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China vulnerable in war with US over computer chips
Reliance on foreign equipment makers leaves Chinese chip plants exposed
A US export ban would choke off China’s access to the basic tools needed to make the latest chip designs © Reuters
December 3, 2018 10:00 pm by Emily Feng in Beijing and Kathrin Hille in Taipei
Xi Jinping, the Chinese president, visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: “No matter how big a person is, he or she can never be strong without a sound and strong heart”.
China’s ambitions to be a leader in next-generation technology, such as artificial intelligence, rest on whether or not it can design and manufacture cutting-edge chips, and Mr Xi has pledged $150bn to build up the sector.
But China’s plan has alarmed the US, and chips, or semiconductors, have become the central battlefield in the trade war between the two countries. And it is a battle in which China has a very visible Achilles heel.
While the two sides agreed a temporary truce over the weekend, Washington plans to ramp up export controls next year on so-called foundational technologies — those that can enable development in a broad range of sectors — and the equipment for manufacturing chips is one of the key target areas under discussion.
The $412bn global semiconductor industry rests on the shoulders of just six equipment companies, three of them US-based.
Together, the companies make nearly all of the crucial hardware and software tools needed to manufacture chips, meaning an American export ban would choke off China’s access to the basic tools needed to make their latest chip designs.
“You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,” said Brett Simpson, the founder of Arete Research, an equity research group. “If you fight a war with no guns you’re going to lose. And they don’t have the guns.”
Under Beijing’s auspices, Chinese chip companies have made enormous gains in semiconductor design as well as chip testing and packaging.
Several private and state-owned Chinese companies — Intel-backed Tsinghua Unigroup, Cambricon Technologies and Huawei’s HiSilicon among them — have already begun to venture into designing the leading edge chips capable of AI applications.
But the real difficulty lies is making the chips, not designing them. “From a design perspective, Chinese companies are at least on par with anyone else in the world,” said Risto Puhakka, president of VSLI Research. “Where they have a challenge is if they decide to make a very cutting-edge chip.”
Equipment is the chokepoint
As Chinese semiconductor plants try to catch up, they have few choices when outfitting or upgrading their chip foundries. Only a few equipment suppliers remain after a decade of consolidation.
Foremost among them is the Netherland’s ASML, which makes the photolithography machines that print and etch designs on to silicon wafers. It is the only supplier of the extreme ultra violet (EUV) lithography machines needed to make a 7-nanometre processor, the industry’s current gold standard.
In the US, Lam Research and Applied Materials as well as Japanese company Tokyo Electron dominate the market for equipment that can deposit billions of transistors and other active components on to a single chip. Another US company, KLA Tencor, sells much of the technology used in testing and monitoring the quality of chip production.
China’s reliance on these companies has made it vulnerable. “Firms like Applied Materials, Lam Research and KLA-Tencor made 10 to 20 per cent of their revenues in China in 2017, a share which is expected to rise in 2018,” said Dan Wang, an analyst at Beijing research group Gavekal Dragonomics. “China is a large and growing market for them, and these companies don’t want export controls that are too restrictive.”
Under current laws, an export ban on semiconductor equipment would mean both foreign companies, such as Samsung and Intel with foundries located in China, as well as wholly owned Chinese foundries would be unable to buy American equipment, though foreign companies are likely to be able to apply for waivers.
“One of the ideas of export controls is to prevent the release of the tech to certain foreign nationals from China: as an example, that could mean to a Chinese national wherever they are located, or to anyone within the physical geographic region of China,” said Anthony Capobianco, a partner at Hogan Lovells in Washington DC.
Any US ban would also have an impact on the non-American chip equipment suppliers, because of the integration of what is a highly specialised supply chain.
“ASML cannot do without Applied Materials and the other way around. If you take even one out of the value chain, that may hamper Chinese fabs,” said a former ASML executive.
Mr Puhakka of VSLI Research said: “[These equipment suppliers] have the research and development, the trade secrets in metallurgy, the recipes: all of that knowledge base is 40 years old.” said VSLI Research’s Mr Puhakka.
He added: “This is not about money. This about the knowledge base . . . and that knowledge base is not moving.”
