Decoding China’s Escalation of the Chip War

In the ongoing technology dispute between the United States and China over the semiconductor industry, the United States has caused massive disruptions in the semiconductor supply chain. The central objective is clear: to make sure that while the world advances, China lags behind. from washington October 2022 Export control bans crippled the purchasing and production capabilities of Chinese companies such as Yangtze Memory Technologies Corp., International Semiconductor Manufacturing Corporationand HiSilicon. Following suit are US allies, including major chipmakers like Japan, Taiwan and the Netherlands. unofficially banned exporting its technology to Chinese companies.

Now China has offered its first retaliatory measure, changing the nature of the chip war. chinese government has restricted the largest US memory chip maker, Micron Technologies, to sell its products to “critical national infrastructure operators” in China. The move followed the conclusion of a seven week probe launched in March by the Cyberspace Administration of China (CAC). He CAC report quoted “significant security risks to China’s critical information infrastructure supply chain” posed by Micron products.

China’s retaliatory action came in the context of two events. First, the recently completed G7 summit in Hiroshima resolved to reduce risk and diversify critical technology supply chains, signaling the risks posed by China. Second, it followed Micron’s announcement that it would invest $3.6 billion in Japan.

The Micron ban effectively revived tensions between China and the US over the technology, despite statements by US President Joe Biden. predictions of an imminent thaw in relations with China. It can be seen as a signal from Beijing highlighting the importance of its domestic market, which the US and its allies cannot effortlessly bypass.

The reason behind China’s tit-for-tat

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China’s domestic chip production totals only 16 percent of the global semiconductor industry. In terms of dynamic random access memory (DRAM) and NAND chips, china part in global production it is 21 percent and 15 percent respectively. As the United States stepped up measures to reduce chip supplies to China, Beijing stepped up its efforts to indigenize its memory chip manufacturing and build local chip-making capabilities.

Just before setting up the probe of Micron’s products in March 2023, Chinese lawmakers sanctioned a plan to inject $1.9 billion into Yangtze Memory Technologies Corp (YMTC), China’s largest memory chip maker. With this funding, YMTC is expected to recover from the Washington shock and move closer to competitors such as Samsung and SK Hynix. According to the Shenzhen Special Zone Daily, Powev Electronic Technology Co, a Shenzhen-based high-tech storage packaging and testing company, is already produce memory chips and large-scale solid-state drives (SSDs).

Deciphering China’s changing strategies in the semiconductor sector through massive state-sponsored programs like big backyard, and the Council of State Document No. 8 of 2020, It is clear that Chinese ambitions to reduce dependence on the United States and its allies have been on the rise since the 2019 bans on Huawei and ZTE in the telecommunications sector.

Winners and losers

In offsetting the impacts of the US chip war on China, one of China’s crucial strategies is to increase foreign countries’ dependence on China’s chip market. Chinese manufacturers are the top destination for any chipmaker doing business. The apparent expulsion from the Chinese market of a foreign firm in the memory chip segment plays in Beijing’s favor for two reasons. First, Beijing’s retaliatory response gives Chinese regulators a sense of exclusivity in managing the attitude of chip vendors and manufacturers, encouraging companies not to act against China’s interests. Two, the removal of foreign suppliers from the domestic market will create space for emerging domestic giants in the memory chip segments. While manufacturers like SK Hynix and Samsung are heavily dependent on markets like China, the Chinese domestic market is large enough to accommodate emerging domestic chip companies.

Micron is a major leader in DRAM and NAND chips, counting China as its third largest market. Micron’s competitors in the Chinese market are South Korean giants Samsung and SK Hynix. Micron can easily be supplanted by South Korean chipmakers, making it an easier target for Chinese authorities.

In fact, the impact of Micron’s withdrawal from the Chinese market is likely to remain limited. from China 2016 National Security Law defines “critical national infrastructure” (the areas in which Micron products are now banned) as technology systems in sectors including telecommunications, transportation, defense, etc. Since most of Micron’s customers are consumer electronics companies in China like Lenovo, Xiaomi, Inspur Electronics, etc., it is more likely to harm US interests in the supply chain than Chinese ones.

Furthermore, the ban on carriers aligned with critical infrastructure may seriously hurt Micron’s revenue. Spillover effects, such as political risks and a lack of confidence in Micron’s products, will affect the choice and attitude of other buyers, leading to diversification of its suppliers and, most likely, a switch to local, different chipmakers. of South Korea’s dominant competitors.

A Chinese media platform, ijiwei, reported that the decision will greatly benefit Chinese memory manufacturers that compete directly with Micron, such as Ingenic, CXMT, YMTC and GigaDevice. Therefore, the ban is expected to boost the substitution process in the domestic memory chip sector.

The broader complexities of chip warfare

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China’s current strategy to achieve self-sufficiency is focused on memory and legacy chips, as it relies heavily on Dutch chipmaker ASML for its lithography tools to produce high-end chips. Therefore, China’s propensity to escalate the chip war will remain limited to those few segments where Chinese chipmakers are becoming increasingly self-sufficient. However, the rapid offensives facilitated by China’s authoritarian regime are indicative of the widening extent of the evolving technology divide, not between China and the US, but with other chipmakers as well. It’s obvious that Chinese actions, in the near term, may not be as retaliatory as US offenses, but how US responses will shape the chip supply chain puzzle remains to be seen.

Although Chinese regulators have described Micron’s bar as “a particular case” and insisted that China remains committed to “opening up” its market, the move broadly provides a glimpse into the evolving Chinese position in the tech war. The recent Chinese tactic undoubtedly shakes up Washington’s dominance in technological warfare and signals that the US is not unilaterally pushing to freeze and unfreeze ties.

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