Friday, August 11, 2023

RESISTING THE HEGEMON
US wants China's chip industry 5 generations behind cutting edge, head of equipment maker AMEC says at Wuxi conference

South China Morning Post
Fri, August 11, 2023 

The head of one of China's leading semiconductor equipment makers believes Washington's escalating export and investment restrictions betray the real goal of the US: keep China's chip-making technology at least five generations behind the cutting edge.

Advanced Micro-Fabrication Equipment Inc China (AMEC) chairman and CEO Gerald Yin Zhiyao made the comments on Thursday at the China Semiconductor Equipment Annual Conference in Wuxi, a city near Shanghai in eastern China. He referred to the US export restrictions imposed last October, which came ahead of another escalation this week when the Biden administration unveiled plans to restrict investment into China in sensitive areas including semiconductors.

"The October rules really exposed the US' true intention, which aims to fix China's chip-making on 28-nanometre, at least five generations behind the global leading edge of 3-nm to 14-nm," Yin said during his talk at the conference. "We can't accept [this]," he added.

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Advanced Micro-Fabrication Equipment Inc China (AMEC) chairman and CEO Gerald Yin Zhiyao speaks at the China Semiconductor Equipment Annual Conference in Wuxi on August 10, 2023. Photo: qq.com alt=Advanced Micro-Fabrication Equipment Inc China (AMEC) chairman and CEO Gerald Yin Zhiyao speaks at the China Semiconductor Equipment Annual Conference in Wuxi on August 10, 2023. Photo: qq.com>

Yin described the updated US tech export controls targeting all China-based foundries as the most "lethal" ban since the US started rolling out related sanctions on China's hi-tech firms in 2019. Yin called the latest executive order - which targets US investment into China's semiconductor, artificial intelligence and quantum computing industries - as Washington's "16th move" against the country since then.

The rules imposed last October aim to cap China's logic chip-making capabilities at the 14-nm level, DRAM chips at 18-nm and 3D NAND memory at 128 layers. The US cited national security risks and the potential military applications of advanced chips.

Yin, a 20-year veteran of the US chip equipment industry including time at Applied Materials, said locally-procured semiconductor equipment in China's foundries accounted for just 15 per cent of the total. The other 85 per cent of machines come from the US, Netherlands and Japan, he said.

"That's why the US needed Japan and Netherlands on board to curb our development," he told a room packed with semiconductor professionals and investors.

Chinese semiconductor equipment firms still lag global peers in both market share and technological sophistication, according to industry professionals attending the conference. China's tool makers have virtually no global presence in some segments such as lithography. Catching up in these areas is an uphill battle for Chinese firms in a worsening geopolitical environment that is squeezing out foreign money and technological cooperation.

Li Jinxiang, deputy secretary general of China Electronic Production Equipment Industry, said some China-made equipment fails to meet the efficiency needs of foundries.

"It's a huge waste that a 1 billion yuan [US$138.7 million] ASML-made lithography machine has to wait for a domestically-made wafer coating and developing machine to catch up in speed," Li said, referring to the Dutch chip equipment firm that has a virtual monopoly on the most advanced lithography machines.

An ASML lithography machine is capable of processing 350 12-inch wafers per hour, Li explained, while China-made wafer coating and developing machines cannot match that output.

A wafer coating and developing machine is crucial in assisting the lithography process. It applies the light-sensitive photoresist material to the wafer, which is then put into lithography systems for exposure. The machine then takes the exposed wafer to develop the pattern.

However, Yin said he has confidence that China can develop a globally competitive equipment industry within years, as many US-trained Chinese experts have returned home. Using chip-making equipment to curb China's progress will yield no good results, he said.

Yin also called AMEC's brief inclusion in 2021 on a US defence department list of companies allegedly supporting the Chinese military "sheer nonsense". It was the first time Yin publicly commented on the US sanctions against AMEC.

He said the US "reluctantly" removed AMEC from the list after "four months of intense negations".


Tech war: new US investment curbs to have limited impact on China's targeted semiconductors, quantum computing and AI sectors, analysts say

South China Morning Post
Thu, August 10, 2023 

New American investment restrictions overseas under US President Joe Biden's latest executive order are expected to have a limited impact on the targeted tech sectors in China, according to analysts, although it could disrupt the flow of fresh funds to the country's private sector amid a weakening economic recovery.

The executive order issued on Wednesday restricts US venture capital and private equity investments in Chinese companies involved in semiconductors and microelectronics, quantum information technologies and certain artificial intelligence systems, according to a fact sheet released by the US Department of Treasury, the agency tasked to implement a new national security programme based on that directive.

The Biden administration identified mainland China, including the special administrative regions of Hong Kong and Macau, as "a country of concern" in the executive order. It said China was "exploiting, or has the ability to exploit, US investments to further its ability to produce a narrow set of sensitive technologies critical to military modernisation".