Lack of operational experience
Some Chinese companies are starting to produce their own chipmaking equipment. At the head of the pack are Shanghai-based AMEC, which makes both wafer fabrication and packaging equipment for 28nm chips, Shanghai Micro Electronics Equipment, which is creating chip-etching lithography machines, and CETC, the state defence company, which announced a 28nm ion implanting device this August.
But no Chinese company is close to being able to offer equipment that can produce the current target size of 7nm chips. SMEE’s machines can only match what ASML was able to do about 15 years ago. Today’s most basic smartphones require chips that are between 14nm and 16nm in size, but the smallest chips offered by China’s biggest manufacturer, SMIC, is 28nm.
If the US cuts them off from purchasing foreign equipment, Chinese plants will also miss out on accumulating operational experience. “Basically, it’s a double whammy,” said Mr Simpson from Arete Research.
“You’ve got two big bottlenecks. You need to get the equipment into your fabs [plants] and secondly, you’ve got to know how it runs and the intellectual property process to make use of that equipment,” he explained.
A more determined China
If faced with US export controls, Chinese-owned plants could continue producing lower-end semiconductors, such as analogue chips, used in everything from industrial robots to electric vehicles.
Out of reach in the medium term would be making the most advanced chips able to support AI functions or 5G telecommunication networks.
Leading edge chips are also where sales and margins are highest. TSMC expects revenue from sales of advanced chips 28nm and smaller to rise to as much as 70 per cent by this year, up from 42 per cent only four years ago.
But in the long term, analysts said, a US export ban would likely cement Beijing’s resolve to cultivate a wholly home grown semiconductor industry along every step, from design to fabrication to packaging.
“In the short term, US export controls can seriously set back Chinese progress on semiconductors. In the longer term, it’s hard to say if China will be permanently set back,” said Gavekal’s Mr Wang, noting that fear of US export controls helped marshal the resources that shaped Japan’s most dominant semiconductor equipment players.
“The more tightly the US controls these goods, the more important it becomes for China to make these goods itself.”
*****
China needs to develop the semiconductor equipment industry ASAP. This is a weakness the US will try to exploit if the US regime gets desperate. Cutting off access to the semiconductor equipment is as powerful as cutting off access to the US market and the US dollar-based financial system.
If you think they won’t target the semiconductor sector, remember they banned Intel chips for China’s supercomputers in 2015.
Reliance on foreign equipment makers leaves Chinese chip plants exposed
A US export ban would choke off China’s access to the basic tools needed to make the latest chip designs © Reuters
December 3, 2018 10:00 pm by Emily Feng in Beijing and Kathrin Hille in Taipei
Xi Jinping, the Chinese president, visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: “No matter how big a person is, he or she can never be strong without a sound and strong heart”.
China’s ambitions to be a leader in next-generation technology, such as artificial intelligence, rest on whether or not it can design and manufacture cutting-edge chips, and Mr Xi has pledged $150bn to build up the sector.
But China’s plan has alarmed the US, and chips, or semiconductors, have become the central battlefield in the trade war between the two countries. And it is a battle in which China has a very visible Achilles heel.
While the two sides agreed a temporary truce over the weekend, Washington plans to ramp up export controls next year on so-called foundational technologies — those that can enable development in a broad range of sectors — and the equipment for manufacturing chips is one of the key target areas under discussion.
The $412bn global semiconductor industry rests on the shoulders of just six equipment companies, three of them US-based.
Together, the companies make nearly all of the crucial hardware and software tools needed to manufacture chips, meaning an American export ban would choke off China’s access to the basic tools needed to make their latest chip designs.
“You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,” said Brett Simpson, the founder of Arete Research, an equity research group. “If you fight a war with no guns you’re going to lose. And they don’t have the guns.”
Under Beijing’s auspices, Chinese chip companies have made enormous gains in semiconductor design as well as chip testing and packaging.
Several private and state-owned Chinese companies — Intel-backed Tsinghua Unigroup, Cambricon Technologies and Huawei’s HiSilicon among them — have already begun to venture into designing the leading edge chips capable of AI applications.
But the real difficulty lies is making the chips, not designing them. “From a design perspective, Chinese companies are at least on par with anyone else in the world,” said Risto Puhakka, president of VSLI Research. “Where they have a challenge is if they decide to make a very cutting-edge chip.”
Equipment is the chokepoint
As Chinese semiconductor plants try to catch up, they have few choices when outfitting or upgrading their chip foundries. Only a few equipment suppliers remain after a decade of consolidation.
