China’s chip making power grows despite US’ effort to crimp it

CHINA’S semiconductor industry is showing signs of flourishing even in the face of Biden administration efforts to counter its growth, raising alarm bells in Washington.

Chinese orders for chip-manufacturing equipment from overseas suppliers rose 58 per cent in 2021, making it the biggest market for those products for a second year running, according to data provided by industry body Semi.

While those figures appeared in April, the flood of machinery headed to China is now drawing more attention — especially as a legislative push to bolster the US chip industry with investments and incentives falters. The US Commerce Department, meanwhile, appears unwilling to crack down harder on Beijing, irking critics.

“If the Biden administration is serious about securing the semiconductor supply chain in the United States and allied and partner countries, it’s absurd to let the Chinese Communist Party buy up and stockpile the global supply of tools and equipment to make semiconductors,” said US House Representative Michael McCaul, a Republican from Texas.

The semiconductor industry became a key battleground during the Trump administration’s trade war with China. President Joe Biden then inherited a set of rules aimed at restricting some Chinese companies’ access to technology. While some parts of the US government want to extend that into a more blanket ban, others are resisting what they see as an unnecessary escalation.

The global chip shortage, which disrupted supplies of everything from cars to smartphones, further inflamed tensions. Biden ordered a review of supply-chain vulnerabilities last year and found that — while the US maintains a healthy share of chip design and manufacturing equipment — the industry is “highly dependent” on overseas sales, notably in China.

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That dilemma is evident in the latest industry figures for 2021. Even in a year when worldwide bookings for equipment from the likes of US-based Applied Materials Inc and Japan’s Tokyo Electron Ltd climbed 44 per cent — fuelled by a global surge in chip demand — the growth of China’s chipmaking industry far outpaced other regions.

Some US chipmakers have expressed concern that Chinese companies are paying above-market rates to obtain the machinery. They say that has made it harder for US companies to get the equipment they need to expand domestic production, undercutting a core goal of the Biden administration. But the US government isn’t convinced intervention is needed.

At the centre of the growing debate, the US Department of Commerce said it’s so far found nothing other than normal market forces at play. The department has enforced bans on some supplies to Chinese companies listed as a threat to national security, including Semiconductor Manufacturing International Corp. But it’s avoiding dabbling in industrial policy beyond that. 

Secretary of Commerce Gina Raimondo said in an interview: “Selling a commodity product to a Chinese company is in and of itself not problematic. If at any point we found evidence of preferencing Chinese companies, then we would take action to address it immediately.”

She added: “I don’t think anyone would want the US government to dip into the private-sector supply chain and try to micromanage it if nothing wrong is happening.”

That stance is too passive for many China critics, possibly including some within the Biden administration. Saif Khan, technology director of the National Security Council, argued before joining the administration in favour of stringent export controls on semiconductor manufacturing equipment. The idea, he said at the time, was to make it difficult for China to make advanced chips, “largely pre-empting China’s development and use of many dangerous or destabilising technologies.”

McCaul and others have advocated for tighter controls on equipment exports to China, either unilaterally or by working with allies such as Japan and the Netherlands — countries that together with the US control some 90 per cent of the market for the most advanced chip-making gear.

China is the largest consumer of semiconductors because of the size of its domestic electronics market and its status as production base for entire industries. Yet it is dependent on foreign companies for equipment, and the overwhelming majority of its output is several generations behind the most leading-edge chips.

However, during the height of the global chip shortages, it’s exactly semiconductors made with lagging technologies that were in the most severe short supply. Carmakers and many other companies were scrambling to get enough of power management chips, display drivers and microcontrollers. 

Even Apple Inc, the largest corporate buyer of semiconductors, was not immune. China’s increasing capability of making those could mean the world will come to rely on the country’s supply even more. BLOOMBERG