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That directive, however, was "more smoke than actual fire" because it only "regulates US investment in a small number of tech sectors", said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital in Hong Kong.



US President Joe Biden issued on August 9, 2023, an executive order targeting three tech sectors in China, which it described as developing and exploiting "sensitive or advanced technologies and products critical for military, intelligence, surveillance or cyber-enabled capabilities". Photo: AP alt=US President Joe Biden issued on August 9, 2023, an executive order targeting three tech sectors in China, which it described as developing and exploiting "sensitive or advanced technologies and products critical for military, intelligence, surveillance or cyber-enabled capabilities". Photo: AP>

"China can expect this long-awaited executive order to be fairly unobtrusive," Silvers said.

While Biden's new directive underscored the escalating tensions between Beijing and Washington, some Chinese investors downplayed the impact of new US investment curbs on funding for the targeted China tech sectors.

"US investment in China's chip sector has gradually dried up since 2019," Zheng Haowei, a manager at Sino IC Leasing, said in an interview on the sidelines of the three-day China Semiconductor Equipment Annual Conference, which opened on Wednesday in the city of Wuxi in eastern Jiangsu province.

"Chinese semiconductor companies are basically supported by Chinese domestic capital," Zheng said. Shanghai-based Sino IC Leasing buys semiconductor-manufacturing equipment that it leases to local chip fabrication enterprises.

That view was echoed by venture capital (VC) analysts Kyle Stanford and Kaidi Gao at investment consultancy PitchBook. They said overall investment by US firms in China's semiconductors, quantum computing and AI sectors represents "a relatively small portion of deal activity".

On a broader scale, there were only 64 US investors involved in China-based VC deals so far this year, according to data from PitchBook. That showed a rapid decline from 179 in 2022, which was down from 246 in 2021.

"The executive order ... will be another hurdle in US-China private market investment," Stanford and Gao said on Wednesday.

"From a US investor perspective, such effort brings an additional layer of challenge for putting capital to work in the Chinese market," they said, adding that some US investors including pension funds have halted their funding allocation to China amid growing acrimony between the two countries.

Covid-19 lockdowns, declining economic growth, and US-China tensions resulted in a 53 per cent drop in Greater China private equity deal value, shrinking its share in the Asia-Pacific region to a nine-year low of 31 per cent in 2022, according to a survey published in March by global management consulting firm Bain & Co.

"A growing tech and trade war won't be good for either side," Silvers of Kaiyuan Capital said. "An unrestrained tech war could become a significant jolt to an already shaky global economy."

Meanwhile, the US Treasury Department said it will accept written public commentary for the next 45 days to inform its formulation of a targeted national security programme based on Biden's latest executive order.

US tech-investment curbs have China gravely concerned, with already shrinking FDI looking even less attractive

Thu, August 10, 2023

The latest "small yard, high fence" investment restrictions by the United States on China would choke venture capital and dwindle foreign direct investment inflows into the world's second-largest economy, while also hitting its technological advancement, analysts said.

US President Joe Biden revealed a long-anticipated executive order on Wednesday, declaring "a national emergency".

The latest restrictions are intended to curb US venture capital and private equity investments in Chinese companies covering semiconductors and micro electronics, quantum information technologies and certain artificial intelligence (AI) systems.

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China's Ministry of Commerce responded on Thursday, saying the US restrictions were moves to "decouple and sever supply chains under the cover of eradicating national risks".

"[The] US is defying its advocacy of maintaining the market economy with the principle of fair competition, affecting ordinary business decisions of companies, destroying international trade orders and seriously disrupting the safety of global supply chains," the ministry said.

"China expresses grave concerns on this matter and we reserve the right to take measures regarding the situation."

Washington, as part of the ongoing tech rivalry, has already blocked China's access to core US-controlled technologies, including semiconductors, and halted grants from US hi-tech companies that produce "advanced chips" in China.

The new investment screening mechanism, which requires the US Department of the Treasury to be notified about any outbound capital flows in selected areas, is set to be the first to curb US financial investment in hi-tech industries in China.

The latest moves could also add uncertainties regarding ongoing talks over a visit to China by US Secretary of Commerce Gina Raimondo, who expressed interest in visiting in "late summer" after intensive senior-level engagements resumed in June.

Alfredo Montufar-Helu, head of The Conference Board's China Centre for Economics and Business, said the US restrictions have become more in-line with the "small yard, high fence" concept since late last year.

This involves restricting China's access only to technologies that could have a military end use, especially AI, instead of "fully decoupling".

But Montufar-Helu noted that "how high will the fence be" would be an issue sticking out as "everything suggests that US authorities intend to make this 'fence' unscalable".

