Is China Tech Doomed? (Part Three)

New Rule: U.S. persons restricted from working in Chinese semis

New to Daily Reflection on China? Please read this.

Subscribe to receive timely updates from on the ground in China.

Just hours ago when I was planning this post, the U.S. announced new restrictions on semiconductor exports to China. The U.S. Department of Commerce also added 30 Chinese tech companies to the Unverified Trade List (UVL), which could lead to further export controls.

The latest export restrictions clearly target high end semiconductors, and support my view that China will lose the high tech war with the U.S.

“The export controls announced in the two rules today restrict the PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.” U.S. Department of Commerce

The U.S. government did not give a clear definition of “advanced semiconductors.” They likely include artificial intelligence (AI), deep learning and supercomputing chips at the advanced nodes.

“Fresh restrictions on exports of U.S. chip technology to Chinese companies have provoked an angry reaction from Beijing, but beyond the rhetoric, China is expected to unleash a new wave of funding to boost domestic production of semiconductors.” Financial Times

What rhetoric? There is absolutely nothing rhetorical about this. Both the U.S. and China mean business now. And the Tech War is fully on. It also doesn’t matter how much more money Beijing pours into semiconductors. Money is not the problem, as I said before. They key is whether China has the right system and people to create technology innovation.

Here is an important detail from yesterday’s press release, which most media overlooked.

“Restricts the ability of U.S. persons to support the development, or production, of
ICs at certain PRC-located semiconductor fabrication ‘facilities’ without a license.”

Why is this important? There is a strong connection between advanced semiconductors in China and Chinese returnees from the U.S. I don’t know exactly how many engineers at Chinese semiconductor firms have a U.S. passport or green card. My guess is there are a lot, probably 10%, or maybe 20% of the core people that matter.

For example, Richard Chang the original founder of SMIC (688981.SS, 0981.HK) is a U.S. citizen. He now runs SiEN Integrated Circuits in Qingdao, which began semiconductor production in August 2021. SMIC is the most advanced fab in China. Under the new rule, “Richard Changs” of the world cannot help China make the next leap in semiconductors.

TSMC: Last Ray of Hope for China

“Commerce Department officials acknowledged that overseas cooperation is necessary to avoid hampering the initiatives and said there are talks with other parties underway around the world on the topic. The officials declined to characterize how advanced the negotiations are or how likely they are to result in similar actions in key countries, such as the Netherlands and Japan.” Bloomberg

It all comes down to TSMC (TSM, 2330.TW), the top founder in the world. Sure the U.S. continues tightening the screws on China. But the Chinese semiconductor industry will survive as long as TSMC continues to supply to China. This won’t change.