Newsletter 12-19 February: Semiconductor industry in China and the latest episodes in the Sino-US technology competition

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ASML discloses theft of technology information by former China-based employee 

Dutch chipmaker ASML has revealed that one of its China-based employees recently stole information about its technology, in violation of export control policy rules. ASML, the world leader in using light to etch semiconductors (lithography), said in its annual report that it had been “subject to misappropriation of proprietary technology data by a former employee from China”, although this was not of a serious nature, it said.

ASML, the European jewel in the production chain of these famous chips needed by many civil and military industries, is now valued at 248 billion euros. The United States is putting enormous pressure on the Dutch company, which is now aligning itself with the Export Control policy orchestrated by Joe Biden’s administration, initiated in 2019.

According to sources cited by Bloomberg, the theft took place from a file containing technical repositories that contains details of systems critical to the production of some of the world’s most advanced semiconductors. The breach involves information, but not hardware, and was carried out in the past two months, the sources said. ASML said it is investigating the breach and has responded by strengthening security controls.

Semiconductors: YMTC and SMIC: two different approaches to the effects of sanctions

The YMTC Group has reduced its orders for equipment and tools needed for semiconductor memory (NAND) foundry to the point that it has had to postpone the opening of a new plant in Wuhan. YMTC has reportedly reduced its orders from Chinese manufacturer Naura Technologies, which specialises in the production of etching and cleaning tools for wafer production, by 70%. The company justifies this decision by the uncertainty that currently prevails for the Chinese semiconductor industry faced with restrictions on imports of components and tools – YMTC has been on the American Entity List since December 2022 – in a context of slowing global demand for semiconductors.

90 redundancies at ARM China

It should also be noted that Arm China, the Chinese subsidiary of the British group Arm Ltd, a supplier of licences for semiconductor architecture, has announced that it has laid off 90 employees. Arm China has also been facing governance problems with its British parent company for some time. The Chinese subsidiary, in which Arm is a minority shareholder (49%) compared to the Chinese investors, had announced that it was developing an image processor (ISP) independently without consulting Arm Ltd.

SMIC maintains its investments planned for 2023

 SMIC said that it would maintain its investments in 2023 in China at an “equivalent” amount to those of 2022 (estimated CAPEX expenditure of USD 6.35 billion). However, SMIC continues to face the same challenges as YMTC and has experienced a 15% decline in revenues in Q4 2022. SMIC is also facing a significant drop in capacity utilisation in Q4 (79.5%) compared to Q3 (92.1%). Plans to open factories in Shanghai, Tianjin and Shenzhen could lead to an overcapacity situation for the group from 2023. This gloomy outlook is also true for US suppliers of semiconductor components and production equipment, for which China accounted for almost 30% of sales.

 For Applied Materials, Lam Research and KLA (with a combined share of nearly 35% of the semiconductor tooling market), the Chinese market still accounts for 20%, 24% and 24% of their respective revenues. Lam Research has announced a plan to restructure its global workforce by almost 7% in a similar way to YMTC at the end of January 2023

Battery: Ford announces partnership with CATL to build a battery plant in Michigan (USA)

On 13 February, Ford announced a $3.5 billion investment to build the first US battery plant supported by an automaker. Located in Michigan, the plant is expected to be operational by 2026 and create 2,500 jobs, with the goal of supplying batteries for nearly 400,000 Ford electric vehicles each year. In order to implement this project, Ford has created a new subsidiary entirely under its control while calling on the technologies of the Chinese company Contemporary Amperex Technology Co. Limited (CATL), world leader in the production of batteries for electric vehicles (37% of the world market). Thanks to the production of batteries in the United States, Ford expects its electric vehicles to benefit from tax credits (notably the Clean Vehicle Credit2 ) resulting from the Inflation Reduction Act, adopted in August 2022 and aimed at encouraging the establishment of green transition value chains in the United States.

Last January, Virginia’s Republican governor Glenn Youngkin opposed the provision of land for a battery plant by Ford in partnership with CATL. The governor had argued that this partnership involving a Chinese manufacturer “linked to the Chinese Communist Party (CCP)” posed risks of technology transfer and presented a threat to US national security (see Beijing SER Briefing – week of 16 January 2023).

Coinciding with Ford’s announcement, Republican Senator Marco Rubio sent a letter to three US Secretaries of State requesting a review of the Ford-CATL licensing agreement by the Committee on Foreign Investment (CFIUS). He also expressed his disagreement with the project while asking that federal subsidies “not enrich China’s national champion CATL, or any other Beijing-backed company, directly or indirectly”.

China-US relations: US considers blocking some outbound investments in Chinese technology companies

According to Reuters, the Biden administration is reportedly considering banning outbound investment to Chinese companies in semiconductor manufacturing machinery, artificial intelligence (AI) semiconductors, supercomputers, and other advanced technologies. Transactions in areas deemed non-sensitive would also have to be notified to the US authorities. The detailed plan could be unveiled by a White House decree in the coming months and would come into force in October 2023. It should be noted that these sectors are precisely those that were the subject of a drastic strengthening of export control measures by the Bureau of Industry and Security (BIS) in October 2022. According to a recent report by the Center for Security and Emerging Technology (a think tank affiliated with Georgetown University), between 2015 and 2021 US investment in China’s AI sector amounted to USD 40.2 billion – 37% of the total global funding received by Chinese AI companies. This is mainly financial investment, as US funds have contributed massively to the development of the Chinese ecosystem.

As a reminder, efforts to incorporate an outbound investment control plan into US legislation failed in Congress in 2022. Nevertheless, a budget was allocated to the Departments of Treasury and Commerce last December to develop a strategy to address national security threats from outbound investment.

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