Cutting-Edge Chips: Despite US Export Limitations, China Could Be Producing Them

Paresh Jadhav

10 months ago

China’s chip industry is under intense pressure to stay on pace with global competitors. Both the government and tech titans are investing both financial and human capital to produce advanced chips.

But China faces an insurmountable obstacle: Washington is increasing restrictions on chipmaking technology, making it harder for China to stay abreast of global developments.

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China’s chip industry

Although China boasts of its ambitions to gain control of AI and supercomputing technologies for use in military weapons systems upgrades, US export controls on chips can prove detrimental to China. Washington asserts that emerging technologies like AI and supercomputing may have military applications; therefore it does not want to risk helping Beijing upgrade them through export restrictions.

American chipmakers and equipment firms that rely heavily on China sales for revenue will also feel the sting of these controls; companies like Applied Materials and Lam Research have warned that complying with new rules could reduce sales volumes significantly.

Chinese semiconductor producers must overcome several complex technical barriers on their journey towards advanced production, each carrying significant costs that must be offset through economies of scale and organizational learning. Doing this may take years; experts from other firms such as Japan or the Netherlands could offer assistance. Unfortunately, however, the United States has blocked this from happening by persuading allies such as these to restrict export of advanced lithographic equipment which plays an essential part in creating advanced chips.

China’s exports

China, home to over 1.4 billion people, relies heavily on exports in order to survive and thrive as an economy. Therefore, they have become the world leader for producing things like cell phones, computer equipment and electronic integrated circuits as well as automobile parts and accessories.

China may not feel the full brunt of an American trade war immediately, yet Chinese companies continue to struggle in both overseas and domestic markets.

China’s top exports particularly those in the telecommunications industry saw their value slightly increase from last year, while other categories declined. Telecommunications equipment continued to lead global shipments, followed by automatic data processing machines and motor vehicles. Other categories that saw sales increases included electrical machinery and apparatus and electronic tubes valves and related articles (Click here for an interactive searchable list of 100 most-valued exported products at four-digit Harmonized Tariff System code level). China total global shipments totalled an impressive $3.594 trillion during 2022!

China’s domestic market

Since US export restrictions are in place, China’s semiconductor industry faces new obstacles; yet its growth could still accelerate toward advanced chips needed for artificial intelligence, quantum computing and military technology applications.

Chinese imports of chip-making equipment spiked 93% year-on-year last quarter despite US and its allies’ imposed export restrictions on machinery used to create cutting-edge chips, according to Nikkei analysis. This indicates that Beijing-based domestic companies still possess access to all necessary tools needed for producing cutting-edge chip technologies.

The US is working hard to block China from access to advanced chip-making technology by restricting exports of key tools like extreme ultraviolet (EUV) lithography machines. But recently, they’ve closed loopholes that would allow China to sidestep their ban by convincing allies such as Japan and the Netherlands to impose export limits for key chipmaking tools.

China’s technology

The US’ original chip restrictions were intended as a strategic move against China’s rising technological prowess and prevent them from obtaining cutting-edge technologies for weaponry or surveillance use, however due to China’s economic adaptability Washington may be powerless against Beijing through tight export control regulations.

However, China is taking steps to meet this challenge head on. They have laid out an ambitious strategy to develop China’s semiconductor industry through a “whole nation” approach by mobilizing their vast research resources as well as companies like smartphone makers Xiaomi Corp and Kingsoft Corp.

But China’s massive investments into chip production don’t appear to be targeting the fundamental research that can create groundbreaking innovations, according to experts. The science required to develop essential chip manufacturing technologies incurs substantial sunk costs and long product development cycles that political actors in China don’t feel incentivized to commit to, creating a major problem for its future development.