Foremost among them is the Netherland’s ASML, which makes the photolithography machines that print and etch designs on to silicon wafers. It is the only supplier of the extreme ultra violet (EUV) lithography machines needed to make a 7-nanometre processor, the industry’s current gold standard.
In the US, Lam Research and Applied Materials as well as Japanese company Tokyo Electron dominate the market for equipment that can deposit billions of transistors and other active components on to a single chip. Another US company, KLA Tencor, sells much of the technology used in testing and monitoring the quality of chip production.
China’s reliance on these companies has made it vulnerable. “Firms like Applied Materials, Lam Research and KLA-Tencor made 10 to 20 per cent of their revenues in China in 2017, a share which is expected to rise in 2018,” said Dan Wang, an analyst at Beijing research group Gavekal Dragonomics. “China is a large and growing market for them, and these companies don’t want export controls that are too restrictive.”
Under current laws, an export ban on semiconductor equipment would mean both foreign companies, such as Samsung and Intel with foundries located in China, as well as wholly owned Chinese foundries would be unable to buy American equipment, though foreign companies are likely to be able to apply for waivers.
“One of the ideas of export controls is to prevent the release of the tech to certain foreign nationals from China: as an example, that could mean to a Chinese national wherever they are located, or to anyone within the physical geographic region of China,” said Anthony Capobianco, a partner at Hogan Lovells in Washington DC.
Any US ban would also have an impact on the non-American chip equipment suppliers, because of the integration of what is a highly specialised supply chain.
“ASML cannot do without Applied Materials and the other way around. If you take even one out of the value chain, that may hamper Chinese fabs,” said a former ASML executive.
Mr Puhakka of VSLI Research said: “[These equipment suppliers] have the research and development, the trade secrets in metallurgy, the recipes: all of that knowledge base is 40 years old.” said VSLI Research’s Mr Puhakka.
He added: “This is not about money. This about the knowledge base . . . and that knowledge base is not moving.”
Lack of operational experience
Some Chinese companies are starting to produce their own chipmaking equipment. At the head of the pack are Shanghai-based AMEC, which makes both wafer fabrication and packaging equipment for 28nm chips, Shanghai Micro Electronics Equipment, which is creating chip-etching lithography machines, and CETC, the state defence company, which announced a 28nm ion implanting device this August.
But no Chinese company is close to being able to offer equipment that can produce the current target size of 7nm chips. SMEE’s machines can only match what ASML was able to do about 15 years ago. Today’s most basic smartphones require chips that are between 14nm and 16nm in size, but the smallest chips offered by China’s biggest manufacturer, SMIC, is 28nm.
If the US cuts them off from purchasing foreign equipment, Chinese plants will also miss out on accumulating operational experience. “Basically, it’s a double whammy,” said Mr Simpson from Arete Research.
“You’ve got two big bottlenecks. You need to get the equipment into your fabs [plants] and secondly, you’ve got to know how it runs and the intellectual property process to make use of that equipment,” he explained.
A more determined China
If faced with US export controls, Chinese-owned plants could continue producing lower-end semiconductors, such as analogue chips, used in everything from industrial robots to electric vehicles.
Out of reach in the medium term would be making the most advanced chips able to support AI functions or 5G telecommunication networks.
Leading edge chips are also where sales and margins are highest. TSMC expects revenue from sales of advanced chips 28nm and smaller to rise to as much as 70 per cent by this year, up from 42 per cent only four years ago.
But in the long term, analysts said, a US export ban would likely cement Beijing’s resolve to cultivate a wholly home grown semiconductor industry along every step, from design to fabrication to packaging.
“In the short term, US export controls can seriously set back Chinese progress on semiconductors. In the longer term, it’s hard to say if China will be permanently set back,” said Gavekal’s Mr Wang, noting that fear of US export controls helped marshal the resources that shaped Japan’s most dominant semiconductor equipment players.
“The more tightly the US controls these goods, the more important it becomes for China to make these goods itself.”
*****
China needs to develop the semiconductor equipment industry ASAP. This is a weakness the US will try to exploit if the US regime gets desperate. Cutting off access to the semiconductor equipment is as powerful as cutting off access to the US market and the US dollar-based financial system.
If you think they won’t target the semiconductor sector, remember they banned Intel chips for China’s supercomputers in 2015.
