The US crackdown on advanced chips gives China an opening to old technology

From 2022, the US has focused on restricting Chinese production of high-end semiconductors. The Commerce Department has imposed stifling export controls and allocated tens of billions of dollars to boost advanced chip manufacturing in the US.

In response, China has formulated its own policy — and it’s focusing heavily on less advanced but widely used “legacy” chips. New data shows that Beijing is rapidly gaining leverage in this market.

China is now on track to install three times more chip-making capacity this year than all other countries combined over the next three years, according to Silverado Policy Accelerator, a nonprofit think tank. The country is poised to control about 40% of total legacy chip production by 2027, according to a study by Rhodium Group.

“What China is doing in that segment of the market is what it has done in many other industries,” Sarah Stewart, CEO of Silverado, told Yahoo Finance. “It infuses that segment of the market with … below-market lending (and) all kinds of subsidies that nobody else is offering. None of this is related to any real demand signal.”

China’s efforts have raised fears that the semiconductor industry could be at risk of going the way of the solar and steel industries, where overcapacity in China has contributed to a collapse in global prices.

Price pressures are already mounting. Silverado’s report shows that Chinese firms offered prices 20% to 30% lower than their non-Chinese competitors in 2022 and 2023. These cuts came despite strong industry pricing, particularly in 2022, when a large shortage of semiconductors led to record sales.

While chips made in China are still largely used to supply the domestic market, deep discounts have helped firms such as Semiconductor Manufacturing International Corporation (SMIC), Hua Hong (1347.HK) and Nexchip (688249.SS) battle market share away from those that are not. -Chinese competitors including GlobalFoundries (GFS) and Samsung, according to consultancy JW Insights.

China accounted for about a third of global output of legacy chips last year, almost double from 2015, according to Rhodium Group. This capacity is expected to increase to 39% by 2027.

New vs old

Although advanced chips represent the latest technology, their use depends on a foundation built by older semiconductors.

The Commerce Department defines these legacy chips as semiconductors built on nodes that are 28 nanometers or larger. They are considered fundamental because they are essential to almost every electrical device, from smartphones to household appliances, medical equipment and military vehicles.

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For example, a smartphone uses 160 to 170 chips, but only three of those are considered advanced, according to Silverado’s research. GPS, Wi-Fi, battery life, and camera controls are just a few of the features that depend on legacy chips.

“There is virtually no application that requires an advanced chip that can function without a core set of chips,” Stewart said. “They go hand in hand.”

However, Biden officials have focused their efforts on producing advanced chips over old ones, in large part because China lags far behind in this technology.

The Commerce Department has announced a total of $3.4 billion in investments to strengthen the U.S.’s ability to produce legacy chips, according to official data. This is a third of the incentives that were allocated to leading semiconductors.

National security is one of the reasons for the emphasis on denying China advanced chips. Commerce Secretary Gina Raimondo said the administration’s export controls are aimed at hindering Chinese advances in artificial intelligence, military systems and mass surveillance.

“Supercomputing, AI technology, AI chips in the wrong hands are as deadly as any weapon we could offer,” Raimondo said at the Reagan National Defense Forum last year.

China ramps up production

China has sought to grow its domestic semiconductor industry for years, pouring billions of dollars into domestic players.

The current acceleration can be traced back to 2019, when the Commerce Department placed telecom giant Huawei on the entity list, cutting off overnight access to critical suppliers including Google ( GOOG ), Qualcomm ( QCOM ) and Broadcom ( AVGO ).

The 2022 export controls, which have all but banned American companies from supplying advanced chips and high-end equipment to China, have only fueled the country’s efforts.

Stewart said China has capitalized on Washington’s policy by ramping up production of legacy chips with the intention of expanding the country’s global market share, gaining influence over the US and controlling prices.

At the center of the effort is China’s National Integrated Circuit Industry Development Investment Fund, which has raised $52 billion to develop semiconductor manufacturing and design over 10 years, with a focus on older chips, according to a report by the Semiconductor Industry Association and BCG. It aims to raise another $40 billion by the end of the decade.

The industry also expanded on the backs of Western companies. China was the largest global importer of semiconductor manufacturing equipment in 2023, importing $15 billion more than its nearest competitor, Taiwan, according to Silverado.

Renewed fears over legacy chips

China’s increased manufacturing capacity has raised alarm bells among policymakers and industry leaders.

This month, California lawmakers signed a letter urging the Commerce Department to end unilateral export controls, saying further controls “could send longstanding American companies into a death spiral.”

Some, including Intel CEO Pat Gelsinger, have warned of the repercussions of sweeping export controls, saying too many restrictions risk speeding up China’s timetable for chip production.

“If this line is too restrictive, then China has to build its own chips,” he said, speaking at Computex in Taiwan.

Earlier this year, the Commerce Department launched a review of the country’s supply chains to better understand how American companies source their core chips.

And a few months ago, the Defense Department imposed its own procurement restrictions on government agencies, barring them from using chips sourced from China starting in 2027. The National Defense Authorization Act also banned transactions with entities that use Chinese chips in critical defense and intelligence. system products.

The European Commission has also taken note of questioning the companies to better understand how Chinese firms are using older chips to undermine them, according to multiple reports.

According to Reva Goujon, director at Rhodium Group, countering China’s semiconductor ambitions will ultimately require additional political support and cooperation among US allies.

“The US needs to effectively create an ex-China market for chips to guarantee demand among the US and trusted partners,” Goujon said. “The sustainability of the AI ​​boom is a major variable, as is the US election. Either a Harris administration carries through that plurilateral momentum or we see new fractures and leaking controls from a Trump 2.0 polarization of partners.”

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