Unlocking China’s Vulnerability in the Semiconductor Industry
Introduction:
China, with its robust technological advancements, faces a critical vulnerability in its reliance on American technology for chips powering its advanced projects and institutions. This article explores the extent of China’s dependence on American inputs and the implications this has on its strategic position in the global semiconductor market. It also discusses how the United States leveraged its dominance in the semiconductor supply chain to exert control over Chinese tech giants like Huawei. The article highlights the role of export control laws and the actions taken by the Trump administration to limit China’s access to semiconductors. Furthermore, it delves into the consequences faced by Huawei and its decline in market share due to these restrictions. Finally, it examines the October 7 rules introduced by the Biden administration, emphasizing the need for a more comprehensive approach in targeting industries rather than individual companies.
The Critical Vulnerability: Dependence on American Technology:
– Despite decades of effort and significant investments in local innovation, China still depends on American technology for its most advanced projects and institutions.
– China’s domestic chip producers supplied only 15.9 percent of the country’s total demand in 2020, while the majority came from American sources.
– Chinese tech giants, including Huawei, heavily rely on chips made in the United States or with American components.
Leveraging Power: The United States’ Control over the Semiconductor Market:
– The Trump administration added Huawei to the entity list in 2019, limiting its access to semiconductors, software, and essential supplies from the US.
– This move demonstrated the United States’ understanding of its power in the global semiconductor market.
– The market for chip design software and advanced chipmaking tools is concentrated among a few American companies, giving the US effective control over essential processes.
– The supply chain for chips runs through the US, US treaty allies, or Taiwan, creating a US-dominated ecosystem.
Export Control Laws as a Tool of Control:
– The Trump administration utilized the foreign direct product rule (FDPR) to further restrict Huawei’s access to semiconductors.
– The FDPR extended US controls over foreign-made items, even if they contained no US-origin components, but were produced using US technology or software.
– This radical assertion of extraterritorial power impacted semiconductor manufacturing worldwide, as most smelters use US tools to some extent.
Consequences for Huawei:
– Huawei, previously the world’s largest smartphone seller, saw its revenue plummet by nearly a third in 2021.
– The company was virtually cut off from semiconductors due to the application of the FDPR.
– Huawei’s market share declined from 18 percent in 2020 to just 2 percent in 2022.
– To stay afloat, Huawei had to sell one of its smartphone brands.
Expanding Measures: The October 7 Rules:
– The Biden administration introduced the October 7 rules as an “interim final rule” to address perceived weaknesses in Huawei’s controls.
– These measures aimed to create surprise and enhance the effectiveness of restricting access to semiconductors.
– The United States recognized that blocking a company would only create space for new competitors, necessitating a more comprehensive approach targeting industries rather than individual companies.
Additional Piece:
Navigating the Technology Power Play: Lessons from the Semiconductor Industry
The semiconductor industry has become a battlefield in the technological power play between China and the United States. The strategic control over semiconductors, essential components for advanced projects and industries, has significant implications for national security, economic influence, and global dominance. As the United States tightened its grip on the semiconductor supply chain, China found itself facing a critical vulnerability that could hamper its technological progress.
The reliance on American technology and the US-dominated ecosystem within the semiconductor industry expose China to significant risks. The case of Huawei serves as a cautionary tale for Chinese tech giants that heavily rely on chips made in the United States or with American components. The restrictions imposed on Huawei’s access to semiconductors proved detrimental to its market share, revenue, and overall competitiveness.
However, these developments also shed light on the broader dynamics of the technology power play. The United States’ control over the semiconductor market demonstrates not only its ability to exert leverage but also its forward-thinking approach in targeting industries rather than individual companies. By understanding the intricacies of the semiconductor supply chain, the US administration effectively restricted Huawei’s access to essential components, forcing it to struggle for survival.
To navigate this power play successfully, countries need to assess their vulnerabilities and work towards achieving technological self-sufficiency. Investing in R&D, nurturing local innovation, and diversifying supply chains become imperative to reduce dependence on foreign technology. Initiatives that promote collaboration between industries, academia, and governments can facilitate the development of domestic semiconductor capabilities.
Moreover, the semiconductor industry’s evolving landscape presents opportunities for countries to position themselves strategically and gain a competitive edge. Creating an ecosystem that fosters innovation, supports startups, and attracts global talent can help countries establish themselves as major players in the semiconductor space.
As the semiconductor industry continues to evolve, it is crucial for governments and industry stakeholders to proactively adapt to these changes. Anticipation, agility, and foresight will be the key ingredients for success in this technology-driven power play. By leveraging their unique strengths, countries can harness the potential of semiconductors to drive economic growth, secure national interests, and shape the future of technology.
