Biden’s new restrictions on exporting semiconductor tools hit China where it hurts

Chinese semiconductor manufacturers and their U.S. suppliers should have seen the Biden administration’s latest export restrictions coming. It’s possible they did. The question is whether they’re prepared.

Years ago, the Trump administration sent the first shot across the bow, first cutting off Huawei from advanced chips and later successfully pressing the Dutch government to bar the sale of EUV lithography machines made by Netherlands-based ASML to leading Chinese semiconductor firm SMIC.

The EUV ban kept SMIC and, by association, China, from getting a chance at producing leading-edge chips with smaller transistors. Smaller transistors make for faster, more energy-efficient chips, and there were concerns that EUV-made Chinese chips would have facilitated myriad military and surveillance applications, including hypersonic missiles and AI-powered video and cyber monitoring tools.

Though SMIC said it could produce chips that were similar to some of its competitors’ second-best designs, the yields were reportedly atrocious. Without EUV, the process was unlikely to be profitable anytime soon.

China is likely trying to develop its own version, but it’ll be a long road. Even if Chinese companies could get their hands on EUV and related technologies, whether through espionage or some other means, they still would have to duplicate ASML’s global supply chain of more than 5,000 suppliers, some of which are the only ones that have the expertise to make those specific parts.

Carl Zeiss, for example, is the only optics company that’s able to produce the 11 mirrors inside the EUV machines, each of which contains more than 100 layers of molybdenum and silicon ground with atomic-scale precision.

Still, it didn’t totally undermine the country’s wider progress on chipmaking. Though the country has struggled to make advanced chips, it still produced enough to capture 7.6% of the global market share, according to the Semiconductor Industry Association, up from 6% in 2020.

That progress may soon stall, though, if the Biden administration’s sweeping export restrictions bite as anticipated. They not only threaten China’s progress toward the leading edge but also its ability to produce better chips more profitably.

Semiconductor manufacturing isn’t just about following a recipe. Each new manufacturing process, known as a node, comes with its own challenges that are unique to each company’s specific recipes and protocols. Mastering a node requires overcoming numerous hurdles, and the lessons learned can be carried forward to work on future nodes. But you can’t skip them.

Time and experience with advanced tools, the likes of which have been supplied by companies like Lam, KLA and Applied Materials can help produce better chips with fewer defects, raising profits. Those companies often have engineers on site to help diagnose problems related to their equipment and software, further speeding the learning process.

Along those lines, chipmakers frequently attempt to poach experienced executives to help them master new processes, and Chinese semiconductor companies are no different. At least 43 American executives work at 16 Chinese firms, according to a recent Wall Street Journal report, and they face an uncertain future in light of the Biden administration’s restrictions.

Altogether, the new rules pose a significant impediment not only to Chinese chip companies’ procurement efforts, but also to their ability to learn by doing and hiring. Already, such learning has enabled Chinese companies to capture market share for less advanced but still-profitable semiconductors, including memory chips that were bound for the next iPhone before the restrictions came down.

Of course, none of these restrictions will stick if the U.S. doesn’t have the support of its allies, especially the Netherlands, Japan, Germany and South Korea. The U.S. may have a large chunk of the semiconductor equipment market, but it’s not a monopoly.

That might not be an issue, though, since the U.S. has been working the diplomatic circuit for the last several years. In 2020, Reuters reported on the Trump administration’s efforts to prevent SMIC from buying an EUV machine. And last year, I learned that Japan had also been included in the discussions to ensure that the country’s advanced tools wouldn’t also find their way inside Chinese factories.

As part of its Made in China 2025 industrial policy, the Chinese Communist Party set out to become self-sufficient when it came to semiconductors, a lofty goal given that the country imports more than $300 billion worth of semiconductors every year — more than it spends importing oil. The CCP dialed it back after the Trump administration dealt them the EUV setback, and now it should probably rein in its expectations once more.

Before Biden’s new rules, China had already faced a decade-long slog to develop its own EUV tools that would help it begin to approach — but probably not overtake — the leading edge. Now, without other advanced tools used for designing, fabricating and testing chips, and the expertise needed to master their use, that goal is probably even farther in the future.