US Sanctions Accelerating China Chip Self-Sufficiency

“Advanced AI capabilities – facilitated by supercomputing, built on advanced semiconductors – present US national security concerns because they can be used to improve the speed and accuracy of military decision-making, planning and logistics. They can also be used for cognitive electronic warfare, radar, signals intelligence and jamming. These capabilities can also create concerns when they are used to support facial recognition surveillance systems for human rights violations and abuses.”

The new restrictions require licenses, which will probably not be granted, for the export to China of AI processors made by Nvidia, AMD and Intel which were not covered by the BIS ruling made a year ago.

Nvidia's A800 processor, a dumbed-down version of its A100 top-of-the-line graphics processing unit (GPU) designed specifically to meet BIS requirements, is now on the Commerce Department's restricted list along with the A100 and other products.

The A800 has been a smash hit in China, with reports indicating it is often sold out. In August, Chinese companies including Alibaba, Tencent, Baidu and ByteDance ordered about US$1 billion worth of A800 processors to be delivered this year and another $4 billion worth to be delivered in 2024, according to news reports.

Only a fraction of these devices will likely be shipped before the new BIS restrictions take effect on November 16.

Technically, the BIS says that recent technological developments and analysis of the effectiveness of last year's ruling have caused it to remove“interconnect bandwidth” as a parameter for restricting chips. Instead, the new rules restrict the export of chips if they exceed a new“performance density threshold” designed to preempt future workarounds.

In other words, even though Nvidia's networked A800 is significantly slower than the A100 (30% slower according to an estimate published by electronics news website Tom's Hardware), it is too efficient for the Commerce Department's liking.

This can be seen as a failure of the original analysis that has been identified in the“ongoing assessment” mentioned by Under Secretary Estevez.

The Commerce Department was also caught flat-footed by Huawei's release in August of its new Mate 60 Pro 5G smartphone, which came equipped with a 7nm processor made by Chinese semiconductor foundry SMIC. Secretary Raimondo found the news, announced while she was in China,“incredibly disturbing.”

The Commerce Department wrongly assessed that 7nm chips could only be made using extreme ultraviolet (EUV) lithography systems monopolized by ASML and banned for sale to China.

But semiconductor industry executives and observers knew that 7nm chips can be made with previous generation deep ultraviolet (DUV) ArF immersion lithography systems made by ASML or Japan's Nikon that the Chinese chip makers had already widely purchased. In fact, ArF immersion lithography can produce chips at 5nm, a capability openly advertised on Nikon's website.

In September, Reuters reported that Raimondo told a US Congressional hearing that“We don't have any evidence that they [the Chinese] can manufacture 7nm (chips) at scale.” In October, Nikkei Asia reported that Huawei is planning to roughly double its smartphone sales to 60-70 million units in 2024 and that SMIC's 7nm production capacity might reach half that amount.

The Netherlands and Japan have stopped shipments of advanced DUV lithography systems to China in line with US export restrictions. That means that there is now a limit on how many 7nm or 5nm chips the Chinese can make, although the precise figure is unknown.

This is also true of the etching systems and other equipment now under US sanctions. It all means that the Chinese are now in a race to develop their own semiconductor production equipment before they reach full capacity at high yields using imported machines.

The Chinese are making, or trying to make, the entire range of semiconductor production equipment but still face serious lithography bottlenecks.

Shanghai Micro Electronics Equipment (SMEE), China's leading chip lithography equipment maker, is now expected to deliver its first 28nm capable ArF immersion lithography system by the end of this year. Founded in 2002, SMEE currently makes i-line (280nm), KrF (110nm) and ArF dry (90nm) lithography systems.

Taiwan's TSMC, the world's leading chip maker founded in 1987, introduced 90nm process technology in 2004, 28nm in 2011 and 7nm technology in 2019. That means SMEE, and thus its customers, are at least 12 years behind at 28nm but making progress. Using imported equipment, however, SMIC is only four years behind TSMC at 7nm.

Chinese makers of other types of semiconductor production equipment are also reportedly making gains. Advanced Micro-Fabrication Equipment (AMEC), which reported a 32% year-on-year increase in sales of its etching systems in the first half of 2023, now sources most of its components in China.

At Naura, which makes etch, deposition, cleaning and other types of equipment, sales were up 55% in the six months to June. Cleaning equipment maker ACM reported a 47% increase over the period. For full-year 2023, the China Electronic Production Equipment Industry Association (CEPEA) is forecasting a 38% increase in sales of semiconductor equipment made in China.

One Chinese industry source told Reuters,“Before the sanctions, top Chinese foundries would use a small amount of machines from Chinese suppliers, but they would really only experiment with new equipment when they would add new capacity. Now, foundries are testing out Chinese-made equipment for every foreign machine they own and if they find that it meets their needs, they replace all of them. They want as few foreign machines as feasible.”

Western tech CEOs have advised their governments and stated publicly that this import substitution was likely to happen in response to the bans, warnings that Raimondo's Commerce Department has chosen to ignore.

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In September, Digitimes summarized a TV broadcast by ASML's Peter Wennink who“stated that if Europe and the United States are unwilling to share technology, China will do it on its own. With a population of 1.4 billion, many of whom are highly intelligent, they are coming up with solutions that Western businesses have not yet considered. The restrictive policies of Western governments are compelling China to become highly innovative.”

In July, Intel CEO Pat Gelsinger told the Aspen Security Forum that“Right now, China represents 25% to 30% of semiconductor exports... if I have 25% to 30% less market, I need to build less factories, right? You can't walk away from 25% to 30% and the fastest-growing market in the world and expect that you remain funding the R&D and the manufacturing cycle.”

Intel CEO Pat Gelsinger is losing sales. Photo: The Next Platform

In May, Nvidia CEO Jensen Huang told the FT that“If [China] can't buy from . . . the United States, they'll just build it themselves.” Huawei's Ascend AI processors are approaching Nvidia standards, according to certain analysts and users of the devices in China.

In a Form 8-K filed with the US Securities and Exchange Commission (SEC) on October 17, Nvidia said this about the new BIS restrictions:

“The licensing requirement may impact [Nvidia's] ability to complete development of products in a timely manner, [and] support existing customers of covered products...[Nvidia] may seek a license for the customer but has no assurance that the [US government] will grant any exceptions or licenses, or that the USG will act on the request in a timely manner.”

The same day, SEMI, the US-based industry association, issued this statement:

“We recognize and appreciate that sustaining a robust US semiconductor sector is central to the administration's national security objectives. However, given the risks of unilateral and broad controls, we will continue to evaluate the consequences of these export controls and communicate to the administration the impacts to the global and US semiconductor supply chain.”

At the same time, Secretary Raimondo told NBC's“Meet the Press” that“We are trying to choke their [China's] military capacity. So if they feel that, that means our strategy's working. Certainly on my watch, we are not going to sell the most sophisticated American chip to China that they want for their military capacity.”

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