The suitcases were packed and the airport taxis booked as President Xi Jinping concluded his two hour acceptance speech at China’s Communist Party Summit last week. As Xi vowed to “resolutely win the battle in key core technologies”, the people who he needs most to win that battle were leaving.
The latest US technology sanctions are savage, finally targeting the toolmakers that keep China’s most advanced chip factories running. Announced by the US Bureau of Industry and Security on October 7, the sweeping new rules effectively turn helping Chinese chip companies into an act of treason.
“At first they restricted the companies. Then they restricted the technologies. Neither of those worked. Now they’re restricting people,” an industry insider says. Company officials face arrest for failing to comply.
American companies such as Lam Research, KLA and Applied Materials are in the front line. Lam began to pull out its support staff, and the others have ceased to service their Chinese customers.
Since the sanctions regime places the liability on individuals, European companies also find themselves ensnared. ASML, the Dutch company now regarded as the most important chip toolmaker of all, with a monopoly on the Extreme Ultraviolet (EUV) lithographic process needed to make the most advanced microprocessors, is exposed and has told US staff to stop working with Chinese customers.
Others such as Taiwan powerhouse TSMC can continue to operate with Uncle Sam’s permission – although it’s a short leash.
At its earnings conference last week, ASML’s chief executive Peter Wennink took it all in his stride. The company still sells older litho technology not covered by existing sanctions into Chinese chip factories, which is 16pc of its business. Wennink pointed to a backlog of €38bn (£33bn) in orders worldwide, with demand far exceeding supply as the West rushes to build new chip factories.
Today, the entire industry is asking two questions: can the China chip plants run without US staff and parts? And in the longer-term, can they catch up with Western technology? Neither will be easy to do. The fabs, as chip-making factories are called, are among the most complex scientific achievements of mankind: a miracle 50 years in the making.
There are 16bn transistors on an iPhone chip, the size of the fingernail on your little finger. The lines that carry the electrons in these dense multi-layered circuits are just a few atoms apart.
A great deal can go wrong. Vibrations from a truck hitting a bump miles away can wreck the delicate manufacturing process. So the biggest burden of building even a modest $5bn (£4.4bn) fab comes not from the sticker price of a lithographic machine – which is $150m a pop – but keeping the temperamental devices happy so that yields are reliable.
“With most equipment, the Chinese are five to ten years behind, and in some areas they are 20 years behind,” says Dylan Patel, chief analyst of Semi Analysis, a boutique semiconductor research and consulting firm.
Very soon we’ll find out just how much foreign technology China has already stolen and replicated in secret.
In last year’s annual report, ASML disclosed that one Chinese company was already infringing its intellectual property. But while Chinese engineers can copy very proficiently, catching up only means matching today’s start-of-the-art technology. Invention is a continual process. In ten years, ASML and others will have moved on – we hope.
You may well ask why, with China hawks in Congress demanding such radical action since 2018, the US has been dithering, and only just triggered these sanctions now. One fear was blowback onto the US companies. The relationship with Apple and Chinese memory leader Yangtze (YMTC) illustrates this nicely, as I wrote in August. YMTC makes 3D NAND chips that are used to make solid state drives, and only last month Apple announced it would take everything Yangtze could make.
“3D NAND is the most affected area,” says Patel.
“YMTC is now on the unverified list and has been completely knocked out from buying US equipment.” Silly Apple – that deal is toast.
Blowback fears were exacerbated by the post-Covid chip shortage too. The US didn’t want to pour more oil onto the fire just as the world’s production lines recovered, and parts were scarce. But the Ukraine conflict, and renewed high tech transfers between China, Iran and Russia have made this the top priority. These latest sanctions show that we’re at war.
“For 30 years we all thought intertwined economies would provide stability. But it’s impossible to separate consumer and military applications for chips – and we’re going to have 30 years of pain decoupling the supply chains,” says Ron Black, chief executive of the chip design business Codasip. The former Imagination boss assembled a consortium last year to buy the Newport Wafer Fab, acquired by a China-owned entity.
But there are also some subtle consequences that may take years to make themselves felt, and here Xi should be worried.
Senior executives at China’s technology companies – and I’ve met a few – typically have degrees from Stanford and Harvard. They’re international in their outlook. They assumed that the escalator of globalisation and increasing prosperity was a given. Now they look at China’s demographic catastrophe – the population is estimated to fall by nearly a billion people to 587m by 2100 – and see Xi turning China into a hermit kingdom. This is not what they signed up for. The future suddenly looks very cold.
Andrew Orlowski is on Twitter @andreworlowski
