USA technologically, in order to give it an edge in the ideological struggle that is currently ongoing.
• This is a struggle that is likely to persist for many years and while silicon-based semiconductors remain at the heart of the technology industry, China is going to be at a great disadvantage.
• The USA is using its superiority in semiconductors to ensure that the advantage that it was dealt by fate is spread to the other sectors where China is faring much better.
• Risks are rising for Western companies that supply China with components or technology in AI, robotics, autonomous driving, supercomputing and the Metaverse meaning that contingency plans need to be made now.