"[While] the 'yard' is supposed to remain small, the restrictions might spillover into theoretically non-sensitive areas, such as autonomous driving, synthetic biology and climate science," he added.

"The restriction of certain technologies now is likely to impair the innovation potential of certain commercial products over the next decade."

According to the Rhodium Group, the value of US foreign direct investment in China was US$8 billion last year - the lowest since 2005.

The value of US venture capital investments in China was US$1 billion last year, compared to a high of US$19 billion in 2018, according to the think tank.

He Jun, a senior researcher with a focus on Chinese technology and the economy at the Beijing-based Anbound Consulting, said that investment restrictions would hit China's hi-tech industry because "the details were designed very directly targeting Chinese companies".

"Right now, the Chinese venture capital market is shrinking, foreign investment has shrunken by a chunk and what is left is mainly state-backed funding," he said.

"It is becoming more and more of a closed-loop market. This is bad for China's venture capital industry, as well as for the development of hi-tech industries."

A co-founder of a mainland China-based private equity firm, who asked to remain anonymous due to the sensitivity of the issue, was also sceptical about the future development of Chinese hi-tech companies.

"The biggest source of finance in our sector would be from the US and in US dollars. Even if we do not source money from the US, it means the companies we invest in might find it more difficult to be backed by other US-related finances in the future," he said.

He added that the restrictions are set to limit how Chinese companies can grow and how successful they can be.

"It will be felt not just in their next round of financing, but all the way until when it becomes an [initial public offering]," he said.

China has already experienced a significant pullback from US private equity and venture capital investments in 2022 due to its coronavirus lockdowns and broader geopolitical tensions.

They dropped by around 76 per cent, year on year, to US$7.02 billion in 2022 from US$28.92 billion a year earlier, according to S&P Global Market Intelligence data published in February.

Huo Jianguo, the former head of a think tank under China's Ministry of Commerce, said that if US investors pulled further back in response to Wednesday's executive order, "investment from other countries could hardly fill in the gap".

In the second quarter, China's direct investment liabilities - one measurement of foreign direct investment (FDI) - plunged by 87 per cent from the same period last year to a historical low of US$4.9 billion, according to figures released by the State Administration of Foreign Exchange on Friday.

Stephen Olson, a senior fellow at Hinrich Foundation, said the latest US measures would "certainly not improve China's attractiveness to foreign direct investment providers".

Although the current information reflected that "only a small slice of US FDI into China will be directly and substantially impacted", Olson added that there are "anticipated future restrictions that could be imposed by the US, as well as any counterpunches China might direct at US business in response".

Reva Goujon, senior manager at Rhodium Group, said that the executive order should be viewed as an initial step, outlining the strategic intent of capturing US capital and know-how in force-multiplying technologies that could be used by adversaries towards military end-use purposes.

"It will be important to see how the executive order defines AI with potential military end-use applications," she added.

"I will also be watching for how the executive order defines covered transactions, for example, will it avoid retroactive review as rumoured? Will it set a [minimal] threshold? How will it draw the line between active and passive investment?"

Before the new investment restrictions, the Biden administration implemented the Chips and Science Act in August last year, which aims at providing around US$52 billion in incentives for companies to reduce reliance on China and other markets for key components, including semiconductors.

The Conference Board's Montufar-Helu added that the investment restrictions "will for sure have a negative impact on FDI into China, in targeted sectors and areas".

"And it won't only be investment coming from the US, but also from other economies due to the extraterritorial nature of the restrictions," he said.

"This will exacerbate the negative impact that China's softening demand and the global growth slowdown are already having on China's inward FDI levels."

In terms of merger and acquisition activities, Rhodium Group expects the outlook will remain dim this year.

"But we'll also be carefully examining transactions moving forward for signs of defensive investments in China, that is multinationals furthering localisation plans in response to growing regulatory pressures," Goujon added.

In the face of the restrictions, "Beijing has not been starving for capital" and "can continue to pump funding into strategic industries", she said.

"But if that capital isn't utilised effectively, then it's only compounding its gargantuan debt problems," said Goujon.

In the long run, Olson at Hinrich Foundation said companies "will look for and probably find work around solutions that will allow them to serve the China market without running afoul of US restrictions".

"Companies from third countries are not pleased about losing out on the lucrative China market," he added.

"And finally, any restriction regime will inevitably experience leakage and circumvention over time."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. 

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Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.


Nvidia, Other Chip Stocks Shrug Off Latest China Curbs.
Why the Restrictions Aren’t All Bad.

By Adam Clark
BARRONS
Updated Aug. 10, 2023
Nvidia NVDA –0.39% and other U.S. chip stocks were rising early Thursday as they brushed off the Biden administration’s latest restrictions on the Chinese semiconductor industry. Curbs on investment in China pose less of a threat than export bans.


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