How Washington Can Save its Semiconductor Controls on China – War On The Rocks

If you think America’s controls on China’s access to advanced chips are important, you might have been troubled by the claim from the chief of one of China’s most important semiconductor equipment manufacturers that 80 percent of the chipmaking equipment China imports could be replaced by domestic tools by the end of 2024.
The U.S. export control regime on China is designed to restrain the growth of China’s advanced semiconductor manufacturing by limiting Beijing’s access to exquisite machine tools produced by the United States and its allies. But China is moving to replace Western equipment with domestically made tools. If Beijing were to succeed in doing so, nothing would stop it from building the cutting-edge chips that enable advanced AI, quantum computing, and next-generation weapons.
Yet Americans are largely still allowed to sell technology, capital, and know-how to China’s growing machine tool companies. Washington should restrict these commercial partnerships to ensure its export controls survive.
Beijing’s Workaround to U.S. Rules
Beijing appears to be doubling down on cultivating homemade semiconductor machine tools. China’s chipmaking equipment manufacturers are rapidly growing after being far behind their Western counterparts for years.
Advanced Micro-fabrication Equipment, an etching firm competing with U.S. company Lam Research, can produce some kinds of etching equipment for chip production at 5 nanometers and 28 nanometers. It has sent tools to Western giants TSMC, Samsung, Intel, and Micron. Advanced Micro-fabrication Equipment’s sales are up 41 percent in the third quarter of 2023 compared to 2022.
Shanghai Microelectronics Equipment, China’s lithography champion, reportedly hopes to reveal soon a machine capable of servicing 28-nanometer manufacturing.
ACM Research, which produces wafer cleaning tools, has invented its own technology that it sells to U.S.-blacklisted Chinese firms SMIC, YMTC, and CXMT and also reportedly to Western giants SK Hynix and Intel. Its third-quarter income of 2023 was up 80 percent from the previous year.
Naura Technology’s etching equipment can be used for 28- and 55-nanometer chips. It reported a 35 percent increase in sales in the third quarter of 2023.
Other firms are reportedly attempting to replace ASML’s crown jewel — extreme ultraviolet lithography tools needed to produce 3-nanometer chips at scale. The Changchun Institute of Optics, Fine Mechanics, and Physics and the Chinese Academy of Sciences appear to be collaborating to develop extreme ultraviolet technology. Huawei also claims to have “entered the game” of extreme ultraviolet lithography, posting on its website about its development of a new light source technology.
Chinese equipment vendors’ share of sales to Chinese chip foundries has, according to some estimates, risen from 21 percent in 2021 to 47 percent in the first eight months of last year. This sector’s growth has thus far been largely in tools used for mature-node semiconductors, not advanced ones.
These machine tool firms will likely continue to grow on the back of generous state support. Beijing has supercharged its push toward independence in semiconductor production, especially since 2022. China is pursuing new advances “at all costs,” said a Chinese government official to the Financial Times. State subsidies to Huawei doubled in 2022 from the year before. These equipment companies likely receive similar treatment.

Washington’s Response
Washington can slow these chipmaking firms’ development by cutting off their access to Western technology, capital, and know-how. Beijing takes advantage of U.S. openness to jump to the cutting edge, and the chipmaking equipment sector is no different.
In finance, for instance, Western capital is deeply tied to many of these firms. U.S. investors Goldman Sachs, Walden Ventures, Redpoint, Interwest Partners, and Bay Partners have invested in Advanced Micro-fabrication Equipment. ACM Research has received funding from Sycamore Ventures. Naura Technology is on the MSCI China All Shares IMI Robotics Index, posing the risk that Americans invest in the firm via passive vehicles such as pension funds. U.S. financial ties with Chinese firms often bring commercial networks and know-how so crucial for their development.
Here are three ways Washington can limit commercial ties that disproportionately benefit China’s equipment producers.
First, the United States could restrict Chinese machine tool makers’ access to foreign technology by adding each firm, their subsidiaries, and their suppliers to the Entity List. Washington can also apply the “Foreign Direct Product Rule” to that listing. These moves would institute a licensing requirement for any sales of technology to these companies to buy American tech or tech made with U.S. intellectual property. Shanghai Microelectronics Equipment is already on the Entity List, but Washington could ensure it cannot obtain Western technology via shell firms by applying the rules to its subsidiaries and affiliates, and by applying the foreign direct product rule to its listing.
Second, the Biden administration could prohibit American technicians, managers, or chipmaking companies from working with these firms to prevent them from gleaning know-how with its “U.S. persons” authorities. Washington already uses these rules to stop Americans from assisting in manufacturing China’s cutting-edge chips. That same logic can apply to the equipment needed to build semiconductors.
Third, Washington could strengthen its draft strictures on outbound investment into China to block U.S. capital flows to these companies. Fortunately, the Treasury Department’s draft rules will ban future private investment into semiconductor fabrication equipment. It could also consider unwinding existing American investments in Advanced Micro-fabrication Equipment and prohibiting investment into publicly listed companies such as Naura Technology.
This expanded approach to semiconductor controls on China would face multiple serious counterarguments worth considering.
One common argument against additional chip controls on China that some might apply here contends that new rules incentivize Beijing and industry to replace Western technology and build a domestic supply chain. But this concern is moot at this point. China has already been accelerating its push to build all parts of the chip supply chain at home, especially since 2022. It would be misguided for Washington to not take the actions needed to save its semiconductor policy on the belief that doing so will alter Beijing’s behavior.
Second, some observers may suggest that it would be pointless to expand U.S. chipmaking rules since China will inevitably achieve self-reliance. Chinese propagandists have doubled down on the narrative that it is futile for Washington to resist Beijing’s advance since Huawei and SMIC’s “breakthrough” Mate 60 Pro smartphone unveiled last August. China’s chip sector still needs Western inputs to progress. Strengthened controls can slow China’s drive to self-reliance.
Third, others might make the opposite argument: that since China’s machine tool manufacturers are only able to make tools for mostly legacy node semiconductors, there’s no reason to bother targeting them. True, Chinese machine tool players are behind their Western competitors today. Yet China’s industrial policy playbook has repeatedly surprisedoutside observers in leapfrogging its Western competitors in strategic supply chains, whether in electric vehicles, solar panels, or shipbuilding. There’s no reason China cannot eventually do the same for chipmaking equipment. It would be better to act early to slow China’s machine tool development.
Allowing China to displace Western machine tool manufacturers could put Washington’s broader China strategy at risk. In October 2022, the Biden administration correctly bet that slowing China’s progress in advanced semiconductor production would set America’s technological-economic edge over Beijing for years to come. This policy would be well served by preventing China from dodging that export control system altogether.
Ben Noon is a member of the Vandenberg Coalition National Security Council’s Asia Directorate. His work has been featured in Foreign Policy, the Hill, and Defense One.
Image: Air Force Research Laboratory
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