Latest US clampdown on China’s chips hits semiconductor toolmakers

China’s commerce ministry described the U.S. restrictions as a clear example of “economic coercion” and “non-market practices,” according to a statement published on its official website after the new curbs were announced. China has stepped up its drive to become self-sufficient in the semiconductor sector in recent years, as the U.S. and other countries have restricted exports of the advanced chips and the tools to make them. However, it remains years behind chip industry leaders like Nvidia in AI chips and chip equipment maker ASML in the Netherlands.

The U.S. also is poised to place additional restrictions on Semiconductor Manufacturing International Co., China’s largest contract chip manufacturer, which was placed on the Entity List in 2020 but with a policy that allowed billions of dollars worth of licenses to ship goods to it to be granted.

For the first time, the U.S. will add three companies that make investments in chips to the entity list. Chinese private equity firm Wise Road Capital, tech firm Wingtech Technology Co and JAC Capital were added, the department said, because of their role “in aiding China’s government’s efforts to acquire entities with sensitive semiconductor manufacturing capability critical to the defense industrial bases of the United States and its allies with the objective of relocating these entities to China.”

Companies seeking licenses to ship to firms on the Entity List generally get denied.

DUTCH AND JAPANESE EXEMPTED

An aspect of the new package that addresses the foreign direct product rule could hurt some U.S. allies by limiting what their companies can ship to China.

The new rule will expand U.S. powers to curb exports of chipmaking equipment by U.S., Japanese, and Dutch manufacturers made in other parts of the world to certain chip plants in China.

Equipment made in Israel, Malaysia, Singapore, South Korea and Taiwan is subject to the rule while Japan and the Netherlands will be exempt. The expanded foreign direct product rule will apply to 16 companies on the entity list that are seen as the most important to China’s most advanced chipmaking ambitions.

The rule will also lower to zero the amount of U.S. content that determines when certain foreign items are subject to U.S. control. That will allow the U.S. to regulate any item shipped to China from overseas if it contains any U.S. chips.

The new rules are being released after lengthy discussions with Japan and the Netherlands, which, along with the United States, dominate the production of advanced chipmaking equipment.

The Dutch government said it will study the new restrictions, adding that “every country has its own considerations” on national security and export controls.

ASML said on its website that it did not see a material impact on its business, adding that if the Dutch government makes a “similar security assessment,” it could affect exports of some of its chip making tools.

The United States plans to exempt countries that adopt similar controls, sources told Reuters.

Another rule in the package restricts memory used in AI chips that correspond with what is known as “HBM 2” and higher, technology made by South Korea’s Samsung and SK Hynix and U.S.-based Micron.

Industry sources expect only Samsung Electronics to be affected. Analysts estimate Samsung generates about 30% of its HBM chip sales from China. The latest rules are the third major package of chip-related export curbs on China adopted under the Biden administration.

In October 2022, the United States published a sweeping set of controls on sale and manufacture of certain high-end chips that was considered to be the biggest shift in its tech policy toward China since the 1990s.

(Reporting by Karen Freifeld and David Shepardson; Additional reporting by Brenda Goh and Antoni Slodkowski; Editing by Sonali Paul, Clarence Fernandez, Nick Zieminski, Chizu Nomiyama and Jonathan Oatis)