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Analysis-China faces a “Sputnik” moment as US export restrictions deal a blow to its chip ambitions According to Reuters



© Reuters. FILE PHOTO: FILE PHOTO: Semiconductor chips are seen on a computer’s circuit board in this illustration photo taken February 25, 2022. REUTERS / Florence Lo / Illustration / File Photo / File Photo

SHANGHAI (Reuters) – U.S. export restrictions on chip equipment to China are likely to lead to a “Sputnik” moment, spurring Chinese chipmakers to try innovative technical solutions and chart their own route even if it may not be commercially successful in the long term, experts say.

Under new regulations announced by the Biden administration on October 7, American companies must stop supplying equipment to Chinese chipmakers that can manufacture relatively advanced ships unless they obtain a license. prior permission.

The measures are designed to undermine China’s efforts to develop its own chip industry to reduce dependence on foreign-made chips. China consumes more than three-quarters of semiconductors sold globally, reaching $556 billion by 2021, but produces about 15% of global output.

“Decoupled technology could serve as China’s Sputnik moment in innovation, forcing the country to adopt a top-down and self-reliant approach, especially in the context of the global economy,” the Citi economists said. in semiconductors,” Citi economists said in a note, likening it to the increase in spending and research seen in the United States after the Soviet Union launched the world’s first satellite.

The restrictions also come just ahead of the upcoming Communist Party Congress in Beijing, during which President Xi Jinping is expected to secure an unprecedented third term.

The importance of technology self-sufficiency, which has been a priority for Xi over the past decade, is likely to become the main theme of this year’s congress.

The Boston Consulting Group estimates by 2021 that a country will need at least $1 trillion in upfront investment to build a fully “self-sufficient” local chip supply chain.

The new restrictions are likely to spur Chinese chipmakers to try making advanced chips using innovative engineering solutions with older technologies with impunity, experts say.

This is something that China’s leading contract chipmaker Semiconductor Manufacturing International Corp (SMIC), has attempted before.

At the end of 2020, Washington banned it from obtaining an advanced chip manufacturing tool called an EUV machine from Dutch company ASML, which is crucial for making chips using 7-nanometer process nodes.

While the sanctions are intended to prevent SMIC from making cutting-edge chips, some analysts have spotted indications that SMIC has however attempted to produce 7 nm chips by adapting simpler DUV machines. which they can still buy freely from ASML.

Experts say such efforts, however, are unlikely to produce products that are commercially viable for mass production.

“You can tune certain tools,” said Marco Mezger, a consultant in Taiwan who tracks the global memory chip sector.

Experts say that Chinese equipment makers are still four to five years behind their foreign counterparts, making them unsuitable for immediate replacements for lost equipment from manufacturers. US suppliers such as KLA Corp, Applied Materials (NASDAQ:) and Lam Research (NASDAQ:).

Two other top Chinese chipmakers likely to be dealt a blow are NAND memory chip maker Yangtze Memory Technologies Co Ltd (YMTC) and DRAM maker Changxin Memory Technologies Inc (CXMT).

YMTC and CXMT are both state-backed companies that were founded about 10 years ago and are China’s best hope in entering the global market, going head-to-head with the likes of Samsung. Electronics (OTC:) and Micron Technology (NASDAQ:).

But neither company has reached mass production at the most advanced level, although they have made strides – with YMTC claiming to have developed 232-layer NAND and CXMT reportedly inching towards production. 10nm DRAM series.

SMIC, YMTC and CXMT did not respond to requests for comment.

WINTER IS COMING

Overseas tool makers will also face painful blows as China’s efforts to nurture its domestic chip industry have benefited many of them. .

KLA, Applied Materials and Lam Research each derive about 30% of their revenue from China, which ranks as the top geographical market and also the fastest growing market.

Applied Materials on Wednesday said export restrictions to China will cause net sales to drop by $250-550 million in the quarter ended October 30, with a similar impact expected in three months. next.

“Until we see about $10 billion in fab set up in Ohio or Oregon, I see a big interest in our revenue next year,” a source at an appliance company told. Reuters, referring to the CHIPS Act providing $52.7 billion in subsidies for US chip manufacturing and research.

Sources at tool-making companies also said they were trying to comply with the new export restrictions, with some companies ordering broad supply bans to avoid breaking the rules they said were vague.

“If we go by the letter of the bill, the equipment companies may have to close,” said one chip equipment seller, said one seller of chip equipment.

People familiar with the matter said Washington is also trying to deal with the unintended consequences of its new export restrictions.

Hours before the new restriction took effect, South Korea’s SK Hynix said it was authorized by the United States to receive shipments to its chip manufacturing facilities in China without additional licensing under the new regulations.

However, business at tool companies servicing Chinese customers has slowed significantly, leaving their employees with little to do but creating opportunities for equipment manufacturers. China seeks to catch up with Western rivals, sources said.

A source at an overseas equipment company based in China said: “Our top management team has told us to relax for a few months – we can still come. work, but it’s not mandatory.”

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