In October 2023, some mature technology equipment was added to the sanctions list, followed by a ban on equipment awaiting shipment. With the U.S. elections starting, rumors of increased sanctions are circulating. It is said that in March, the U.S. will release the final report on the Mate60 and introduce sanctions. Will the fabs embroiled in internal competition be hit hard again?
01
Discover the 3 Potential Outcomes: What’s Next?
Since the launch of Mate60, the United States has reacted strongly, with continuous rumors of various versions of sanctions. Based on comprehensive information from all parties, there are three possible scenarios for subsequent sanctions:
- The intensity of the sanctions remains at the level of the plan from October last year. After Huawei’s Mate60, the United States conducted a prolonged investigation. As of now, the U.S. Department of Commerce has not given a final result but claims there is no evidence that China can “mass produce” 7nm chips, and has not yet stated which Chinese company has “violated” regulations. In October last year, the United States upgraded its sanctions, limiting the use of lithography machines to produce 7nm chips through repeated exposures.
- The scope of sanctions is expanded to all Chinese chip manufacturing companies. According to Global Times, in December 2023, U.S. Commerce Secretary Raimondo, in a speech at the Reagan National Defense Forum, compared sanctioning Chinese companies in violation to playing whack-a-mole, claiming to expand the scope of sanctions to ensure their effectiveness. Meanwhile, the U.S. Congress’s Foreign Affairs Committee also called for an expansion of the scope of sanctions.
- Sanctions on mature processes target only some companies. In January 2024, after repeated confidential talks between the United States and the Netherlands, the CFO of ASML publicly stated that the new export restrictions expected from the United States and the Netherlands would lead to a reduction in sales of the mid-range “DUV” to China by about 10% to 15%. A few Chinese foundries are expected to be unable to obtain the NXT:1970i and NXT:1980i models of lithography machines.
Regarding the U.S. sanctions, Chip Strategy Research has conducted extensive analysis, and we still adhere to our previous judgment that the Sino-U.S. technology war has entered a stalemate, with the U.S. toolbox being exhausted, and even sanctions cannot cause severe damage. Currently, for sanctions targeting mature processes, the third possibility, which entails limited damage, is more likely.
02
Pushing Boundaries: The Limits of Sanctions Explored
The reason for believing the damage will be limited is that internationally, the barrier to sanctioning China is not solely constructed by the United States; domestically, the U.S. government also has to consider the attitudes of the business community.
- Europe will not fully comply with all U.S. opinions. Last October, U.S. pressure on the Netherlands to increase sanctions already sparked anger among European legislators, who believe that current exports do not violate any agreement terms. With most European countries on the brink of recession, they are more concerned about economic interests than ever before. At a time when demand for semiconductor equipment is weakening in other regions, China’s counter-trend growth in demand is particularly valuable. As of the end of January 2024, the Dutch Ministry of Foreign Trade stated that it is in dialogue with the United States on the issue of sanctions control.
- Resentment in the U.S. semiconductor industry. At a time when China’s demand for AI chips and equipment is increasing, U.S. companies are disgruntled with the endless sanctions. The U.S. Secretary of Commerce criticized U.S. companies, like Nvidia for making special chips for China, accusing them of deliberately continuing to help Chinese companies without crossing red lines. Recently at the Davos Forum, Intel CEO Pat Gelsinger called out, saying the current sanctions have restricted the development of China’s technology for processes below 7 nanometers, putting China’s semiconductor technology ten years behind the global semiconductor industry and maintaining this gap over the long term. Intel, as a leader in the U.S. semiconductor industry with significant interests in the Chinese market, this statement is essentially a plea on behalf of the American industrial sector that enough is enough with the sanctions. With semiconductor equipment and products from other countries selling well in China and U.S. products in the Chinese market continuously decreasing significantly, the U.S. business community has long been dissatisfied. With the election approaching, the attitude of the industrial sector is crucial for all parties.
- The United States continuing to increase sanctions will not yield new benefits but will put itself in an awkward position. China’s ability to manufacture chips using mature processes will not disappear with sanctions. If sanctions are increased significantly, it will not stop products like the Mate60 from continuing to be launched, and it would essentially admit to its impotence. The most sensible approach at this time is to continue to emphasize that China cannot “mass-produce” 7nm chips. The U.S. government itself is aware that sanctioning mature processes has little practical significance in limiting China, and is more about appeasing the hard-liners.
In summary, amidst domestic and international opposition, further sanctions targeting mature processes have reached the limits of what the United States can achieve.
03
Future Uncertainties Unveiled: What Lies Ahead?
