From American Affairs Journal:
This article is an American Affairs online exclusive, published November 20, 2024. Figure 3 was added on December 6, 2024, after the announcement of a new round of U.S. export controls.Since I last wrote about China’s responses to U.S. export controls in these pages, in February 2024, much has changed, both in terms of U.S. export control measures and the situation on the ground in China. The relative strength of China’s domestic semiconductor industry has also received substantially more media attention. Teardowns of advanced semiconductors produced by domestic foundry leader SMIC purport that China is only three years behind global foundry leader TSMC, though these types of predictions can be misleading.
In fact, gaining a detailed understanding of what is happening in China’s semiconductor industry is becoming increasingly difficult.1 In May, the Chinese Semiconductor Industry Association (CSIA) issued an ominous warning to industry insiders to avoid disclosing technical information to media and outside consultants.2 The pattern for the semiconductor manufacturing industry in China is following a trajectory similar to that of the high performance computer (HPC) sector. Justified by the concern that HPCs could be used for military applications, U.S. export controls were imposed in 2015 and have essentially forced China’s supercomputing sector to stop publicly revealing new systems and technological progress.3
Complicating the semiconductor industry situation in China is the close association of U.S. controls across the sector with the development of artificial intelligence. So far, companies developing advanced generative AI in China have not had to conceal news about their model development because they are operate in the consumer and enterprise space.4 Continued U.S. pressure on the Chinese semiconductor industry will eventually force these developers into hiding and make it more difficult to assess progress across the AI stack in China and limit U.S. visibility into an area of national security concern.
Understanding where Chinese companies currently stand in terms of development—from tech conglomerate Huawei, to toolmakers, to smaller players innovating in the development of process gases and materials for advanced semiconductor manufacturing—is also becoming more difficult, as the topic is now politically sensitive. The latest round of U.S. export controls has added yet another dimension to the issue: scores of Chinese companies, including fabs, toolmakers, and smaller companies up and down the supply chain, are now caught up in the broader U.S.-China competition over technology in general and semiconductors in particular. The United States has also added critical components such as high bandwidth memory (HBM) to its controls. The expansion of controls reinforces what National Security Advisor Jake Sullivan calls the “small yard and high fence” strategy focused on containing China’s ability to develop advanced capabilities in AI.5 China’s responses, including retaliatory measures such as the Unreliable Entity List (UEL) Anti-Foreign Sanctions Law and many other internal policies, are now part of the equation. Beijing has also tightened restrictions on the export of critical minerals, including some essential for semiconductor manufacturing, namely gallium, germanium, graphite, antimony, and soon, tungsten.6
At the same time, Chinese firms and officials are recognizing that raw hardware manufacturing capacity for advanced semiconductors is not the only decisive factor. As Huawei transforms from a hardware company into a hybrid hardware-software giant, it is struggling to cultivate a robust software development environment for its Ascend series of advanced GPUs. Meanwhile, the firm’s HarmonyOS mobile operating system has gained broad traction over the past year, and the firm is now ramping up its software engineering prowess in a bid to compete head-to-head against the likes of Nvidia in the GPU and AI datacenter space.7 Gaining access to advanced semiconductor hardware for compute, which means capacity for training large language models (LLMs), is now highly complex in China.
Beijing continues to tinker with models and mechanisms of government support for its complex, sprawling, and still very much global technology sector. So far, it has employed a mix of government assistance for the sector and critical pieces of supply chains, coupled with novel financing and policy incentives, to ensure China’s access to more advanced semiconductors over the next decade. Thus, there are both short-term and longer-term dynamics at play in the industry and among industrial policy planners in Beijing. The industry continues to defy efforts to centrally plan development, so Beijing relies on public-private partnerships, targeted funding, and greater leeway for linchpin companies such as Huawei to drive progress in the “chokepoint technologies” targeted by U.S. export controls and investment restrictions. For their part, companies at the forefront of the industry in China must continue to innovate despite severe limitations on their access to technology, support, and spare parts, while planning for a future largely free of U.S. and other foreign technology in their supply chains.
The View from Beijing
Beijing’s sense of the importance of the semiconductor industry has only grown over the past year. As Chinese officials, including President Xi Jinping, have ramped up rhetoric critical of U.S. export controls, Beijing has considered retaliatory measures and looked to put its domestic semiconductor industrial complex in order.
