China’s High-End Chip Industry Struggling After US Announces Microchip Export Ban

By Anne Zhang
Anne Zhang
Anne Zhang
Anne Zhang is a writer for The Epoch Times with a focus on China-related topics. She began writing for the Chinese-language edition in 2014.
and Olivia Li
Olivia Li
Olivia Li
Olivia Li is a contributor to The Epoch Times with a focus on China-related topics since 2012.
November 29, 2022Updated: November 29, 2022

News Analysis

After the United States announced the export ban on the sale of advanced chips to entities in China, the Chinese regime’s high-end chip industry finds it difficult to pursue its original research and production goals.

Under the new U.S. regulations, logic chips of 14/16 nanometers (nm) or below, DRAM memory chips of 18 nm half-pitch or less, and NAND flash memory chips with 128 layers or more, as well as manufacturing equipment and related items, must apply for a license from the U.S. Department of Commerce if they are to be exported to China.

As a result, Semiconductor Manufacturing International Corporation (SMIC), which manufactures the most advanced chips in China, has to halt its plan to explore advanced chip processes.

A lower nanometer processor means more tightly packed transistors, lower power consumption, and higher performance. Presently, 28 nm is the dividing line between mature and advanced processes, and 28 nm and above are called mature processes.

Engineer holding a chip
An engineer holds a chip at the Taiwan Semiconductor Research Institute in Hsinchu, Taiwan, on Feb. 11, 2022. (Ann Wang/Reuters)

In a press conference on Nov. 11, SMIC Co-chief Executive Officer Zhao Haijun said that because the delivery time of some production equipment can be as long as 16 months to two years, SMIC plans to increase its spending by $1.6 billion to raise the prepayment deposit for equipment, to increase the chance of on-time delivery.

Between September 2020 and July 2021, SMIC announced its plan to create three 12-inch fabs in Shanghai, Shenzhen, and Beijing, primarily using mature processes of 28 nm and above. The increase in budget spending that Zhao mentioned is mainly for the equipment prepayment for these three projects.

On Dec. 18, 2020, SMIC was officially added to the U.S. Bureau of Industry and Security (BIS) Entity List, restricting its access to chip manufacturing equipment for processes below 10 nm, dealing a devastating blow to SMIC’s plan to develop advanced processes below 7 nm.

The company had already announced mass production of 14 nm chips in the fourth quarter of 2019. However, the new U.S. regulation extends the scope of export control to include 14/16 nm and below manufacturing equipment, further limiting SMIC’s 14 nm chip production capacity.

In a Nov. 17 article, Tom’s Hardware, an online tech publication, speculates that SMIC “could possibly come up with a 17 nm fabrication process” to circumvent the U.S. sanctions.

However, shifting from 14 nm to 17 nm would require SMIC’s customers to significantly change their existing design solutions to meet specific performance and power consumption targets at thicker nodes. In addition, lower transistor density also means a larger die size, which affects cost, yield, and package size. This change not only requires a lot of money, but is also time-consuming and challenging to implement.

SMIC Lowers Profit Forecast

So far, a month following the new U.S. sanctions, SMIC has already lowered its revenue forecast.

In its third-quarter earnings report released on Nov. 11, SMIC stated that due to weak market demand and the U.S. chip export ban, the company’s revenue is expected to decline 13-15 percent in the fourth quarter compared to Q3. The company’s gross margin is also expected to decrease from 38.9 percent in Q3 to 30-32 percent in Q4.

In Q3, SMIC’s production line utilization rate was 92.1 percent, down 5 percentage points from the second quarter’s 97.1 percent. Zhao warned that SMIC’s capacity utilization would further decline in Q4.

“Some of our U.S. customers are hesitant to place orders at this time,” Zhao said at the press conference. As a result, SMIC was forced to slow down some operations, including reducing wafer production.

According to SMIC’s financial reports, North American customers, including Qualcomm and other companies, accounted for about 20 percent of SMIC’s revenue in Q3 this year.

Worse Situation for Yangtze Memory Technology Corp

Compared to SMIC, China’s largest memory chipmaker, Yangtze Memory Technology Corp (YMTC), was hit even harder by the U.S. ban.

According to the Chinese edition of Financial Times, YMTC has issued at least 20 tenders for a range of chip manufacturing equipment since the latest U.S. export control regulations were issued.

Epoch Times Photo
Employees make chips at a factory of Jiejie Semiconductor Company in Nantong, in eastern China’s Jiangsu Province, on March 17, 2021. (STR/AFP via Getty Images)

YMTC is the world’s sixth-largest NAND flash memory chipmaker. The company’s second chip plant will be in production by the end of this year, expanding its capacity for 128-layer or more advanced 3D NAND flash memory chips to close the gap with Samsung and Micron. However, as the new U.S. sanctions also target the export of manufacturing equipment for NAND flash memory chips with 128 layers and above, YMTC’s strategic plan is facing a significant crisis.

Moreover, after the new rules were issued, the U.S. equipment suppliers pulled their engineers and staff out of their semiconductor plants in China. This means YMTC will no longer be able to get technical support and maintenance assistance from the equipment suppliers.

YMTC is also one of several Chinese tech companies that have come under U.S. scrutiny due to security concerns.

According to Reuters, along with 30 other Chinese companies, YMTC was added to an “unverified” trade list in October and is currently under investigation by the U.S. Department of Commerce, as it has allegedly supplied cellphone chips to telecom giant Huawei, another blacklisted company. Due to its military ties, Reuters claimed that YMTC could be added to the Entity List by Dec. 6.

While SMIC and YMTC could choose non-U.S. equipment manufacturers, such as Netherlands-based ASML and Japan’s Tokyo Electron, Gregory Allen, AI Governance Project director, told Time that these companies “generally specialize in different technological areas and don’t sell products that replace U.S.”

He believes there is no viable alternative to replace U.S. technology, at least in the short term. “Loss of access to U.S. chips puts China’s entire future as an AI superpower in jeopardy,” he said in the article.

Possible Expansion of US Sanctions

Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. John Cornyn (R-Texas) were heavily lobbying for a ban on U.S. government business with Chinese chipmakers, further pressuring China’s chip industry, according to a Nov. 17 report by Politico.

The Schumer-Cornyn proposal, if passed, would broaden provisions in Section 889 of the National Defense Authorization Act (NDAA).

First passed in the 2019 NDAA, Section 889 mainly targets Chinese tech giants such as Huawei or ZTE. But the lawmakers’ proposed amendment would grow the targeted list to include SMIC, YMTC, and ChangXin Memory Technologies, Politico revealed.

Olivia Li is a contributor to The Epoch Times with a focus on China-related topics since 2012.