The biggest variable in the future is Trump. If Trump makes a comeback, likely, the U.S. sanctions policy will not advance further.
Firstly, the close cooperation between Europe and the U.S. would be disrupted. Trump has several major ideas targeting Europe, such as forcing Europe to significantly bear NATO military expenses and increase spending on the Russia-Ukraine war, as well as imposing tariffs on European imports. Once Trump enters the White House, the relationship between the U.S. and Europe is likely to return to its previous state of sharp opposition. We should not hope that Europe will turn a blind eye to exports to China, but it is also unrealistic to expect Europe to continue to increase sanctions on the current basis.
In the context of the current close cooperation between Europe and the U.S., it can be seen how difficult it has been for the U.S. to push for sanctions after the launch of the Mate60, with prolonged investigations and back-and-forth in pushing sanctions. If Trump takes office, maintaining coordination will be even more difficult.
Secondly, from Trump’s mercantilist perspective, he is more concerned with interest exchange and supporting American businesses to grow. Ineffective sanctions that also harm domestic businesses are not worth the loss.
In September 2023, after Huawei launched a new smartphone, Trump, in an NBC interview, was asked about Huawei phones. Trump counter-asked the host if they had noticed that Huawei, like China, started from scratch through hard work, which sounds very familiar. He highlighted values that Americans once cherished. Then he spoke at length about how Chinese people study hard and are diligent and competent, and how American manufacturing has failed.
This quote is not to say that Trump would relax sanctions because he admires Huawei but to illustrate that even when everyone in America was against it, Trump maintained a calm attitude, reflecting a shrewd businessman’s focus on substance and interest. Trump is concerned about strengthening American manufacturing and is interested in interest exchange. Therefore, he is unlikely to mix interests and ideology or seek to please the general public to the extent of doing something detrimental to oneself and others, as Biden might. At least, Trump prioritizes self-interest over harming others.
Moreover, Trump’s willingness to praise Huawei in a time of public fervor in the U.S. suggests that as the initiator of the trade war, whatever he does has a natural legitimacy in the eyes of U.S. hardliners. Compared to Biden, who followed in terms of sanctions, Trump has more room to maneuver to do meaningful things. There’s no need to sanction mature processes just for the sake of appearing tough.
Therefore, even if Trump takes office, the likelihood of comprehensive sanctions on mature processes is not high. What is more worth focusing on is how we can become self-reliant and make rapid progress with limited resources.
04
Solving Problems Through Growth: A Path Forward Uncovered
For some companies that may be subject to sanctions, there is no need for excessive concern. After a long period of sanctions, it is believed that the relevant companies have already prepared to withstand the impact. Backed by a huge domestic market, no hurdle cannot be overcome. Chip Strategy Research predicts that in 2024, mainland China’s chip sales revenue will increase by 12%, with revenues in various application markets growing to varying degrees. Strong demand for automotive-related chips and photovoltaic cell-related chips will drive an overall increase in China’s semiconductor market in 2024. As long as the market continues to develop, difficulties will be resolved in the process of development.
Of course, it is also important to note that in 2024, mainland China’s foundry industry is expected to add about 135,000 pieces/month of 12-inch wafer capacity. As the market grows, capacity is also increasing, and the industry will inevitably face fierce competition.
More than sanctions, what deserves attention is internal competition. As China’s semiconductor technology strength improves, Europe and America have frequently accused the Chinese semiconductor industry of causing a mature capacity surplus due to government support, distorting the global market. The Chinese semiconductor industry needs to be aware of potential trade disputes that this may cause. The semiconductor industry is highly globalized, and as the Chinese semiconductor industry grows, it will inevitably participate in international competition.
Internal competition is a challenge that Chinese companies must face, and Chinese fabs must first prepare for government weaning. Government support can only help to get on the horse and send off on a journey, but cannot provide support forever. Moreover, with the economic downturn, the objective reality also does not allow for long-term government support.
Secondly, companies should also prepare for industry consolidation. The current market conditions will not recover quickly in the short term, local fiscal burdens are increasing, and the difficulty of going public is growing. For some projects, the best option may be to seek mergers and acquisitions for integration. Otherwise, equipment will remain idle for a long time, and production lines will become less valuable.
05
In Conclusion
With the start of the U.S. elections, performative sanctions may emerge, and the semiconductor industry might frequently experience shocks, potentially becoming the norm. However, regardless of the situation faced, the overall stalemate is set, and further sanctions will not have a significant impact. Moreover, China’s semiconductor industry has adapted to the sanctions and can safely navigate this difficult period with the support of the vast domestic market.
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