Cold war in technology: China may face restrictions from the US and EU over outdated chips - Cafeqa

Cold war in technology: China may face restrictions from the US and EU over outdated chips

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Concerns over China’s domination of semiconductors used in daily technology have intensified since the US shut off access to advanced processors. This has caused anxiety in the EU and the US.

Modern artificial intelligence (AI) systems may be powered by more powerful semiconductors than the “legacy chips” used in commonplace electronics like vehicles, televisions, and medical equipment. However, since China dominates their market, they are becoming an increasing problem for the US and EU.

If Washington wants to slow down Beijing’s plans to become a digital powerhouse, it may prohibit Chinese companies from getting their hands on cutting-edge processors that were built in the West. The focus has shifted to so-called legacy chips, a product category in which China accounts for about one-third of global production capacity.

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Beijing has increased its efforts in the manufacturing of established chip technology in response to restricted access to more modern semiconductors. A $40 billion (€37 billion) state-backed investment fund was launched in September by the Chinese government to support local semiconductor manufacture. As a result, the need for Western countries to support their own chipmakers has increased.

Joanne Chiao, an analyst at the Taiwan-based semiconductor research agency TrendForce, told DW that “[Current US] export controls only apply to advanced technologies, with the impact on mature technologies limited.”

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Competition in the chip market: Who will come out on top?

To determine if China was still dominating the market for legacy chips, the Biden administration ordered a comprehensive audit of the semiconductor supply chain in December. This week, in the Belgian city of Leuven, the EU-US Trade and Technology Council met, and the EU’s executive arm, the Commission, may be prompted to conduct a comparable assessment.

Following the discussions, the Council issued a statement that alludes to potential EU action, stating that the two entities “may develop joint or cooperative measures to address distortionary effects on the global supply chain for legacy semiconductors.”

“The pressure is on to do something, but the question is how effective would any curbs be?” semiconductor industry, according to DW’s Malcolm Penn.

Cheap chips: will China ditch them?


Western chipmakers might be priced out swiftly, according to industry insiders, if China were to flood the market with old chips that were subsidized by Beijing. They cite the same practise of China’s low-priced solar panels that Brussels claims has unfairly benefited the Asian superpower.

“If companies like Lam Research and Applied Materials lose half their market permanently, they would have to downsize as they’re geared up to serve a market that will grow to twice as large as it is now,” Penn added, referring to two influential US legacy chipmakers.

At the tail end of 2021, a picture was taken of employees standing in front of Bosch’s new semiconductor plant in Dresden, a city in eastern Germany.At the tail end of 2021, a picture was taken of employees standing in front of Bosch’s new semiconductor plant in Dresden, a city in eastern Germany.
In response to the high demand for semiconductors, Bosch established a manufacturing facility in Dresden, a city in eastern Germany.The photo alliance’s Oliver Killig/dpa/picture
Trendforce reports that, as a result of Beijing’s subsidies, China’s legacy chip capacity is expected to increase to 39% of the global market in the next three years. According to a different prediction by Gavekal Dragonomics, China would increase its chip-making capacity by one million legacy chips a month compared to last year, surpassing the rest of the world combined.

There may be even more overcapacity in the semiconductor supply chain if India gets in on the action as well. The chip factory in Dholera, Gujarat, is being built by the Indian conglomerate Tata Group, which is investing $11 billion.

In order to fulfill the demand for sophisticated chips, chipmakers from Taiwan, the US, South Korea, and Japan have shifted their emphasis. Currently, Taiwanese chipmakers account for about half of the world’s chip manufacturing capacity. In December, TrendForce predicted that due to China’s investment boom, Taiwanese foundries will probably see a decrease in their total market share.

The dangers of being too dependent on China


Another issue is critical dependencies. The United States and the European Union risk becoming too dependent on Chinese semiconductors for not just consumer electronics but also defense gear and essential infrastructure if Western chipmakers can’t compete with Chinese competitors and downscale.

China may restrict Western access to old chips via economic pressure if it were to control the market. The impact may be much more severe than the COVID-19-era chip scarcity, which caused the postponement of the release of many electronic devices, including the most recent iPhones, due to a lack of older, less sophisticated processors.

“For consumers, the importance of legacy technologies outweighs that of advanced chips like AI,” Trendforce’s Chiao told DW. He went on to say that AI chips may be all the rage, but they only make up less than 1% of the world’s semiconductor industry.

For instance, German car manufacturers are currently fighting tooth and nail in the electric vehicle transition, so any disruption to their access to Chinese legacy technology may be disastrous.

Using allies as suppliers, sanctions, and subsidies


Everyone agrees that the US and EU need to take action, but others worry that Western chipmakers may also suffer as a result of sanctions and other restrictions.

“It’s the wrong solution to the right problem,” Penn, CEO of the UK-based semiconductor consultant Future Horizons, told DW. “Sanctions will only delay China’s dominance, they won’t stop it.”

In light of Russia’s full-scale invasion of Ukraine, exporters and Russian customers have discovered ways to circumvent sanctions by using third nations, as pointed out by Penn.

He cautioned that in the case of tit-for-tat retribution, Western nations would not be able to increase chip manufacturing quickly enough to compensate for any shortfall that may occur from China.

“If you decided to do it today [invest in more domestic production], you wouldn’t see the first chips for at least three years, probably longer — even if there were no delays in building the factories and you found the people with the skills to run them,” said Penn.

Industry sources predict that instruments that assist legacy chip fabrication will be subject to export limitations, even if US and EU authorities are contemplating more penalties on China. A strategy known as “friendshoring” might help Washington and Brussels reduce their dependency on China by allowing them to source and manufacture from geopolitical allies like India.

To help domestic foundries weather a pricing battle and produce more legacy chips, they may dangle further subsidies. The United States and the European Union have pledged to subsidize the semiconductor industry to the tune of $86 billion over the next decade, according to two recent Chip acts.

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