By Steve Coonen
Last week, Chairman Mike Gallagher of the House Select Committee on the Chinese Communist Party spoke a plain truth: “Every foreign business that enters China takes on a sometimes silent, sometimes not-so-silent business partner: the Chinese Communist Party.” This reality continues to play out in the legacy semiconductor space. The more that American companies are allowed to sell components and manufacturing equipment for legacy chips to China, the more power the CCP will acquire to shape American national and economic security. When it comes to focusing on the danger of advanced or legacy Chinese chips, the U.S. government should reject a false choice of “either/or.” It must embrace a “both/and” concept and act to prevent a looming Chinese monopoly on legacy chips.
In the months since the U.S.’s October 2022 export controls directed at China’s advanced chip manufacturing sector, China has responded by ramping up production of legacy node chips (those 16 nm or larger). State-funded legacy chipmaker SMIC, which supplies the PLA, is currently constructing four new factories. SMIC’s growth is all the more notable because the company was put on the Entity List in 2020, but the restrictions focused on advanced chips over legacy nodes.
According to research firm the Rhodium Group, “In the next 3-5 years China is due to add nearly as much new 50-180nm wafer capacity as the entire rest of the world.” The October 2022 controls, says Rhodium “should not obscure the fact that China is building significant capacity in semiconductor markets that rely on mature process nodes.” Technology analyst Dan Wang, writing for the New York Times this week, similarly stated “With one hand, the U.S. government is blocking China’s progress on A.I. and supercomputing, but with the other, it is ushering Chinese companies toward concentrating their efforts on chips for products of daily use. And 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.”
A theoretical U.S. dependence on Chinese legacy chips would be enormously damaging to U.S. national security. The U.S. would potentially be dependent on China for chips essential to various military technologies, critical infrastructure, and the automotive industry. And the CCP would have more new conduits for spying on, hacking, and stealing from targets in the West. As former National Security Advisor Robert O’Brien has written, “A single compromised chip in the right place can provide our adversaries with unfettered access to critical platforms.”
A China-led legacy chip industry would also expose America and the world to supply chain vulnerabilities associated with China-based chip production. I’m not just talking about the types of delays related to a pandemic or cyclical economic issues which the world has already endured. Rather, Beijing has already demonstrated a willingness to use economic coercion as a tool of statecraft. In 2020, when the Australian government demanded explanations for the origin of COVID-19, the CCP responded with blockades of Australian goods like barley, wine, and coal. This month, China announced it would impose its own controls on global exports of gallium and germanium, two critical rare earth metals necessary in high-tech manufacturing, including semiconductors.
China’s willingness to impose a chokehold on various products in order to gain geopolitical leverage accords with a statement CCP General Secretary Xi Jinping made three years ago: “We must tighten international production chains’ dependence on China, forming powerful countermeasures and deterrent capabilities based on artificially cutting off supply to foreigners.” Clearly, the Chinese playbook is to dominate key technologies, make foreign users dependent, and then coerce them in other areas of national interest by threatening to cut off supplies. One professor at Peking University has already foreshadowed an application of this strategy to the semiconductor sector by saying, “If China were to capture a major share of the world’s market for mature process chips, it would also gain a ‘bargaining position’: If the U.S. were to block 20 percent of advanced process products, we would reciprocate by blocking 80 percent of mature process products.”
In an ideal world, American companies which supply the tools Chinese companies need to make legacy chips would channel a sense of patriotism and not sell their know-how to China. But that’s not their reflexive attitude. “Industry is our primary line of defense,” says Thea Rozman Kendler, the assistant secretary of export administration at the Bureau of Industry and Security, who is testifying in front of Gallagher’s Subcommittee this week about “The Biden Administration’s PRC Strategy.” “We can do whatever we can in government to promulgate clear and concise and effective rules, but it’s industry that’s responsible for compliance and putting those rules into effect.” While American toolmakers Applied Materials, Lam Research, and KLA may be technically in compliance with the law, they unfortunately have been waging a lobbying effort in Washington to keep selling whatever they can to China, according to The Economist.
Clearly, the industry cannot be trusted to police itself, and the Biden Administration has shown little appetite to curb exports for the legacy chip sector. In February, BIS Undersecretary Alan Estevez testified that “Chips are a ubiquitous commodity at the legacy level,” implying little desire to take action against the Chinese legacy chip sector. It’s now up to Congress to act. From an export control standpoint, the U.S. should stop providing Chinese semiconductor manufacturers with any tools that could be used to produce legacy chips. U.S. Senators Marco Rubio (R-FL) and Roger Wicker (R-MS) have introduced a bill to require BIS to adopt a presumption of denial for any end user from China, and to notify Congress before approving a license to that country. Congress should also take up a reform of the many useless China-specific export control measures which permit the diversion of controlled American tech to the Chinese military under China’s military-civil fusion strategy. (See my paper Willful Blindness for more on this topic.)
The U.S must also play offense in creating a domestic supply of legacy-node chips. That means money allocated to manufacturers under the CHIPS Act should also be fairly devoted to creating legacy-node production capacity inside the U.S. Secretary of Commerce Gina Raimondo has said that one goal of the CHIPS Act is to increase production of “current-generation and mature-node chips most critical to our economic and national security.” Congress must ensure her Department follows through on a proper disbursement of CHIPS Act funding for legacy chip production.
The October 2022 controls were a good start, but they were too narrowly focused on advanced chips. There is much more work to do to stop the CCP’s ambitions of dominating the legacy chip space.