China enjoys a unique position in the semiconductor space. The country is not just the cheapest electronics maker, but the world’s largest semiconductor consumer as well. In 2020, Beijing bought 53.7% of the world’s supply of chips worth around $240 billion. This makes it very difficult for companies to comply with the US chip sanctions. 

Naturally, companies are not ready to let go of China just yet. 

Bullish on China 

Last week alone, chiefs of chip companies like Qualcomm, ASML, and Apple went ‘nostalgic’ over the long-standing relationship they have with China, while further committing to strengthening their presence there. And this is happening even as the United States continues to tighten the noose. In the larger US politics, the Biden administration is proposing new rules explaining the restrictions chip companies would face on operations in China and other countries of concern if the companies accept the tax incentives here.

Allied countries like Japan, South Korea, and the Netherlands have also agreed to side with the US and pose similar restrictions to China. The Netherlands banned the export of several advanced lithography tools, while Japanese chip-equipment-making companies have stressed that even “non-cutting edge” tools have come under regulatory scrutiny. 

Similarly, acknowledging that the trade restrictions will make it difficult for South Korean companies to invest in China, the country’s trade minister said that it would ultimately be up to the companies to make those decisions. 

Seems like the companies are not shying away from making the decisions. Recent reports suggest that China’s commerce minister “sought to assure” the head of the Dutch firm, ASML Holding NV, that Beijing will continue to remain a reliable partner even as the government imposes new restrictions on the export of technology. Qualcomm also made its intentions clear of actively being involved in the construction of digital China. 

Nvidia is, in fact, doubling down on the China market. While its flagship products – the AI chips A100 or H100 GPUs – come under the US export restriction, the company found a way around it. A whole new range of products called the H800 (modified version of H100), A800 (modified version of A100), BlueField-3 DPU, and others are shipped specifically to China. 

The reason these companies have been bullish on China is that this land constitutes the majority of their sales. ASML had 14% of its sales in China in 2022. Nvidia had about 26.3% of its revenue coming from China and Hong Kong in 2022. Qualcomm had a whopping 50% of revenue coming from these regions in 2022. And with Apple, if we only take the last quarter of 2022, China contributed 24% of their smartphone sales. 

Effect of chip ban on China

Companies are indeed pushing to retain their market share in China, but the overall effect of export restrictions on China also cannot be ignored. According to a report by South China Morning Post, China’s chip imports by volume fell 26.5% in the first two months of 2023, while exports for the same duration dropped 20.9%. 

China’s largest chip maker SMIC (Semiconductor Manufacturing International Corp) also warned in February that the mass production at its new Beijing plant will be delayed by a month or two owing to difficulties in obtaining equipment. Experts predict that as an effect of such an export control, semiconductor companies in China will move to create their own semiconductor ecosystem to serve the domestic market. 

While it certainly has the capability for legacy technologies like analogue or mixed CMOS, if it were to move towards the advanced technology segment it will take them a long time, especially when ASML’s advanced lithography technology is not up for grabs. We are witnessing a nudge from China to woo ASML, but it remains to be seen how successful the effort will be. 

So, at the moment, two waves are running concurrently. On the one side, China is completely sidelined by the US and its allies, and on the other, companies in these countries are expressing how important China is to them. And caught bang in the middle of these narratives is India. 

What about India?

The interest in India soared when companies looked to diversify their supply chains away from China. India was quick to take advantage of this by launching incentives that would aid capital expenditure required to move production. In this light, companies like Apple, Tower Semiconductors, RuttonSha International, and IGSS Ventures expressed their interest. 

But now with these two opposite narratives, the future of what India will mean to the western world is uncertain. Moreover, the US Chips Act is already deemed a failure by many for reasons that include the time required to construct new chip pants, the lack of workforce, and the necessity to comply with government rules that favour labour unions, demographics, and empowering community partners. 

Hence, even with increasing pressure from nations to push definitive regulations, chip companies are always finding their way back to China.