U.S. Chip Sanctions ‘Put Temporary Checkmate on China’

Article By : Alan Patterson

The U.S.'s escalation of the chip war with China is expected to hamper China's foundry industry and cost multinational chipmakers billions.


The latest U.S. salvo in the chip war against China will set back its domestic chipmakers by generations, while global suppliers of semiconductors and fab tools will incur billions of dollars in lost sales because of a giant dent in demand out of China, analysts told EE Times.

The administration of U.S. President Joe Biden has strengthened Cold War measures from longer than 40 years ago. In its new rivalry, the U.S. aims to freeze China’s advancement on a new front: chip technology that is critical for economic development and military superiority.

Based on the Cold War-era Wassenaar Arrangement, including more than 40 nations, the latest U.S. regulations ban exports of Nvidia and AMD GPUs destined for supercomputers in China, as well as sales of chipmaking tools and design software.

Brett Simpson (Source: Arete Research)

For now, the U.S. export rules have probably stymied the advancement of China’s chip industry, Brett Simpson, senior analyst at Arete Research, told EE Times.

“The sanctions put a temporary checkmate on China developing their foundry industry at more advanced nodes,” he said. “The main solution or response from China is in building their own equipment ecosystem, which will require mastering decades of Western R&D, particularly in areas such as material science and lithography. This will be a long and challenging road—but this has always been the main solution, and the restrictions do not change that.”

The latest U.S. measures are likely to set back SMIC, China’s largest chipmaker, by years.

Although there has been some “chatter” that SMIC can manufacture 7-nm chips without EUV lithography, the cost/benefit is not compelling, and the scope of SMIC’s leading-edge production will be limited, Mehdi Hosseini, senior equity research analyst at Susquehanna International Group (SIG), wrote in a report to investors obtained by EE Times.

“We remind investors that SMIC has been trying for more than 20 years to catch up to the likes of TSMC and UMC, with little to no success.”

Hosseini covers chipmakers like Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung, as well as chip tools suppliers like ASML, for SIG—a privately held trading and technology firm.

Mehdi Hosseini (Source: SEMI)

The multinational chipmakers currently operating in China like TSMC, Samsung, and Intel have U.S. permission to continue manufacturing there for about a year. After that, they will most likely be forced to wind down in China, said Paul Triolo, a senior VP at Dentons Global Advisors.

“Eventually, non-Chinese multinational firms manufacturing in China given short-term reprieves will have a hard time maintaining their China operations,” Triolo said. “Without the ability to continue to move up the technology curve, China-based facilities will eventually become less competitive, serving a gradually diminishing market.”

China will need to rely more on Taiwan-based foundries like TSMC for capacity support, Simpson said.

“These restrictions will only create more challenges for global supply chains–where China is a key cog,” he said. “We would expect inventory levels to remain elevated in China. There seems little scope at this stage in finding a settlement.”

Lost sales estimated

Analysts interviewed by EE Times also predicted that global suppliers of semiconductors and fab tools will incur billions of dollars in lost sales because of a giant dent in demand out of China. And details giving credence to those predictions are already spilling out: Equipment maker Applied Materials Inc. last week told the press it was lowering its sales estimates for the fourth quarter by about $400 million, pointing to the restrictions as the key factor.

SIG estimates the downside risk to wafer fab equipment from the U.S. chip sanctions to be in the $8 billion range, “or 8% of the average of our annual wafer fab equipment forecast for the 2022-2025 period,” Hosseini wrote. “On the supercomputer side, we see an approximate 10% downside risk to our estimates for TSMC, the main GPU manufacturing partner.”

The U.S. has also prohibited its “people” from working in the Chinese semiconductor industry without a license. The measures will cost the global industry nearly $10 billion over the next three years because of lost sales of goods and services to China, he added.

Some U.S., European firms caught in crossfire

While the U.S. chip sanctions will have the greatest impact on Chinese chipmakers like Yangtze Memory Technologies Corp (YMTC), ChangXin Memory Technologies (CXMT,) and Semiconductor Manufacturing International Corp. (SMIC), U.S. and European chip tool suppliers like ASML, Applied Materials, Lam Research, and KLA will be caught in the crossfire, Triolo said.

“ASML will also lose significantly, though the company this week claimed the losses would be low because they have such a huge backlog for clients such as TSMC, Samsung and Intel.”

ASML, a Dutch company that serves as the world’s only supplier of extreme ultraviolet (EUV) lithography tools used to make the most advanced chips, did not estimate the size of its potential losses. Following its quarterly earnings announcement this week, company representatives said in a call with analysts and journalists that it expects to continue exporting less advanced, deep ultraviolet (DUV) equipment to China.

