Deciphering China’s Chip War Escalation – The Diplomat

In the ongoing technology struggle between the United States and China over the semiconductor industry, the US has caused massive disruptions to the semiconductor supply chain. The main goal is clear: to ensure that while the world moves forward, China stays behind. Washington October 2022 export bans have undermined the purchasing as well as manufacturing capabilities of Chinese firms such as Yangtze Memory Technologies Corp., International Corporation for the production of semiconductorsand HiSilicon. Following suit, US allies, including major chip manufacturers such as Japan, Taiwan, and the Netherlands, unofficially banned exporting their technologies to Chinese firms.

Now China has proposed its first retaliatory measure, changing the nature of the chip war. Chinese government restricted the largest U.S. memory chip manufacturer, Micron Technologies, from selling its products to “National Critical Infrastructure Operators” in China. This step followed the conclusion seven weeks probation launched in March by the Cyberspace Administration of China (CAC). CAC report cited “significant security risks to China’s critical information infrastructure supply chain” posed by Micron products.

China’s response came against the backdrop of two events. First, a recently concluded G-7 Summit in Hiroshima decided to reduce risks and diversify the supply chains of critical technologies, pointing out the risks associated with China. Second, it followed Micron’s announcement of its intention to invest $3.6 billion in Japan.

The Micron ban has effectively reignited tensions between China and the US over technology, despite statements from US President Joe Biden. predictions about the imminent thaw in relations with China. This can be seen as a signal from Beijing, highlighting the importance of its domestic market, which the US and its allies cannot easily bypass.

Rationale for China’s “Tit for an Tat” Policy

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China’s domestic chip production totals only 16 percent global semiconductor industry. From point of view dynamic random access memory (DRAM) and NAND chips, share of China in world production is 21 percent and 15 percent, respectively. As the United States stepped up its efforts to cut chip shipments to China, Beijing stepped up its efforts to localize its memory chip production and build up its own chip manufacturing capacity.

Shortly before the start of the investigation into Micron products in March 2023, Chinese politicians authorized the plan a $1.9 billion investment in Yangtze Memory Technologies Corp (YMTC), China’s largest manufacturer of memory chips. With this funding, YMTC is expected to recover from the Washington shock and move closer to rivals such as Samsung and SK Hynix. According to Shenzhen Special Zone Daily, Povev Electronic Technology Co, a high-tech storage packaging and testing firm based in Shenzhen, has already memory chip production and solid state drives (SSD) on a mass scale.

Deciphering China’s changing strategies in the semiconductor sector through massive government-sponsored programs such as big fund, and State Council Document no. 8 2020, it is clear that Chinese ambitions to reduce dependence on the United States and its allies have grown since then. Bans on Huawei and ZTE in 2019 in the field of telecommunications.

Winners and Losers

To offset the impact of the US chip war on China, one of China’s most important strategies is to increase the dependence of foreign countries on the Chinese chip market. Chinese manufacturers are the main focus for any chip manufacturer doing business. The apparent exclusion of a foreign firm from the Chinese market in the memory chip segment works in Beijing’s favor for two reasons. First, Beijing’s response gives Chinese regulators a sense of exclusivity in the treatment of chip suppliers and manufacturers, encouraging firms not to act against China’s interests. Second, the removal of foreign suppliers from the domestic market will create space for new domestic giants in the memory chip segment. Although manufacturers such as SK Hynix and Samsung are heavily dependent on markets such as China, China’s domestic market is large enough to accommodate new domestic chip makers.

Micron is a major leader in the manufacture of DRAM and NAND chips and considers China as its supplier. third largest market. Micron’s competitors in the Chinese market are South Korean giants Samsung and SK Hynix. Micron can be easily replaced by South Korean chipmakers, making it an easier target for Chinese authorities.

In fact, the impact of Micron’s departure from the Chinese market is likely to remain limited. China National Security Act of 2016 defines “critical national infrastructure” – areas in which Micron products are now banned – as technology systems in sectors including telecommunications, transportation, defense, etc. Since most of Micron’s customers are Chinese consumer electronics companies such as Lenovo, Xiaomi , Inspur Electronics, etc., it is more likely to harm US interests in the supply chain, not the Chinese.

What’s more, a ban on operators associated with critical infrastructure could seriously undermine Micron’s revenue. Side effects such as political risks and distrust of Micron products will influence other buyers’ choices and attitudes, leading to diversification of their suppliers and most likely a move towards domestic chip makers rather than dominant South Korean competitors.

One Chinese Media Platform, Ijiway, informed that this decision will greatly benefit Chinese memory manufacturers that directly compete with Micron, such as Ingenic, CXMT, YMTC and GigaDevice. Thus, the ban is expected to stimulate the replacement process in the domestic memory chip sector.

Uncovering the intricacies of the chip war

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China’s current strategy to achieve self-sufficiency is focused on memory and legacy chips, as it is heavily dependent on Dutch chipmaker ASML for its lithographic tools to produce high-performance chips. Thus, China’s propensity to escalate the chip war will remain limited to the few segments in which Chinese chip makers are increasingly becoming self-reliant. However, the rapid advance, fueled by China’s authoritarian regime, is indicative of a growing technological alienation, not between China and the US, but with other chip makers. Clearly, China’s actions in the short term cannot be as retaliatory as those of the United States, but it remains to be seen how the United States’ retaliatory actions will further shape the chip supply chain mosaic.

While Chinese regulators have described the bar for Micron as “special case” and insisted that China remains committed to “opening up” its market, the move as a whole provides insight into China’s changing stance in the technology war. Recent Chinese tactics certainly undermine Washington’s dominance in the technology war and signal that the United States is not unilaterally initiating freeze and thaw ties.