Beijing hits back at US plan to scrutinise China's role in legacy chip supply chain

US moves to investigate American companies' procurement of Chinese-made legacy node chips has triggered a backlash from the Chinese government, which blamed Washington for "weaponising" trade issues.

China's foreign ministry spokesman Wang Wenbing said on Friday that the US move would endanger global supply chains, urging Washington to respect international trade rules and market-based principles.

The US commerce department said on Thursday that it would conduct a survey on the use and sourcing of Chinese-manufactured legacy chips in the supply chains of critical American industries such as telecommunications, car making, and defence over national security concerns.

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The survey was designed to "create a level playing field for legacy chip production, and reduce national security risks posed by China", it said.

"The citing of national security is just a pretext to maintain US competitiveness in legacy chips," Ma Jihua, a veteran telecoms observer, was quoted as saying on Friday in the Chinese nationalist tabloid Global Times. Ma said China has advantages including lower costs, faster research and development progress, and more diverse applications compared to the US.

China currently has 44 semiconductor wafer foundries in operation and a further 22 under construction, Taiwan-based IC research company TrendForce said in a recent note. By the end of 2024, China will expand mature chip production at 32 foundries, it added.

Chinese customs data showed that the value of China's US-bound exports of chips such as processors and controllers grew 17 per cent year on year to US$1.3 billion in the first 11 months. However, total US imports of China-made integrated circuits declined 0.5 per cent to US$2.02 billion over the same period.

China's state-sponsored expansion in mature chipmaking, or legacy chips using the 28-nanometre (nm) or older technologies, has triggered concern from the US and EU, which have both offered generous subsidies to lure global foundries such as Taiwan Semiconductor Manufacturing Co and US chip giant Intel in efforts to reshore chip production.

In August, the US president Joe Biden signed into law the Chips Act, offering subsidies of up to US$53 billion for wafer fabs built on American soil. However, conditions were attached to the funding, preventing chip makers that receive funding from expanding or building advanced semiconductor facilities in China for 10 years.

The act, which was slammed as "chip hegemony" by Beijing, would have the effect of reducing China's overall silicon capacity by 180,000 equivalent 12-inch wafers a month by 2025, according to ICWise, a Shanghai-based semiconductor consulting firm.

US Commerce Secretary Gina Raimondo speaks during a visit to BAE Systems, December 11, 2023. Photo: AP alt=US Commerce Secretary Gina Raimondo speaks during a visit to BAE Systems, December 11, 2023. Photo: AP>

There is a growing consensus among semiconductor professionals in China that US semiconductor export controls are meant to hobble China's chip industry development under the pretext of national security.

Early this month, US commerce Secretary Gina Raimondo said there was "no way we are going to let [China] catch up" to the US lead in advanced semiconductor design, adding that "protecting our national security matters more than [the] short term revenue" of US firms wanting to sell hi-end chips to China.

In October, the commerce department intensified export controls on shipments of advanced chips and chipmaking tools to China, reinforcing a blizzard of such rules implemented over the past four years in a bid to cap China's progress in advanced chipmaking at 14-nm for logic semiconductors.

In response, China has vowed to achieve higher chip self-sufficiency, with billions in state money being poured into the sector. Those efforts have started with the domestic substitution of parts and equipment for mature foundry processes because older foreign-sourced technologies are easier to replace.

"China is focusing aggressively on mature process technologies such as 28-nm and older, particularly in response to export controls on advanced equipment by the US, Japan, and the Netherlands," said TrendForce.

China's global share of mature process capacity is expected to reach 39 per cent by 2027, up from 31 per cent in 2023, with room for further growth if equipment procurement proceeds smoothly, according to TrendForce. In contrast, China's proportion of global advanced process capacity, defined as 14-nm and below, would drop to 6 per cent from 8 per cent this year.

TrendForce warned that China's rapid expansion of mature process capacity would lead to a price war in products like image sensors and power management ICs, impacting Taiwan-based foundries.

"China's chip sector has been a darling of investors and the expansion in mature processes was lifted by its electric vehicle industry, where demand is huge for chips like power management ICs," said Brady Wang, an associate director with research firm Counterpoint, adding that pricing for mature nodes would come under downward pressure next year.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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