"MAKING CHIPS is complex work.
Semiconductor manufacturers such as Intel, Samsung and TSMC themselves rely
on machine tools built by an array of firms that are far from household
names. The equipment sold by Applied Materials, Tokyo Electron, ASML, KLA and
Lam Research is irreplaceable in the manufacture of the microscopic
calculating machines that power the digital economy. A supply crunch, coming
after years of ructions between America and China over control of technology,
has made governments around the world more aware of the strategic importance
of chipmaking. The significance of the kit used to make chips is now being
recognised, too.
Such tools handle the complex
processes of scratching billions of electric circuits into a silicon wafer.
Those circuits shuttle electrons to do the calculations that display this
article on a screen, plot your route across town or allow your fingerprint to
unlock your phone. They must be perfect. KLA makes measurement tools which
are essentially electron microscopes on steroids, scanning each part of a
finished chip automatically for defects and errors. Some Lam Research tools
are designed to etch patterns in a silicon wafer by firing beams of
individual atoms at its surface. Applied Materials builds machines which can
deposit films of material that are merely a few atoms thick.
The Chinese government's efforts
to develop a large and advanced semiconductor industry at home using these
mind-boggling technologies have led to a rapid shift in the source of the
revenues for the firms making it over the past five years. In 2014 the five
main toolmakers sold gear worth $3.3bn, 10% of the global market, to China. Today
the country is their largest market by a significant margin, making up a
quarter of global revenues (see chart). Of the $23bn in sales for Applied
Materials, the largest equipment-maker, during its latest fiscal year, $7.5bn
came from China. It accounts for over a third of Lam Research's revenues of
$14.6bn, the largest share of any big toolmaker (though the firm notes that
some portion of Chinese sales are made to multinational firms that operate
there).
This new reliance has created
political and commercial problems, particularly for the trio of American
toolmakers: Applied Materials, KLA and Lam Research. The Chinese government
has thrown hundreds of billions of dollars at domestic chipmakers. Because
each of the American trio is dominant at a different step of the process, the
unavoidable conclusion is that America's most advanced technology is
furthering China's economic goals. There is strong bipartisan agreement in
Washington that this is unacceptable.
America's government has long
sought solutions to this uncomfortable problem. In December 2020 it placed
SMIC, China's leading chipmaker, on an export blacklist. Any American company
wishing to sell products to SMIC had to apply for a licence. But tools have
kept flowing to the Chinese firm, in part because America acted alone. The
Chinese government's lavish subsidies have instead started finding their way
to non-American competitors. Applied Materials noted that this might help
other firms as, in effect, shutting it out of China "could result in our
losing technology leadership relative to our international competitors".
The problem is becoming more
acute. SEMI, the global semiconductor-tooling trade body, announced on April
12th that worldwide industry revenues from China grew by 58% in 2021, to $29.6bn,
cementing its place as the world's largest market. Political pressure is
rising. In March two Republican lawmakers wrote to America's Department of
Commerce demanding a tightening of export controls on chip technology going
to China, specifically mentioning chipmaking equipment.
China's appetite for chipmaking
tools is also causing commercial difficulties for non-Chinese chipmakers,
depriving them of equipment and hence the capacity to manufacture chips. On
April 14th C.C. Wei, the boss of TSMC, said the Taiwanese firm had
encountered an unexpected "tool delivery problem" that threatened
its ability to make enough chips. Though he did not blame China,
chip-industry insiders say it is the likely cause. TSMC has warned Apple and
Qualcomm, two of its largest customers, that it may not be able to meet their
demand in 2023 and 2024, according to two independent sources.
Over the past four months the
American toolmakers have started working with the government, through Akin
Gump, a firm of lawyers and lobbyists based in Washington, DC, to find a way
round the problem. The toolmakers formed the Coalition of Semiconductor
Equipment Manufacturers late last year to further that aim, using Akin Gump
to represent them. Lawyers have been poring over the products of Applied
Materials, Lam Research and KLA in an attempt to identify workable export
controls under which less advanced pieces of equipment that are not used for
cutting-edge manufacturing might still be sold to China, while more advanced
tools would be prohibited. That would allow the toolmakers to retain some
portion of their Chinese revenues.
Efforts to figure out where to
draw the line continue. Akin Gump has been lobbying cabinet members and
legislative leaders on behalf of the coalition, and is in ongoing discussions
with both the Biden administration and members of Congress. "The plan is
being driven by the Biden administration," the Coalition said in a
statement on April 25th.
The proposal hinges on getting
America's allies--in particular Japan and the Netherlands, home to Tokyo
Electron and ASML--to impose the same export controls on their toolmakers.
The chances of this have increased since Russia's assault on Ukraine.
Officials around the world have been regularly putting their heads together
to understand the effect America's bans on trade with Russia will have on
their countries. That has created channels through which the complex task of
shutting China out of advanced chipmaking, a far trickier task than curbing
sales of oil or weapons, might take place.
The plan may yet fall apart. China
is unlikely to accept it meekly. Hawks in Washington may push for harder
restrictions. Defining what equipment can continue to be exported to China
may prove too difficult. But if it works, Chinese chipmakers would need
decades to catch up with the West--and America would have met its goals of
suppressing Chinese semiconductor development while causing minimal harm to
its own industry." [1]
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