China’s semiconductors: Latest US export controls may hinder ambitions to catch up

Coco Feng
·5-min read

Tighter US export controls on emerging technologies will prove a new barrier to China’s goal of catching up to the west in advanced semiconductor manufacturing and a Biden Administration would be unlikely to roll them back, say analysts.

Last month the Bureau of Industry and Security under the US Department of Commerce designated six emerging technologies as controlled export items deemed “essential to US national security.”

They include two key technologies in chip making: computational lithography software used in EUV applications and 5-nanometre wafer production. Other areas cover computer numerically controlled tools, digital forensics tools, software that captures and analyses communications and metadata, and suborbital aircraft.

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The move extends controls over dual-use products and technologies under the Wassenaar Arrangement, a multilateral export control regime involving 42 countries, including the US, UK, Canada and Russia.

As counting continues in the US presidential election, Democratic candidate Joe Biden is ahead in some key battleground states and narrowing the gap with Republican president Donald Trump in Pennsylvania, which is a make-or-break state for both candidates.

If elected, a Biden Administration would be unlikely to immediately or unilaterally lift Trump’s export controls because Democrats broadly supported the augmentation of the measures two years ago, said Jonathan Wood, lead analyst for the US and Canada at risk consultancy Control Risks.

“Some of Biden’s advisers on China have staked out a relatively hawkish view, specifically including the use of export controls on semiconductors. In line with Biden’s overall foreign policy views, however, his administration would likely seek to coordinate with allies and partners to limit the impact of export controls and sanctions on third-countries,” he said.

Although the Wassenaar Arrangement is voluntary and lacks the “binding force of a treaty”, participating countries “have the opportunity to implement those controls on a local basis,” said Melissa Duffy, a Washington-based partner at law firm Dechert, a practice focused on export controls and regulation of emerging technologies.

“Many countries that are not members voluntarily choose to follow the Wassenaar controls,” she said.

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The latest US move, which comes after the annual update of the Wassenaar list in December 2019, does not target China specifically but it could further hamper China’s efforts to catch up in semiconductor manufacturing.

“China has been put on the list of the embargoed countries, which hinders [it] from joining the global production system. China has been facing critical challenges for technology development and civil production in many areas, such as computers, aerospace, chip research and manufacturing,” said Charlie Dai, principal analyst at market research firm Forrester.

The new items include “computational lithography software designed for the fabrication of extreme ultraviolet (EUV) masks”, a technology critical to achieve the advanced 7-nanometre node in chip making.

“China’s self-developed lithography software can only support process nodes of 80 or 90 nm,” according to a research note provided to the Post by Taiwan-based semiconductor industry research firm Isaiah Research.

Smaller nanometre process nodes are important because they boost circuit performance and reduce power consumption, meaning fewer battery charges for products like smartphones. Each new process node usually boosts speed by around 20 per cent and cuts energy use by 40 per cent, according to Taiwan foundry TSMC.

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The current state-of-the-art 7nm process can only be achieved by TSMC and Samsung Electronics, while US chip giant Intel announced this summer that it was facing a six month delay in its transition to 7nm.

When it comes to the 5nm production node – also just added to the US export control list – only TSMC has the ability to produce chips at that level.

“Under current US export controls, TSMC has already been prohibited from making 5nm chips for Huawei,” said Arisa Liu, a research fellow at the Taiwan Institute of Economic Research, which specialises in the semiconductor industry. “Without proper machines and supply it may be difficult for China to keep advancing the process node.”

China’s most advanced foundry, SMIC, can produce chips at the 14nm node using equipment from US suppliers but the company’s expectation of achieving 10nm this year may not be realised, according to Isaiah.

“We don’t think China is capable of crossing the hurdles in the short term,” according to Isaiah Research, adding that core technology for lithography and etching are controlled by Dutch company ASML and US peers Applied Materials and Lam Research respectively.

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ASML chief executive Peter Wennink said on an earnings call last month that a US export license was not required to ship deep-ultraviolet (DUV) lithography technology directly from the Netherlands to China, but permission would be required if DUV systems or parts were sent from its US operations.

However, a license from the Dutch government is needed to export more advanced EUV machines, which are needed for 7nm semiconductor production. DUV technology can typically only produce chips down to the 14nm node although TSMC has used it for 7nm.

In 2018 SMIC ordered an EUV scanner from ASML but it was not delivered because an export license was not granted by the Dutch government.

The chances of getting an export license approved under the Wassenaar Arrangement depends on the type of technology involved, the reason for the export controls in the first place, and the destination country, according to lawyer Duffy.

Any dual-use technology that has national security implications or military applications – and is destined for China – would be “very unlikely” to receive license approval from the US, she said.

“Anything having to do with the semiconductor production process is a sensitive area in the US trade relationship with China,” she said. “It would [also] be a violation of US law to circumvent the export controls by purchasing through a middle man without the requisite export authorisations.”

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