NEW YORK – The Biden administration’s unprecedented package of bans on chip and chip equipment sales to China announced on October 7 could not have come at a worse moment for the global semiconductor industry.
The damage to capital investment and R&D in the Western semiconductor industry will exceed Washington’s modest subsidies for the chip industry by a factor of five or more.
The US measures won’t affect China’s sensors, satellite surveillance, military guidance and other strategic systems because the vast majority of military applications use older chips that China can produce at home. But it may postpone autonomous driving, cloud computing and other efforts to digitize China’s economy.
It will also elicit an all-out Chinese effort to replace American chip-making and design technology. CapEx and R&D will shrink drastically in the US semiconductor industry while China allocates a massive budget to the sector.
On a five- or ten-year horizon, America’s technological edge in semiconductor design and fabrication is likely to vanish. As capital budgets collapse in the Western semiconductor industry, the damage to the US and other Western economies is likely to be greater than the harm inflicted on China.
The Biden administration meanwhile proposed a 14% budget cut for the Defense Advanced Research Projects Agency (DARPA), which is a much larger cut after inflation. Starving US high-tech industry of public as well as private funds is a strange way to conduct a strategic rivalry with China.
The incipient global recession turned the chip shortage of 2021 into a glut, reflected in a collapse of the Philadelphia index of semiconductor stocks (PHLX) by nearly half during 2022. NVIDIA, the leading US chip designer, has lost 68% of its market capitalization so far this year.
The industry had already cut capital investment plans from about US$200 billion to $160 billion for 2022. US restrictions on exports of semiconductor equipment, design tools and high-end chips to China will shrink revenues further, putting an air pocket into R&D and capital expansion. The world’s dominant chip fabricator, Taiwan’s TSMC, planned $44 billion in CapEx just six months ago but on Wednesday announced a cut to $36 billion.
The Biden administration’s $50 billion, five-year subsidy for onshore chip fabrication will help firms that use older technology to supply the US defense industry, which mainly buys chips five to seven generations behind the cutting-edge semiconductors targeted by the new round of US sanctions.
Smaller American fabricators like GlobalFoundries and SkyWater Technology, who make chips for the US military several generations behind the present state of the art, will benefit from the Biden subsidies. But companies with the most advanced technology have the most to lose, including American manufacturers of chipmaking equipment.
It’s still unclear what loopholes will be left in Washington’s chip bans, or how damaging they will ultimately be. Reuters headlined an October 12 report, “US scrambles to prevent export curbs on China chips from disrupting supply chain,” noting that the leading South Korean fabricators, Samsung and SK hynix obtained a 12-month reprieve for investment in their mainland chip plants, while TSMC obtained a one-year license to ship US chipmaking equipment to its expanding plants in China.
Few military applications of chip technology will be affected. According to a 2022 RAND Corporation study, the vast majority of chips used by the US military use so-called mature nodes with wider transistor gate width than the latest 3 to 7-nanometer (nm) chips that only TSMC and Samsung can produce. RAND published the chart below showing the node size of chips employed for key military applications:
| Application | Node Size |
| Artificial Intelligence | <10nm |
| Edge Computing | 14nm |
| Radio-Frequency Communications | 22nm |
| Integrated Silicon Photonics | 90nm |
| Space-Based Applications | 90-180nm |
| Laser-based sensing | 100nm-1000nm |
The new US restrictions won’t stop China’s 2,000 surface-to-ship and surface-to-surface missiles from targeting US aircraft carriers in the Western Pacific, or US air bases in Guam and Okinawa, and they won’t prevent China’s more than 1,000 interceptors from aiming long-range air-to-air missiles at US planes. But they are likely to delay the rollout of key digital applications in China’s civilian economy, such as autonomous vehicles.
The US is “doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People’s Republic of China’s military, intelligence, and security services,” US Commerce Department official Alan Estevez said in an October 7 release.
The best that might be said about the Biden policy is that it came ten years too late to make a dent in the military balance in the Pacific. But the Biden administration estimates that it will spend $30 billion a year in student loan forgiveness over the next ten years, but less than $10 billion a year in subsidies to the US semiconductor industry.
Federal subsidies will cover a small fraction of the reduction in CapEx and R&D due to the economic downturn and restrictions on semiconductor sales to China.
China is by far the world’s largest consumer of semiconductors, with 53% of the global total. The US manufactures just 12% of the world’s chips, but it leads in some areas of chip technology, including some chip-making equipment.
LAM Research, a top producer of etching and other hardware, earned 30% of its sales revenues from China in 2022. KLA, its top competitor, also sells to China. Cadence, a top producer of Electronic Design Automation (EDA) software, obtained 45% of its total revenue from China in the second quarter of 2022.
Two years ago, a Boston Consulting Group study warned that an all-out US ban on chip sales to China would eliminate 37% of the revenue of US semiconductor companies, lead to severe cuts in R&D and capital expenditures, and the loss of 15,000 to 40,000 highly skilled direct jobs in the US semiconductor industry.”
China can’t match American EDA tools yet. It would take China five to ten years to catch up, using software it already had purchased, or pirated copies without manufacturer support. It also can’t match the lithography machines that burn impossibly small transistors with a gate width of 7nm or less, with Extreme Ultraviolet (EUV) technology.
That’s available only from Holland’s ASML, and the US has banned sales of the newest machines to China because they contain a significant amount of US intellectual property.
Hardest to gauge is China’s ability to work around US technological restrictions. Mainland China has 20 of the world’s 50 highest-ranked engineering schools – and more if Hong Kong is counted – and graduates seven times the American count of engineers each year. China can’t buy some American technology, but it can hire anyone it wants.
At worst, the damage to China’s economy is likely to be temporary, and the impact on its military capacity is likely to be minimal. But the impact of the incipient depression in the Western semiconductor industry may well do permanent harm.
Follow David P Goldman on Twitter at @davidpgoldman