US Aims to Cut Off China's Semiconductor Industry Completely

The Core of the Unverified List is Semiconductor 'Equipment'... China's Determination to Completely Block Semiconductor Sources
Biden Tells Xi Jinping 'Don't Even Dream of Semiconductors'... Regulations Extend to Universities and Research Institutes

[Asia Economy Senior Reporter Cho Young-shin] Regarding the recently announced U.S. semiconductor regulations targeting China, the Chinese Ministry of Commerce commented on the 10th that these are typical acts of "paerung (ostracism)" and actions that disrupt market order. It urged all parties to work together to build a win-win global industrial supply chain system that benefits everyone.

While Chinese authorities have previously taken a tough stance by mentioning "reciprocal measures (retaliation)" against U.S. sanctions and regulations, this time their tone was somewhat different. It appears that Chinese authorities are aware of the impact of the U.S. measures on China's semiconductor industry and issued a cautious statement.

◆ U.S. ‘Zeroing In’ on Chinese Semiconductors

On the 7th (local time), the U.S. Department of Commerce announced semiconductor export control measures and added 31 Chinese companies to the "Unverified List." The Unverified List is an export control triggered when U.S. authorities cannot accurately identify the end user.

Under this measure, U.S. semiconductor equipment companies trading with Chinese semiconductor firms producing △18nm (nanometer, one billionth of a meter) or smaller DRAM △128-layer or more NAND flash △14nm or smaller system semiconductors (logic chips) must undergo a separate approval process. This is effectively a trade ban.

The measure is widely analyzed to target three companies: Yangtze Memory Technologies Co. (YMTC), Semiconductor Manufacturing International Corporation (SMIC), and ChangXin Memory Technologies (CXMT).

YMTC produces 128-layer 3D NAND, CXMT produces 17nm process DRAM, and SMIC is China’s largest semiconductor foundry company. The core of this measure is to cut off the inflow of advanced semiconductor equipment to Chinese semiconductor companies.

In fact, Beijing Fanghua Chuang, a leading Chinese semiconductor equipment company, is listed as number one on the list. Beijing Fanghua Chuang is known for producing 12-inch 14nm FinFET silicon plasma etching equipment and 12-inch wafer etching equipment.

◆ China’s Achilles’ Heel: Equipment

The semiconductor industry is broadly divided into five sectors: design, manufacturing, back-end processing, equipment, and materials. China’s global market share by semiconductor sector is approximately 7% in design, 16% in manufacturing, 38% in back-end processing, 13% in materials, and about 5% in equipment. Equipment is the weakest link in China’s semiconductor industry.

Semiconductor production requires eight processes: oxidation and heat treatment, chemical vapor deposition, photolithography, etching, molecular implantation, physical vapor deposition, polishing, and cleaning. Inspection is fundamental at every stage. Without ultra-precision equipment, semiconductor quality cannot be guaranteed. Without U.S. and European semiconductor equipment, China’s semiconductor production, manufacturing, and research and development (R&D) come to a complete halt.

The first company to respond after the U.S. Department of Commerce released the Unverified List was the American equipment company KLA. KLA produces semiconductor metrology equipment that verifies product quality during substrate and chip manufacturing. It is known to hold over 63% of the global market share. Following KLA are Applied Materials (15%) and Hitachi (7%).

KLA announced it would no longer supply products to semiconductor companies located in China and even withdrew its employees stationed locally. This occurred just seven days after the U.S. Department of Commerce announcement. KLA’s swift action is expected to influence other semiconductor equipment companies.

◆ Focus on ‘ASML’

The most important semiconductor equipment is the photolithography machine. China cannot even present a business card in this area. The process of projecting a design onto a wafer using light is called photolithography. This process accounts for more than 30% of semiconductor manufacturing costs and is crucial. Photolithography directly affects semiconductor quality and productivity.

The global market leader in photolithography machines is the Dutch company ASML, which holds over 75% market share. The second and third are Japan’s Canon (11%) and Nikon (6%), respectively. Especially for producing cutting-edge semiconductors below 7nm, ASML’s extreme ultraviolet (EUV) photolithography machines are essential. ASML monopolizes the EUV photolithography market. From the perspective of semiconductor manufacturers, ASML is the ultimate dominant player. This is why Samsung Electronics Vice Chairman Lee Jae-yong never misses visiting ASML during his European business trips.

Among Chinese companies, Shanghai Micro Electronics Equipment (SMEE) is the only one producing photolithography machines. However, SMEE’s photolithography equipment is far from advanced, operating at the 90nm level. They plan to develop 28nm photolithography machines by the end of this year, but it is uncertain whether they will succeed. Even if successful, these machines cannot be used for products below 18nm. The semiconductor industry generally considers 14nm and below as advanced processes. SMEE was already included on the Unverified List in February and is under regulation.

On August 23, Chinese Premier Li Keqiang held a video conference with Dutch Prime Minister Mark Rutte, citing the 50th anniversary of diplomatic relations. Premier Li emphasized during the meeting that "both China and the Netherlands are open economies and important cooperation partners." The People’s Daily featured the meeting on its front page the next day. Within China, this meeting is interpreted as Premier Li holding a summit with Prime Minister Rutte, rather than just sending a congratulatory message, to prepare for U.S. semiconductor pressure on China.

◆ U.S. Intends to ‘Cut Off the Buds’

The Unverified List also includes universities and research institutions. The U.S. Department of Commerce added the Chinese Academy of Sciences’ Institute of Chemistry and Institute of Geology, Shanghai University of Science and Technology, University of Chinese Academy of Sciences, and Shanghai University of Engineering Science to the list. The U.S. appears to suspect that China is secretly nurturing semiconductor-related equipment technology through universities. This reflects an intention to cut off the budding talent development and to force China’s semiconductor ambitions to submit.

The Chinese government entered the semiconductor industry in 2011 by unveiling the "Software Industry and Semiconductor Industry Development Promotion Policy," and in 2014 invested 1 trillion yuan to establish the National Semiconductor Industry Development Leading Group. In 2015, it set a 10-year goal called "Made in China 2025," aiming to surpass Japan by 2025, Germany by 2035, and the U.S. by 2045 in manufacturing. This is a long-term goal and challenge.

To this end, China established two rounds of "National Semiconductor Industry Investment Funds" in 2014 and 2019, totaling 138.7 billion yuan (about 28 trillion KRW) and 204.1 billion yuan (about 41 trillion KRW), respectively. The first fund invested 67% in manufacturing companies, 17% in design companies, 10% in back-end processing, and 6% in equipment and materials. The second fund is known to have focused heavily on equipment and materials. Despite astronomical investments, China’s semiconductor localization rate is reported to be around 15%. The Chinese authorities’ target localization rate by 2025 is 70%.

This content was produced with the assistance of AI translation services.