The US on Thursday escalated efforts to undermine China's tech sector by blacklisting more than 30 entities, citing national security concerns. Among the company's added to the US export restrictions list is a Japanese subsidiary of YMTC - China's top flash memory chipmaker.
In October, the Biden administration expanded controls on the export of US semiconductor technology going to China to restrict Beijing's ability to make certain high-end microchips used in military applications. Beijing, meanwhile, took the matter to the World Trade Organization (WTO) earlier this week, filing a lawsuit challenging the US export controls.
Taiwan and South Korea have long dominated the advanced manufacturing of microchips, while the US still leads in certain critical technology and design.
Raju thinks, however, the restrictions may afford Beijing an opportunity to advance in these areas. The expert said Beijing in response could indigenize its semiconductor supply chain with a stronger thrust on research and development while increasing government control and forging a conducive domestic ecosystem.
"With indigenization of supply chain in design, fabrication, assembling and testing and manufacturing equipment, China may reduce the current technology gap and emerge as an important challenger to the US," Raju said. "These positions gain credence especially with China’s efforts to reduce dependence on the US."
Though China lags behind in technology and scale in the industry as compared to the United States, efforts to bridge the gap through indigenization would be possible for several reasons, Raju said. For one, China’s expertise in developing new super conductive materials and dominance in Outsourced Semiconductor Assembly and Test (OSAT) can lead to advanced chip packaging, new transistor architectures and new carbon based materials, which together can emerge as a "game-changer," she said.
China can also collaborate more closely with firms like ZTE, Lenovo, and Huawei on chip design. Moreover, the diversified global market players in semiconductor manufacturing equipment and memory devices will aid China in accelerating its progress, Raju added.
Meanwhile, Beijing, she said, is also making a strong push to develop skilled personnel to support its advances.
The expert also said the US move will drive Beijing to consolidate its dominant position in the lower node chips domain.
China, by the end of 2024, will have 31 new chip factories established for making mature and low process nodes that could result in high price competition, she added.
"With global prices going down, it will be difficult for other suppliers to compete with China resulting in Chinese foundries dominating this market segment," Raju said.
In addition, the expert cautioned, the push by the US and China - along with Japan and Europe - to develop local semiconductor production, strongly supported by government aid, could slow technology advances and result in higher costs.
Potential Resistance
Raju said implementing the restrictions will depend on US cooperation with countries like Europe, Japan, South Korea and Taiwan. However, considering China is such a major consumer market, many foreign microchip equipment manufacturers might find it difficult to forego this revenue.
For example, the expert noted that China accounts for more than 30% of US-based Lam Research sales - amounting to about $2.5 billion annually. China also accounts for 33% of Applied Material revenue and 27 percent of Intel’s.
Raju also underscored that the "China factor" in various sub segments of the semiconductor supply chain cannot be undermined, pointing out that global majors in chip manufacturing, such as TSMC, Samsung and Intel, all have their production facilities located in China.
Although many countries may resist US restrictions, Raju warned that Beijing could leverage its edge in critical minerals, including rare earth elements.
Chinese dominance of the rare earths market has left the US and several of its allies heavily dependent on China across a range of critical applications.
"If China weaponizes rare earths material which is used for chip manufacturing then this conflict could take an ugly turn," Raju said.
In the meantime, Raju doubts Beijing's WTO challenge will be effective, largely because a key settlement mechanism has been defunct for three years.
Hence, the US will likely be successful in getting WTO rules waived by citing national security concerns.
"The WTO's dispute settlement mechanism is virtually non-functional since 2019. The term of the judges on the appellate body has ended and new judges have not been appointed. US has been blocking this since 2019," Raju added. "So China raising a dispute at WTO may not affect US as of now."