Skirting U.S. Export Controls, China Stockpiles U.S. Semiconductor Toolmaking Equipment

New Financial Reports Reflect Huge Profits from Selling to Chinese Chipmakers with Connections to the Chinese Military

The White House’s June 2021 supply chains report noted that the People’s Republic of China (PRC) relies on the U.S. and a couple of other companies/countries to purchase the tools that allow them to manufacture their own microchips. More specifically, three U.S. companies lead the global toolmaking industry: Lam Research, KLA, and Applied Materials. According to White House calculations, the semiconductor equipment manufacturing industry is dominated by the US (42 percent market share), Japan (31 precent) and the Netherlands (19 percent), concluding that “although there is a Chinese company producing every category of semiconductor manufacturing equipment, Chinese companies “do not have a notable share of any category,” with one exception (p. 49).

In other words, Chinese semiconductor manufacturers cannot operate without tools from the U.S. and a few other countries.

Consequently, the same White House report recommended, “The Administration should target and implement export controls on critical semiconductor equipment and technologies to address certain supply chain vulnerabilities.” (p. 80) Now, having taken limited action, U.S. policymakers are patting themselves on the back for intensifying some export controls.  For instance, in a recent hearing with the House Foreign Affairs Committee, BIS Under Secretary Estevez effectively denied that every node of chip – including those over 14 nanometers in size which are found in virtually all technologies – would be a target of future U.S. government export controls.

The problem is that the delay in issuing the regulations and, more importantly, the narrow scope of U.S. export controls means that PRC chipmakers (such as SMIC, CXMT, and YMTC) have continued to stockpile American toolmaking equipment. This is clear from Reuters reported reporting on April 20 that these U.S. companies “expect sales to Chinese companies to increase in the coming months despite the U.S. imposing sweeping restrictions on China’s semiconductor sector in October.”

More evidence from American toolmakers cashing in from a quarterly earnings call the Lam Research CFO held recently, in which he pointed to “customer cash and advanced deposits” from “domestic China” customers (which we can assume to mean SMIC, CXMT, YMTC, all of which are connected to the Chinese military). It’s not just LAM that is profiting from and collaborating with Chinese companies. According to the IEEE Technology Blog, “the three US toolmakers generated around 30 percent of their total sales last year in China” (per ChipInsights) and all three collectively sponsored China’s 25th Integrated Circuit Manufacturing Annual Conference in Guangzhou just last week. 

Incredibly, the US export controls were even less restrictive that the US toolmakers originally thought, allowing for additional sales of a few hundred million. Reuters reports that [Lam] “said it had received a ‘clarification’ of the rules from the U.S. government that Chief Financial Officer Doug Bettinger said during a conference call would allow Lam to sell ‘a few hundred million dollars’ worth of tools that it initially thought were banned.”

The problem with all of this is that American toolmakers are giving China the means to dominate the global semiconductor business, especially at the legacy level (read why that would be such a disaster for the U.S. and the world in CTT’s recent in-depth report). For the sake of U.S. national and economic security, the Biden Administration and Congress must take the threat of a Chinese-dominated legacy chip sector seriously and do more to close export control loopholes.