China Inches Closer to Legacy Chip Dominance – Will the U.S. Government Act Fast and Strong Enough? 

A collection of recent headlines reinforces what China Tech Threat has been warning about for months – that the world is increasingly at risk of relying on China for its legacy semiconductor needs.

The news tells the story of China’s march to obtain total self-sufficiency in semiconductors. This month the world saw Huawei unveil a phone with a 7nm chip made by SMIC – a technological breakthrough that caught many by surprise. CNBC reports that revenue from China’s top chip equipment makers surged in the first half of the year. And Arrian Ebrahmi notes in The Diplomat that China is boosting the country’s tax credit for investments in semiconductor research and development by 20% – further incentivizing Chinese firms to help build an indigenous Chinese chip industry.

Most analysts of the Chinese chip sector believe China has a long way to go to achieve success and show leadership with cutting-edge semiconductors. That said, the Huawei news is all the more notable given that Huawei and SMIC are both on the Entity List and the U.S. issued export controls last October specifically targeted at China’s advanced chip capabilities (more on that next week as the one-year anniversary approaches).

What’s also notable is that U.S. action thus far has ignored legacy chips. As technology analyst Dan Wang wrote in the New York Times , “…a world in which Chinese companies dominate the production of mature chips — driven directly by American policy — hardly looks like a victorious outcome for the United States.” In essence, we helped push China toward a focus on developing its legacy chip sector. Earlier this summer, Beijing expanded subsidies for legacy chip production. Recently, CTT advisor and former Assistant Secretary for Industry and Analysis Nazak Nikakhtar told EE Times, that “SMIC (Semiconductor Manufacturing International Corp.) is building major capacity to flood the markets with cheap chips.”

The Under Secretary of the Commerce Department’s Bureau of Industry and Security, Alan Estevez, has previously downplayed the Commerce Department’s willingness to tackle the Chinese legacy chip sector. But that may not be the consensus view. Commerce Secretary Gina Raimondo recently acknowledged the significance of China’s legacy chip position. And according to Nikakhtar, there are “voices that are currently in the administration who want to take a tougher stance. They know that there are gaps in the laws that they want to tighten.”

Sadly, Nikakhtar commented, American chipmaking equipment producers “want to keep the status quo.” U.S. semiconductor equipment manufacturers have seen profits made in China surge in recent years, and are eager to keep the spigot turned on. As CTT documented in its recent report Cash Over Country, U.S. chipmakers “have succeeded in lobbying the U.S. government to permit them to sell some of the world’s most complex technology to Chinese government-aligned firms making legacy chips.” These firms’ sales to China undermine both American national security and economic interests. And in the long run, selling chipmaking tools to China also damages these companies’ own interests. As Nikakhtar says, “The ‘gravy train’ for U.S. chip companies will halt when China finishes ‘indigenizing’ the chip industry.”

The U.S. needs to play both defense and offense in tackling the Chinese legacy chip sector. A presumption of denial policy for all U.S. tech bound for the Chinese semiconductor industry should be a priority item for the members of Congress who recently expressed alarm at SMIC’s ability to build a 7nm chip and put forth strong recommendations to protect American national security and competitiveness. The U.S. must also use funds distributed under the CHIPS Act to supercharge legacy chip manufacturing inside our own borders. Absent these steps, an unwanted dependence on Chinese chips is bound to happen.

Be sure to visit our Substack for all CTT content!