Summary:
China’s strength in advanced projects and institutions is accompanied by a crucial vulnerability—their reliance on American technology for chips. Despite efforts to promote domestic innovation, China’s chip producers only supplied 15.9 percent of the country’s demand in 2020. The United States leveraged its dominance in the semiconductor supply chain, blocking Huawei’s access to semiconductors and causing a significant decline in the company’s market share. Export control laws, such as the foreign direct product rule, extended US controls over foreign-made items. The October 7 rules introduced by the Biden administration aimed to create surprise and target industries rather than individual companies. To navigate the technology power play, countries must invest in R&D, nurture local innovation, and diversify supply chains. The evolving semiconductor industry presents opportunities for countries to establish themselves as major players by fostering innovation, supporting startups, and attracting global talent. Anticipation, agility, and foresight are crucial in this technology-driven power play.
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Beneath China’s strength, however, is a crucial vulnerability: Nearly every chip powering the country’s most advanced projects and institutions is inextricably linked to American technology. “The entire industry can only run on American inputs,” says Miller. “In every facility that is remotely near the cutting edge, there are American tools, American-designed software, and American intellectual property throughout the process.” Despite decades of effort by the Chinese government and tens of billions of dollars spent on “local innovation,” the problem remains acute. In 2020, China’s domestic chip producers supplied just 15.9 percent of the country’s total demand. As recently as April, China spent more money importing semiconductors than oil.
The United States fully understood its power over the global semiconductor market in 2019, when the The Trump administration added Huawei, a major Chinese telecommunications manufacturer, to the entity list. Although the listing was ostensibly a punishment for a criminal offense (Huawei had been caught selling sanctioned materials to Iran), the strategic benefits were immediately apparent. Without access to semiconductors, software and other essential supplies from the US, Huawei, the world’s largest producer of telecommunications equipment, had to struggle to survive. “The sanctions on Huawei immediately drew the curtain,” says Matt Sheehan, a fellow at the Carnegie Endowment for International Peace who studies China’s tech ecosystem. “Chinese tech giants are powered by chips that are either made in the United States or have deeply American components.”
Export control law had long been seen as a dusty and arcane backwater, far removed from the actual exercise of American power. But after Huawei, the United States discovered that its primacy in the semiconductor supply chain was a rich source of untapped leverage. Three companies, all located in the US, dominate the market for chip design software, which is used to arrange the billions of transistors that fit on a new chip. The market for advanced chipmaking tools is similarly concentrated, with a handful of companies able to claim effective monopolies on essential machines or processes, and almost all of these companies are American or rely on American components. At every step, the supply chain runs through the US, US treaty allies or Taiwan, all operating in a US-dominated ecosystem. “We ran into that,” says Sheehan . “We started using these weapons before we really knew as to use them.”
In May 2020, the Trump administration tightened the screws even further, this time subjecting Huawei to a previously obscure provision of export control law called the foreign direct product rule. Under the FDPR, foreign-made items are subject to US controls if they were produced using US technology or software. It’s a radical assertion of extraterritorial power: even if an item is manufactured and shipped outside of the United States, never crossing the country’s borders, and contains no US-origin components or technology in the final product, it can still be considered a product. US. good.
For Huawei, the application of the FDPR meant that the company was virtually cut off from semiconductors. “That rule brought every semiconductor on the planet under US law, because every smelter on the planet uses US tools, at least in part,” says Kevin Wolf, former assistant secretary of commerce for the BIS Export Administration. “If you have one US tool and 100 non-US tools in your factory, that contaminates any wafer that moves through the line.”
In 2020, according to the market analysis firm Canalys, Huawei was the largest smartphone seller in the world, with a market share of 18 percent, surpassing even Apple and Samsung. Huawei’s revenue plunged by nearly a third in 2021, as the company sold one of its smartphone brands in a bid to stay afloat. By 2022, their share had fallen to 2 percent.
The October 7 rules represented the sum of everything US politicians had learned about semiconductors, supply chains and American energy. The measures were announced as an “interim final rule,” meaning they took effect immediately, a direct reaction to a perceived weakness in Huawei’s controls. “There was a lot of notice before the Huawei rule went into effect, and they spent the time leading up to stockpiling,” says Peter Harrell, a former senior director for international economics at the National Security Council who was involved in crafting the 7 rules. October. . “That was a tactical lesson: that you need the element of surprise.” More important, the United States had learned that blocking a company, no matter how large, simply created space for new competitors to enter. A more comprehensive approach would be needed. “The Trump administration went after the companies,” says Allen, the CSIS expert. “The Biden administration is going after the industries.”
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