China’s tech sector is really suffering from US chip sales sanctions

Despite all the bravado rhetoric, China’s tech sector is actually feeling the impact of export restrictions imposed by the US last year, writes The Wall Street Journal. They were aimed at curbing Beijing’s progress in areas such as artificial intelligence (AI) and supercomputer technology. Sanctions are starting to have a significant effect, despite some loopholes and workarounds.

Decreasing imports

Customs data released by Beijing this month showed a sharp decline in semiconductor imports, which fell 22% in value terms in the first half of 2023 from a year earlier. Imports of chip manufacturing equipment fell 23%, extending last year’s decline. Leading chip-producing regions, including Taiwan, South Korea and the United States, accounted for most of the decline in Chinese chip imports.

Impact on Chinese companies

Chinese companies are trying to get the necessary components and equipment. Upgraded chipsets, made less powerful to meet US regulations, are now at risk of further restrictions. Inspur, a leading Chinese maker of artificial intelligence servers, has warned investors of a potential 30% drop in revenue in the first half of the year due to supply constraints.

Yangtze Memory Technologies, a leading Chinese manufacturer of memory chips, called on suppliers to deliver equipment it had already paid for. A major Chinese tool maker has said that sourcing certain components now requires applying for licenses through US suppliers, a process that can take months with no guarantee of success.

US Export Regulations

The U.S. export rules, announced Oct. 7, include limits on the power of certain processors used in artificial intelligence applications and supercomputers, as well as restrictions on the types of chip-making equipment, components and software that China can import.

Some Western companies are benefiting from China’s efforts to boost domestic chip production. ASML, a Dutch maker of lithography machines critical to chip production, posted a 27% rise in revenue in the second quarter, driven in part by sales to China.

At least two US giants, NVIDIA and Intel, have modified their products to meet export control requirements, releasing degraded versions of high-end AI computing chips for the Chinese market.

Further restrictions and countermeasures

The Biden administration is considering further restrictions, including increasing exports to China of chips used for artificial intelligence. Meanwhile, China has retaliated by restricting exports of gallium, which is used in some modern semiconductors. China’s ambassador to the US, Xie Feng, threatened further action, comparing the situation to an unfair swimming competition.

Analysis and future implications

Emily Benson, a senior fellow specializing in trade and technology at the Center for Strategic and International Studies think tank, said the controls make it harder and more expensive for China to obtain certain resources.

The restrictions also highlight the challenges China faces in developing domestic alternatives that could replace important foreign semiconductor technologies. Although Beijing has invested heavily in its domestic technology industry, it still lacks the ability to produce state-of-the-art chips, key elements of which are controlled by the US and its allies.

This situation highlights the complex relationship between trade, technology and geopolitics. The long-term success of the controls and their potential impact on accelerating China’s own efforts remain uncertain.

In a metaphorical statement, Ambassador Xie Feng described the situation: “It is like forcing the other side to wear outdated swimwear in a swimming contest while you yourself are wearing a Speedo Fastskin. It’s not fair”.