Senior Chinese officials have gradually ramped up criticism of U.S. controls. In March, Foreign Minister Wang Yi claimed that controls had reached “a bewildering level of unfathomable absurdity.”8 Building on strong language first delivered in November 2023, President Xi sharply criticized U.S. export control policy on a video call with President Biden in April 2024. Xi argued that the restrictions represented an effort to “suppress China’s trade and technology development.”9 During the call, Xi apparently put the issue of U.S. export controls nearly on par with U.S. support for Taiwan independence as a redline for Beijing.10 Xi’s comparison of the two issues reflects how Chinese leaders see technological control as a much more serious short-term challenge to economic growth, while Taiwan remains a longer-term challenge. When the United States releases a new export control package in December, Beijing’s response has the potential to reinforce a dynamic of tit-for-tat controls with the potential to disrupt global semiconductor supply chains.11
As I stressed in my last article, Beijing’s primary response to U.S. technology controls involves developing new structures to provide better support for the domestic semiconductor industry. These tools and policies continue to be designed, built, and fine-tuned across the government at all levels. Developments during 2024 demonstrated a much higher degree of involvement of domestic industry than ever before in complex long-term industrial policy planning, in addition to high levels of cooperation across multiple industry supply chains.
In terms of broader government policy, Beijing has also revamped its science and technology bureaucracy with the aim of improving both the government and private sector’s ability to innovate. In March 2023, two critical new Party-led bodies were formed: the Central Financial Commission (CFC) and Central Science and Technology Commission (CSTC). Both were intended as major efforts to consolidate the Party’s authority in vital sectors and provide tools for assisting with long-term goals around technology development. While the CFC has been extremely active and public in driving financial regulatory reform, the CSTC has maintained a low profile. Party media outlets have reported little about its mission and actions beyond issuing instructions to certain ministries. As with other organizations and slogans, Beijing now sees little upside to highlighting who is doing what and how when it comes to sensitive technologies at the center of U.S.-China relations and competition.
The CSTC is starting to have a major impact on China’s science and technology sector and supporting ecosystems, however, by issuing new guidance to set priorities for central funding for the development of strategic technology sectors at the local level, according to the 2023 Notice on Management Measures for Central Guidance Funds for Local S&T Development.12 The new measures stress that funds will be prioritized for (1) CSTC-approved major science and technology projects in need of central financial support and (2) regional science and technology innovation ecosystems, likely including semiconductor-focused ecosystems under development in places such as Shanghai. These priorities suggest that between the CFC and CSTC, Beijing is building a more focused and centralized approach to funding for important sectors that goes beyond basic research. Beijing appears to want to reduce what it views as wasteful spending and overcapacity in some sectors, while making up for its past inattention of core hard technology areas that require longer-term planning and investment horizons, such as semiconductors. This is a major change in thinking in Beijing.
Despite the secrecy surrounding China’s semiconductor plans, new leaders and supporting structures have started to emerge. One major new structure for developing policy goals for the semiconductor industry is a Leading Small Group (LSG) under Vice Premier Ding Xuexiang. This LSG also approves mergers and acquisitions, and coordinates with other central bodies such as the CSTC. In June 2024, Chinese state media revealed Ding to be the head of the CSTC, a role that gives him a lofty perch to channel government R&D in the semiconductor industry into private sector companies targeting strategic technological choke points.13 Information about roles, subordinations, and plans for the LSG, as well as Ding’s role and function as CSTC chief, remain scarce, reflecting Beijing’s increased level of sensitivity around the sector. Another official embodying Beijing’s commitment to the semiconductor industry is Xiangli Bin, vice chairman of China’s National Development and Reform Commission, a powerful executive department primarily responsible for macroeconomic management. Before his appointment to the NDRC, Xiangli spent his career at the Chinese Academy of Sciences (CAS) leading research into optics and precision electronics; at the NDRC, he has a leading role on semiconductor issues, as well as a major portion of other sectors Beijing terms “choke point technologies.”14
The View from Washington
From Washington’s perspective, tighter controls on semiconductor manufacturing technology and GPUs are serving their purpose. Policymakers must steadily expand the “small yard and high fence,” and annual updates on export controls are now the norm. The U.S. Commerce Department is planning to issue a complex set of new technology control rules in the waning days of the Biden administration, building on the major releases of October 2022 and October 2023.15 These rules are expected to cover new technologies critical to AI hardware, such as HBM. The rules also likely include a substantial rewrite of the foreign direct product rule (FDPR), giving U.S. officials more flexibility in restricting sales of manufacturing tools from overseas facilities of U.S. and other foreign toolmakers. Additionally, the new rule will expand the types of tools that are restricted for export to certain designated facilities in China....
....MUCH MORE (he goes deep into Huawei, GPUs, etc.)
