One of the latest steps in the US’ tech war with China has seen the Biden administration grant Korean chip giants Samsung Electronics and SK Hynix indefinite waivers on previous tech export bans (specifically, US chip technology) to China. While seemingly counterintuitive, the move is expected to help them dominate Chinese markets while discouraging Chinese tech from producing their own.
The waiver allows the two Korean companies to export American chip-making tools to their factories in China without requesting special licenses to do so. The South Korean chipmakers in China operate individually on the mainland and their lack of collaboration with local industry players is expected to be sufficient to stop China from benefiting from the waiver. Prior to this waiver, the two companies relied on a one-year waiver from the US to continue their business. The waivers were due to expire this month.
The requirement for a licence to export US chipmaking technology to China is the result of a sweeping set of regulations imposed by the current administration to limit China’s competitiveness in the high-tech semiconductor chip market. According to the Washington narrative, the US is concerned that an unobstructed technological flow to China would advance China’s military capabilities, which could threaten the US’ own sovereignty. The US’ reluctance to engage on equal military footing with the Asian giant has now therefore resulted in a tense war being fought on a commercial front, as China doubled down on the offensive by pouring millions of Yuan into increasing its own technological capabilities. China’s chip companies for example are seeing a massive surge in growth following the semiconductor industry’s own pursuit of self-reliance.
Semiconductors are a key component of most of the world’s tech products, from smartphones to microwaves, and are also a key point of contention in this new-age cold war between the two technological juggernauts. The US is also using export restrictions to cut China off from critical semiconductor technology.
The waiver is expected to affect China’s domestic memory chip makers such as Yangtze Memory Technologies Co (YMTC). Despite China’s assurance to the global market that the industry has no intention of submitting to the US’s sanctions, industry experts point to certain choke points where China depends on US technology in chip manufacturing. For example, it is said that China still does not possess a domestic alternative for the metrology tools supplied by the US. Another sensitive point in the domestic supply chain is the lithography systems provided by the Dutch and the Japanese. According to media reports, China is looking to invest in companies that solve these choke points one by one.
YMTC is said to be China’s best hope at competing in the global chip market following the US sanctions. Just earlier this year, the state-owned corporation received an investment amounting to $7 billion from state-backed investors and the ‘National Integrated Circuit Industry Investment Fund’. Whether the firm will be able to answer the call of the hour should make for an interesting observation. It does not do to underestimate either YMTC’s or China’s capabilities: just last September, Chinese smartphone giant Huawei launched a new 5G-enabled smartphone whose domestically produced processor was far more advanced than what outside experts believed China was capable of.
Samsung Electronics and SK Hynix, the beneficiaries of the new waiver are respectively the largest and second-largest memory chipmakers in the world. The waiver, which is an indefinite one, removes a significant source of anxiety for the two firms. In a statement, Samsung stated that:
“Through close coordination with relevant governments, uncertainties related to the operation of our semiconductor manufacturing lines in China have been significantly removed”.
SK Hynix also welcomed the US government’s decision, stating that it would contribute towards the stabilization of the global semiconductor supply chain. The two companies control nearly 70% of the global market for dynamic random access memory chips and 50% of the total flash memory chip market.
Both Samsung and SK Hynix are facing their own troubles, however, as the global demand for chips is showing a steady decrease. The global economic slowdown that followed the post-pandemic boom is even forcing chipmakers to slash production to avert the oversupply in the market. Samsung has also pivoted to producing its more profitable, higher-end chips while discontinuing its legacy products in an attempt to cut its losses. The chips currently receiving the attention of the company are its DRAM chip line, which is used in artificial intelligence technology. According to reports, the annual growth rate for AI-related chips is currently at an explosive 30%. However, SK Hynix has superseded Samsung in meeting this demand despite Samsung’s prior entry into the market.
US sanctions face domestic criticism
While competitive industry players obviously have much to criticise about the US move to dictate the market through policy interventions, it is not without its domestic critics. The free market philosophy dictates that market measures of demand are the most efficient in directing investment. A domestic US chip market propped up by national policy therefore has the risk of being overly reliant on government support and therefore uncompetitive on the global market. However, supporters point out that the US is actually the last to the table in a proven system.
The current largest players in the chip market for example – China, South Korea, Japan, and Taiwan – all gained the market leverage they now possess through both direct and indirect government intervention. China obviously operates as a planned economy and South Korea’s chaebol, family-run industrial conglomerates, worked and still work closely with the government to maximise market opportunities. Japan, the first country to overtake US chipmakers had government help in doing so and Taiwan, the world’s single largest producer of silicon chips had direct government intervention in 2003 to reach this status. The end result is that the US now provides for only about 12% of the global demand for chips.
Indeed, some members of the US Congress even argue that the current sanctions are nowhere near sufficient to protect the country’s interests. For example, they argue that China should be banned from using open-source technologies such as RISC-V. This is to prevent China from abusing open technology to “get around US dominance of the intellectual property needed to design chips” (Representative Michael McCaul, Chairman of the House Foreign Affairs Committee). However, RISC-V is a global standard and such, is not governed by any single company or country. Instead, it is overseen by a Swiss-based not-for-profit, which coordinates among the various private contributors to the technology. Experts warn that taking the US, and China technological war to such extremes will have implications that will even harm the US’ own interests.
(Theruni Liyanage)