“The fact that we are a European company with limited U.S. technology in it, of course, creates this situation where a direct impact on us is fairly limited,” ASML CFO Roger Dassen said in the earnings call. “We can continue to ship non-EUV lithography tools out of Europe into China.”

At this point in time, ASML still cannot meet global demand, according to Dassen. If ASML can no longer supply certain tools to certain customers in China, the demand outside of China will still offset the potential loss in sales, he added.

The U.S. aims to offset the short-term financial impact from the sanctions on China with the recently passed CHIPS and Science Act, including a $52 billion investment-stimulus package.

Paul Triolo (Source: Dentons Global Advisors)

While that new law and similar legislation in the E.U. will help fund foundry construction outside China and soften the blow from U.S. chip sanctions, the stimulus measures cannot replace major losses in the China market, Triolo said. “This has the potential to be a multi-billion dollar hit to multiple U.S. technology leaders in the sector, including GPU makers and semiconductor manufacturing equipment leaders.”

Triolo noted that California-based Lam Research this week estimated that sales losses in China will be as much as $2.5 billion in 2023.

‘Watershed moment’ is complex

The U.S. export rules announced Oct. 7 represent a pivotal moment, strengthening the argument that the U.S. is in a new Cold War with China, Hosseini said.

“While the U.S. appears to have just started to consult with allies, in our view, there is no doubt that more semiconductors will be made outside of China.”

Still, the U.S. is “joined with China at the hip,” Hosseini added, noting the reliance of the U.S. on trade with China. “We expect this watershed moment to remain highly complex and difficult to navigate, leading to ongoing uncertainties with no clear path to quantifying the downside risk and eventual outcome.”

“There’s going to be a continual decoupling with China over the next five to 10 years,” Dan Hutcheson, an analyst at TechInsights, told EE Times.

International companies need to, he said, “prepare for the real probability that business with China can go to zero in the next five to 10 years.”

‘Our allies are not on board’

The sanctions are also likely to strain U.S. ties with allies like Japan that rely on trade with China, Hutcheson said.

“What we often see is that our allies are not on board,” he said. “They have equipment companies in their countries that are not following these regulations. Biden’s tried a multilateral approach, but the Japanese government still allows a lot of stuff to go to China.”

As EE Times reported last month, the U.S. is pushing for the creation of a “Chip 4” alliance with chipmaking nations Japan, South Korea, and Taiwan to share information and tighten control of exports to China. The plan is still at a preliminary stage.

Complications for China outlined

Chinese manufacturers will still get the technology they need—at a higher price, Hutcheson said. “It slows down their growth. It also slows down their ability to dominate the world. China’s playbook has been to build too much capacity, flood the market and then force all the competition out of business.”

China’s efforts to build a domestic supply of semiconductor tools will be difficult, Triolo said.

“The ability of Chinese semiconductor tool makers to ‘catch up’ will be very problematic,” he said, noting the wide technology gap separating them from industry leaders like ASML. “The restrictions also include inputs to domestic Chinese toolmakers, which will slow their ability to move up to higher technology levels.”

Because Chinese chipmakers are affected by the sanctions, that nation’s domestic toolmakers have no place to go to develop and compete either domestically or internationally, he added.

Widening the lead

Last month, U.S. National Security Advisor Jake Sullivan said the U.S. must “revisit the long-standing premise of maintaining relative advantages over competitors in certain key technologies.”

Under the Wassenaar Arrangement, the U.S. tried to stay a few generations of technology ahead of its rivals.

“That is not the strategic environment we are in today,” according to Sullivan. “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

Will China change course?

Analysts are waiting to see how China will respond.

Jordan Schneider (Source: Rhodium Group)

“It’s still an open question what the Chinese government policy response is going to be,” Jordan Schneider, a China tech analyst with research firm Rhodium Group, told EE Times. “The State Council has reportedly expressed disappointment at the level of progress” after decades of effort to build a domestic chip industry.

“Are they going to recognize that the leading edge is going to be incredibly expensive and maybe not even possible even within a 10-year horizon? These firms have huge amounts of state investment, and their priorities are very much subject to what Beijing wants,” he said. “Look at China’s effort over the last 10 years: The majority of semiconductors in China, by 2025, are supposed to be made in China. They’re not even close.”

“You may end up seeing these firms instead redouble on the lagging nodes and try to capture market share,” Schneider added. “Will Beijing be okay with them taking one step back to go two steps forward?”


Barbara Jorgensen, Editor-in-Chief of EPSNews, contributed to this article.


This article was originally published on EE Times.

Alan Patterson has worked as an electronics journalist in Asia for most of his career. In addition to EE Times, he has been a reporter and an editor for Bloomberg News and Dow Jones Newswires. He has lived for more than 30 years in Hong Kong and Taipei and has covered tech companies in the greater China region during that time.


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