China’s access to semiconductors and chip manufacturing equipment continues to tighten due to U.S.-led efforts to restrict the country’s advanced chip industry. Trade data indicates that exports of U.S. semiconductor manufacturing equipment to China plunged by around 50% during Q4 2022 after export restrictions were imposed in October. Exports of chipmaking equipment from the Netherlands and Japan fell by 44% and 16% respectively over the same period. Overall chip imports to China decreased by around 23% or $28.6 billion in Q1 2023 compared to the same period in 2022 due to the ongoing trade restrictions.
New restrictions will further impact Chinese chip access
The decline in Chinese semiconductor imports looks set to continue as Japan prepares to pass a measure which will restrict the types of chip-making equipment that can be exported to China. The trade restriction will come into place on July 23 and will require semiconductor manufacturers to apply for licenses to export 23 different types of equipment to China. The restrictions will apply to shipments of ultraviolet lithography and etching equipment used for the manufacture of advanced chips below 14nm.
However, Chinese companies have warned that the Japanese restrictions appear wider in scope than those announced by the U.S. and the Netherlands and could impact shipments of simpler chipmaking equipment intended for the manufacture of less-advanced semiconductors as large as 45nm. Such restrictions could end up impacting the production operations of less-advanced chipmakers in China and lead to a disruption in the supply of more common chips used in smartphones and everyday household electronics.
In addition to Japan’s trade restrictions, the U.S. has also continued implementing measures to restrict China’s semiconductor industry. Most notably, the U.S. Commerce Department has introduced a proposed set of funding rules that would limit the ability of semiconductor companies to invest in countries of concern including China while receiving subsidies from the recently passed CHIPS Act. These new rules would prevent recipients of U.S. semiconductor subsidies from engaging in joint research projects with Chinese semiconductor firms and would also prevent CHIPS subsidy recipients from expanding their manufacturing operations in China by more than 5% over the next ten years.
Risks increase for semiconductor companies
The escalating geopolitical tensions surrounding China’s semiconductor industry have negatively impacted several American companies in the chipmaking sector. Major U.S. semiconductor firms have all seen revenue declines of between 4% to 9% in the quarters after U.S. chip restrictions were implemented.
Japanese semiconductor manufacturers are also expected to take a financial hit due to the upcoming export restrictions. Trade data from 2021 indicated that Japanese semiconductor equipment companies are much more reliant on Chinese customers than their American and Dutch counterparts, with China accounting for 39% of the country’s total semiconductor exports compared to 23% for the U.S. and 12.5% for the Netherlands
South Korea has indicated that it is less willing to support U.S. chip controls as China accounts for around 40% of the country’s total semiconductor exports. The Korean government has also begun pushing the U.S. to review its plans to implement investment restrictions on companies that receive subsidies from the CHIPS Act.
South Korea’s efforts to appease both sides could end up providing China with an alternate source of memory chips and less advanced chip making equipment in the short-term. However, South Korea is unlikely to provide China access to the most advanced chips and chipmaking equipment due to its existing ties with the United States, indicating that China should continue to see a decline in its advanced chip making capabilities.
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