[Peace&Chips] Despite Layered US Regulations, China's Loopholes Remain

Did US AMAT Supply Semiconductor Equipment to SMIC?
US Increases Regulations Annually... China's Response Also Evolves
Concerns Over China's Self-Sufficiency Amid Growing US Pressure

Last week, it was reported that Applied Materials (AMAT), a U.S. semiconductor equipment company, is under investigation for allegedly selling equipment to China's SMIC without authorization. SMIC is a foundry (semiconductor contract manufacturing) company that has been subject to U.S. export controls since December 2020. It is said that AMAT supplied equipment to SMIC through its South Korean subsidiary in 2021 and 2022 without permission from the U.S. Department of Commerce, after the regulations were applied.

If this news is true, it would reveal loopholes in U.S. sanctions. Although the United States imposes various regulations every year to curb China's semiconductor ambitions, it may indicate that perfect control is impossible. The fact that Huawei equipped its latest smartphone (Mate 60 Pro) with semiconductors produced using advanced 7-nanometer (nm; 1 nm is one billionth of a meter) processes despite U.S. pressure in August also supports this notion.

Why does the world's strongest country, the United States, lose face despite numerous efforts? The semiconductor industry says that no company can ignore China, the largest consumer market. Even looking at AMAT, China accounts for the largest share of sales by region. This year, China’s share of total sales reached 27%. Including 2021 (33%) and last year (28%), it has consistently maintained around 30%.

China’s desperate moves to survive "even if it means using gums without teeth" cannot be ignored either. China is producing advanced semiconductors using outdated semiconductor equipment and taking advantage of the time lag in U.S. regulations to stockpile various semiconductor products and equipment. In fact, the U.S. House of Representatives recently released a report stating that Chinese companies hoarded semiconductor equipment from allied countries such as the Netherlands and Japan in the first half of this year before export controls from those countries fully took effect. Tencent of China also revealed at its earnings announcement this month that it quickly ordered Nvidia’s AI semiconductor (H800) before U.S. regulations applied, accumulating a large inventory.

[Image source=Yonhap News]

Additionally, the fact that a vast and complex semiconductor supply chain is formed on a global scale, and that countries consider semiconductors as economic and security assets and are nurturing related industries, also makes unilateral regulation by a single country difficult. In many ways, it seems the United States is undertaking a challenging voyage to strengthen its position as a global hegemon.

There are concerns that this process might inadvertently accelerate China’s semiconductor self-reliance. Various reports containing related forecasts have been released one after another. In fact, KOTRA predicted in its report 'Current Status and Development Policies of China’s Semiconductor Industry' that China could improve its related technological capabilities and self-sufficiency through continuous semiconductor investment. It also stated that "(China) will focus on securing the technology, equipment, and materials necessary for developing advanced chips below 10 nm," and "China can strengthen overseas cooperation in fields where it has competitiveness, such as autonomous driving semiconductors."

Editor's NoteSemiconductors, often called the rice of modern industry. Although it is a term we hear every day, it is hard to explain when asked. Peace & Chips will make the difficult concepts and overall flow of the semiconductor industry easy to digest for you. Just place your spoon on it.