Breakingviews -tech chip curb risks lower-tech blowback

HONG KONG, Oct 11 (Reuters Breakingviews) – Washington’s sweeping technology curbs on China today will have ripple effects across global supply chains tomorrow. The export controls unveiled by the U.S. Department of Commerce on Friday will effectively block the People’s Republic from developing its own advanced semiconductors needed for supercomputers and the like. But the ban may prompt Chinese chipmakers to hasten their progress in the commoditised parts of the market, embedding firms like Semiconductor Manufacturing International (0981.HK) in global supply chains.

The measures mark a huge escalation in President Joe Biden’s efforts to hobble Beijing’s chip advances. Essentially, any company that uses American equipment will be restricted from selling relatively high-tech semiconductors or tools to Chinese firms. And because nearly every factory relies on crucial hardware and software from U.S. suppliers like Lam Research (LRCX.O) and Applied Materials (AMAT.O), the latest move potentially sets back Chinese chipmakers by years, if not decades.

Yet this need not be the end of the $23 billion SMIC and its compatriots. In fact, most are quietly thriving by churning out low-tech chips that are seen as less politically sensitive. Notably, while the new U.S. rules target specific types of leading-edge memory and logic components to be restricted, so-called trailing-edge products, such as analog or discrete semiconductors commonly used in computers, gadgets and cars, fall under a grey area.

They may not be as lucrative as processors or memory units, but those chips are still a huge market to play for. Analog sales alone jumped by more than a third last year, to $74 billion, outpacing growth for logic and memory, according to the Semiconductor Industry Association. And even for lower-tech processors, demand is still strong in China. First-half revenue at SMIC jumped 53% year-on-year to $3.7 billion, despite the company being put on Washington’s so-called Entity List in 2020. Its Hong Kong stock is down roughly 14% this year, outperforming the $360 billion TSMC’s (2330.TW) 30%-plus slump.

Longer term, Chinese outfits could start grabbing a larger global share of this less flashy end of the market. One reason is that most governments are nudging the dominant chipmakers, TSMC, Samsung Electronics (005930.KS) and Intel (INTC.O), to prioritise leading-edge semiconductors. That leaves the rest of the market up for grabs. For all the talk about decoupling, Chinese firms could end up even more intertwined in supply chains.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

The U.S. Department of Commerce on Oct. 7 published a raft of new technology restrictions, including export curbs that aim to cut China off from certain semiconductor chips made anywhere in the world with U.S. equipment.

Under the new regulations, U.S. companies must cease supplying Chinese chipmakers with equipment that can produce relatively advanced chips — logic chips under 16 nanometers (nm), DRAM chips below 18 nm, and NAND chips with 28 layers or more — unless they first obtain a license.

The U.S. Bureau of Industry and Security within the Department of Commerce also added 31 Chinese companies to its so-called Unverified List for 60 days, which could trigger tough penalties. The government takes such action when U.S. authorities cannot complete on-site visits to determine if they can be trusted to receive sensitive U.S. technology, forcing U.S. suppliers to take greater care when shipping to them.

Editing by Antony Currie and Thomas Shum

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