New U.S. Export Controls Complicate Xi’s Tech Ambitions

Chinese Communist Party General Secretary Xi Jinping’s two-hour speech to the 20th CCP Party Congress on October 16th didn’t contain too many surprises. If anything, it’s clear Xi remains committed to stiff competition with the West for control of the commanding heights of modern technologies. That control will be harder to obtain in light of the new export controls the Commerce Department issued on October 7th.

Held every five years, the Party Congress gives CCP leaders a chance to set priorities for the Party. In one key passage, Xi stated, “To meet China’s strategic needs, we will concentrate resources on original and pioneering scientific and technological research to achieve breakthroughs in core technologies in key fields.”

Presumably, semiconductors would be one of these “key fields.” China has already subsidized chipmakers like YMTC to the tune of some $24 billion in hopes of crushing international competitors and forcing the world to depend on Chinese chips. Expect more support to flow to Chinese chipmakers as China pursues its “Made in China 2025” plan.

Additionally, Xi underscored the need to “achieve greater self-reliance and strength in science and technology.” While framed as a goal, he may have no choice but to embrace “self-reliance” in the realm of semiconductors. Analyst Jordan Schneider of the Rhodium Group tweeted that the new U.S. controls are already “wreaking havoc on China’s chip industry.”

Much of the damage is due to new rules that prevent U.S. personnel from working with Chinese chipmakers. Already scores of Americans are staying away as a result. Andrew Orlowski, writing for The Telegraph in the United Kingdom, wryly noted that “The suitcases were packed and the airport taxis booked as President Xi Jinping concluded his two hour acceptance speech.” Orlowski also wrote, “Today, the entire industry is asking two questions: can the China chip plants run without US staff and parts? And in the longer-term, can they catch up with Western technology? Neither will be easy to do.”

The Financial Times is also out with a report echoing the impact the restrictions on personnel working for YMTC:

  • One executive in the semiconductor industry said the choice amounts to, “You either give up your citizenship or quit your job.”
  • Another executive at a state-backed chipmaker said, “Now we are not just trying to build up ‘US-free’ manufacturing lines but also de-Americanise the teams.”
  • Another YMTC engineer lamented the loss of American engineers working on critical NAND memory chips but conceded, “But there’s no other way around [them leaving].”

The new export controls will only make Xi’s goal of Chinese supremacy in semiconductors more difficult. But this is far from game over. We fully expect the CCP and its allies to exploit loopholes and find workarounds. One Chinese chip start up thought it found a gap this weekend; though that one was swiftly quashed (at least for now). With this in mind, the U.S. Commerce Department must continue to follow through on the rules’ monitoring and enforcement provisions to ensure that they have their intended effect.