The US targets China’s potential chip stars with new restrictions
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In China’s southern tech hub of Shenzhen, workers at chip-making startup PXW Semiconductor Manufactory panicked after the US placed their company on a trade blacklist last week.
“Most of the team leaders and executives are in emergency meetings, but the rest of us are not allowed to discuss such a ‘sensitive’ matter,” one employee said, adding that their boss’s office door on Friday, a day after the US’s addition, PXW remained closed along with 35 other Chinese companies on the “Entity List”.
American suppliers are prohibited from exporting to companies on the list without a permit, and in many cases are likely to be refused. Analysts said the latest blacklist was “housekeeping” to close loopholes in sweeping measures imposed in October that allow Washington to block Chinese access to high-end chips and the talent and tools to make them.
“It’s a whack-a-mole game,” said Douglas Fuller, an expert on the Chinese chip industry at Copenhagen Business School. “Whenever Washington comes up with sanctions, new projects come up which they then try to block.”
The US began curbing China’s technological rise through export controls by listing Huawei in May 2019. Since then, Washington has added many more Chinese tech companies, including surveillance companies, chipmakers, drone developers, smartphone makers, and institutes suspected of supplying the People’s Liberation Army.
Some of the companies targeted over the past week, including PXW, are just beginning to build their semiconductor businesses, making them more vulnerable than established players like Huawei.
“The US government controls the Chinese semiconductor supply chain and knows who the priorities are and who has future potential,” said Brady Wang, a Taiwan-based analyst at research firm Counterpoint.
PXW has strong backing, including funding from the Shenzhen government and leadership from a former Huawei executive. The company has ordered equipment from various US companies that should arrive next year, but it may never receive it now, according to two employees at the company.
Another unexpected addition to the list is Hefei Core Storage Electronic, a company founded by former employees of Taiwanese chip design firm VIA Technologies to create a homegrown alternative to Intel-based PC processors. “It’s a nasty surprise,” said a Hefei Core Storage engineer. “Nobody expected us to be on their radar.”
A Western trade official said the US may have discovered that the Hefei firm is working on processors suitable for supercomputers or supporting China’s development of advanced memory chips – areas targeted by October’s controls.
“The US is developing an increasingly detailed understanding of the industry in China, including players you would have considered obscure,” the official said.
But the list also includes more prominent companies.
Yangtze Memory Technologies, China’s largest memory chip maker, was hit hard by the October inspections. The company has halted its expansion and has asked U.S. equipment makers to return down payments for tools previously ordered, a senior engineer at YMTC said.
“At that time we could still think about a withdrawal [making less advanced] Chips, but now our fate is pretty much sealed,” he said, citing the near impossibility of getting licenses for devices to expand production once they’re on the company list.
YMTC had already suspended talks with Apple about supplying memory chips for iPhones in China. Research firm TrendForce predicts it may be forced to exit the advanced 3D Nand Flash product market by 2024 as it has lost crucial support from toolmakers to compete with rivals in this particular memory technology.
Also present in Washington was a prominent developer of chip-making equipment: Shanghai Micro Electronics Equipment, which represents China’s only hope for the development of domestic lithography machines, the key advanced chip-making tool currently dominated by Dutch firm ASML.
The company’s lithography machines are based on imported components and have never been mass-produced. “There’s still a long way to go,” said a Shanghai official in charge of SMEE’s development project. However, the official pointed out that the company formed teams of experienced employees to replace ASML field workers who provided services but were later withdrawn due to US export controls.
“SMEE does not have personnel that are US persons like some other Chinese chip equipment manufacturers,” Fuller said. “Therefore, the controls included in the October measures are less effective for US persons.”
Another key addition is the Shanghai Integrated Circuit Research and Development Center, a venture believed to be linked to Huawei’s efforts to increase domestic chip manufacturing. Huawei denies its involvement.
“ICRD has been a long time coming,” the western trade official said. “We’ve been expecting for two years that they will be blacklisted because the US will try to crack down on any company that even comes close to Huawei’s chip development projects.”
None of the companies in this article have responded to a request for comment.
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The list also targets China’s development of high-performance chips. It includes chip design house Cambricon Technologies and its nine subsidiaries. It also subjects them and their incubator at the Chinese Academy of Sciences to a “foreign direct product rule,” which prevents them from receiving supplies or services that contain a certain amount of US technology.
Cambricon was funded by Alibaba and the Shanghai government before listing on China’s tech-focused Star market in 2020. It sources intellectual property from UK-based Arm and design tools from US vendors Cadence and Synopsys. It also relies on Taiwan’s TSMC to manufacture its chips.
“If tensions between China and the US heat up . . . this may have a significant adverse impact on the company’s future product development and supply chain,” Cambricon said in its latest fundraising document.
This fate could await other Chinese startups, analysts believe. “There’s a lot more on the chip design side,” Fuller said.
