Analysis: China faces ‘Sputnik’ moment as US export curbs hit chip ambitions

SHANGHAI, Oct 13 (Reuters) – Restrictions on U.S. exports of chip equipment to China are likely to lead to a “Sputnik” moment, prompting Chinese chipmakers to try creative engineering solutions and forge their own path, even and if it does not succeed commercially for a longer term, experts said.

Under sweeping new regulations announced by the Biden administration on Oct. 7, U.S. companies must stop supplying Chinese chipmakers with equipment that can produce relatively advanced ships unless they first get permission.

The measures are set to undermine China’s efforts to develop its own chip industry to reduce its reliance on foreign-made chips. China consumes more than three-quarters of the semiconductors sold globally, which will reach $556 billion in 2021, but produces about 15% of global production.

“Technological decoupling could serve as China’s Sputnik moment in innovation, forcing it to adopt a top-down and self-reliance approach, especially in semiconductors,” Citi economists said in a note, likening it to increase in spending and research seen in the United States after the Soviet Union launched the world’s first satellite.

The restrictions also come just before the upcoming Communist Party Congress in Beijing, at which President Xi Jinping is expected to secure an unprecedented third term.

The importance of technological self-sufficiency, already a priority for Xi for the past decade, will likely emerge as a key theme for this year’s congress.

The Boston Consulting Group estimated in 2021 that a country would need at least $1 trillion in upfront investment to build fully “self-sufficient” local chip supply chains.

The new restrictions are likely to prompt Chinese chipmakers to try to produce advanced chips using creative engineering solutions with older technologies that are not subject to sanctions, experts said.

That’s something China’s leading chipmaker Semiconductor Manufacturing International Corp (SMIC) ( 0981.HK ) has attempted in the past.

In late 2020 Washington barred it from acquiring an advanced chip-making tool called an EUV machine from Dutch company ASML ( ASML.AS ), which is critical to making chips using 7-nanometer process nodes.

While the sanctions are intended to prevent SMIC from producing advanced chips, some analysts have found signs that SMIC has nevertheless been able to produce 7nm chips by modifying simpler DUV machines that it could freely buy from ASML.

Experts say such efforts, however, are unlikely to produce commercially viable products for mass production.

“You can tweak some tools. People are creative. But what will the returns be? How can they achieve commercial volumes? Those are the questions,” says Marco Mezger, a consultant in Taiwan who tracks the global memory chip sector.

Experts say China’s equipment makers are four to five years behind their overseas counterparts, making them unsuitable as immediate replacements for equipment being lost by U.S. suppliers such as KLA Corp ( KLAC.O ), Applied Materials (AMAT.O) and Lam Research (LRCX.O).

Two other top Chinese chipmakers that could take a hit are NAND memory chipmaker Yangtze Memory Technologies Co Ltd ( YMTC ) and DRAM firm Changxin Memory Technologies Inc ( CXMT ).

YMTC and CXMT are both state-owned companies founded about 10 years ago and China’s best hopes to enter the global market, with leading players such as Samsung Electronics ( 005930.KS ) and Micron Technology ( MU.O ).

But neither company has achieved mass production at the cutting edge, although they have made strides – with YMTC claiming to have developed 232-layer NAND and CXMT moving towards mass production of 10nm DRAM.

SMIC, YMTC and CXMT did not respond to requests for comment.

WINTER IS COMING

Foreign toolmakers will also take a hard hit, as China’s efforts to nurture its domestic chip industry have been a boon for many of them.

KLA, Applied Materials and Lam Research earn about 30% of their revenue from China, which ranks as their top geographic market and also their fastest growing market.

Applied Materials said on Wednesday that restrictions on exports to China would result in a loss of $250 million to $550 million in net sales in the quarter ended Oct. 30, with a similar impact expected in the next three months.

“Until we see about $10 billion of fab set up in Ohio or Oregon, I see a lot of concern about our revenue next year,” a source at an equipment company told Reuters, referring to the CHIPS Act that provides subsidies of 52.7 billions of dollars in US chip production. and research.

Sources at toolmakers also said they are scrambling to comply with the new export restrictions, with some companies ordering a broad supply ban to avoid running afoul of the rules, which they say are ambiguous.

“If we follow the letter of the bill, the equipment companies may have to close their doors,” said one chip equipment vendor, who asked not to be named because of the sensitivity of the matter.

Washington is also trying to deal with the unintended consequences of its new export restrictions, people familiar with the matter said.

Hours before the new restriction took effect, South Korea’s SK Hynix ( 000660.KS ) said it had received U.S. permission to receive products for its chip manufacturing facilities in China without additional permission required by the new rules.

But business at toolmakers serving Chinese customers has already slowed dramatically, leaving their staff with little work but creating an opening for Chinese equipment makers seeking to catch up with their Western rivals, the sources said.

“Our top management team has told us to take it easy for a few months – we can still come to work, but it’s not mandatory,” said a source at a China-based overseas equipment company.

Report by Josh Horwitz. Editing by Miyoung Kim and Kim Coghill

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