China’s chip industry set for deep pain from US export controls

Two years after the US hit Huawei with harsh sanctions, the Chinese technology group’s revenue has dropped, it has lost its leadership position in network equipment and smartphones, and its founder has told staff that the company’s survival is at stake.

Now, China’s entire chip industry is bracing for similar pain as Washington applies the tools tested on Huawei much more broadly.

Under new export controls announced on Friday, semiconductors made with US technology for use in AI, high performance computing and supercomputers can only be sold to China with an export licence — which will be very difficult to obtain.

Moreover, Washington is barring US citizens or entities from working with Chinese chip producers except with specific approval. The package also strictly limits the export to China of chip manufacturing tools and technology China could use to develop its own equipment.

“To put it mildly, [Chinese companies] are basically going back to the Stone Age,” said Szeho Ng, Managing Director at China Renaissance.

Paul Triolo, a China and technology expert at the Albright Stonebridge consultancy, said: “There will be many losers as the tsunami of change unleashed by the new rules washes over the semiconductor and associated industries.”

He added the impact would be especially profound on Chinese companies using US-origin hardware to deploy AI algorithms including for autonomous vehicles and logistics, as well as medical imaging and research centres using AI for drug discovery and climate change modelling.

“The full impact will take some time to become clear, but at a minimum will slow innovation in both China and the US, ultimately costing US consumers and companies hundreds of millions or even billions of dollars,” Triolo said.

Several of the new controls work through third-country chip manufacturers as almost every semiconductor is designed using US software and most chip plants contain US machines.

“You can look at Huawei as a case study,” said Brady Wang, an analyst at technology market research house Counterpoint. While Huawei could still obtain certain supplies, he said, it was not the most advanced ones but those from a previous era, which would limit the functionality of its products.

The new controls on semiconductor equipment are also a potent weapon, set to hit mainstream manufacturers and leading-edge chip producers. According to analysts at the Bank of America, the equipment restrictions will affect logic chips designed in the past four to five years, and Dram chips designed after 2017. “It’s their sweet spot right now — they’re a laggard in technology and are relying on older tools and technology,” said Wayne Lam, an analyst at CCS Insight.

Chinese chip companies are even more concerned about Washington’s attempts to bar US citizens from supporting them.

“That is a bigger bombshell than stopping us from buying equipment,” said a human resources executive at a state-backed semiconductor plant….