I never expected U.S.-China relations could get any worse. Then, last month, the Biden administration pulled the pin on a grenade by announcing sweeping restrictions on the sale of advanced semiconductor technologies to China. The aim is to thwart China’s chip-making capabilities and advancements in space, military, and supercomputing.
The fallout from the sanctions will overwhelm any token goodwill coming out of Xi and Biden’s recent G20 meeting in Bali. The sanctions are even more severe than the ones Trump implemented during his tenure. They bar American citizens from working with Chinese semiconductor companies and, going further, forbid foreign companies that use imbedded American technologies from exporting cutting-edge semiconductors and equipment to China.
The sanctions will certainly hit China in the short term. But do they pose a real threat to China’s long-term aspirations of reaching high-tech independence? Perhaps—although it is just as likely that they will backfire on the US.
A Next-to-Impossible Task?
If history offers any clues, then China faces a tough road ahead in achieving semiconductor prominence. Whether from joint venture developments, forced technology transfers, or outright intellectual property theft, China’s success to date has required outside assistance in one form or another.
Huawei, China’s flagship multinational organization, could not have become the largest telecommunications equipment manufacturer without initially partnering with Canada’s Nortel. Thanks to joint ventures with German, Japanese and American auto companies, China today boasts the world’s largest automotive market. The same goes for the consumer electronics, mining and medical technology industries.
And what happens when China tries to go it alone? It usually fails. Unable to find a joint-venture partner, the state-owned Commercial Aircraft Corporation of China (COMAC) has spent the last 14 years unsuccessfully trying to build a Boeing 737-like commercial aircraft. COMAC hasn’t been able to integrate the many dozens of foreign technologies into a completely integrated, coherent system.
Just this year, COMAC finally received certification from China’s aviation regulatory agency. Its only orders have come from domestic carriers. Aviation experts consider the C919 too outdated and expensive to compete on the global stage.
On top of needing foreign assistance, China would be facing a daunting task in trying to mimic the semiconductor supply chain. Many analysts consider the semiconductor industry to be uniquely complex, as it entails multiple technologies in software, hardware and manufacturing.
Semiconductor independence would require China to duplicate America’s dominance in chip-design software, Taiwan and Korea’s prowess in chip manufacturing and the Netherlands and Japan’s virtual monopoly on the crucial equipment needed to produce cutting-edge chips. To cite one example, without extreme ultraviolet equipment sourced solely from the Dutch company ASML, experts believe that China will never be able to move up the chip value chain.
Don’t Bet Against China
But let’s not totally count China out. Underestimating China and the will of its people has been a losing bet for the past 30 years. I give them more than a puncher’s chance to reach a level of respectability and competitiveness.
Sure, the sanctions will invariably delay China’s progress. Global market intelligence firm International Data Corporation estimates that while China is currently three to four generations behind leading-edge technologies, it could catch up in in as few as 10 years.
Investment capital certainly won’t hold China back. Beijing announced in 2020 that it would invest $1.4 trillion in high tech over the next five years, with much of it in the semiconductor space. This makes Biden’s CHIPS and Science Act, a $52.7 billion plan to revitalize semiconductor manufacturing, a drop in the bucket.
While China’s semiconductor industry is still relatively nascent, it isn’t starting from scratch. Before the sanctions, China was learning from the world’s best tech companies. China’s state media reported in 2021 that all the chips in their new space station, as well as in China’s Mars rover that landed on the red planet that year, were made in China.
China also has a geopolitical angle to play. Biden is banking on the fact that most of world’s semiconductor talent resides within America’s sphere of influence. The U.S. hopes to essentially strongarm nations into making an economic choice between it and China. Many experts, however, question whether the U.S. still wields that kind of geopolitical influence.
China is betting on America’s weakened clout. And it may have a point. Just look at the U.S. sanctions imposed on Russia for Putin’s invasion of Ukraine. India, Spain, Germany and Japan—democratic nations all—have actually increased Russian imports since the invasion began in February. India has been particularly vexing to the U.S., as it maintains strong diplomatic ties with Russia, continues to purchase Russian munitions and crude oil and abstains from condemning Russia on human rights violations.
Finally, corporations might look for ways to create “de-Americanized” technologies that lack “Made in USA” components and thus could be sold to China. I sat in board rooms that discussed this route around the time President Trump first weaponized the use of sanctions and criticized companies for “selling out” to China.
Today, American and foreign companies alike are seriously vetting the de-Americanization option. Nikkei Asia recently reported that Japanese and Dutch semiconductor companies could produce equipment without the use of any U.S. technology.
No One Wins
The US and China are digging in for a long battle. Don’t expect a clear-cut winner. Some nations will side with the U.S., while others may look to work with China. More than likely, the U.S. will dominate the chip technologies needed for AI and military applications and China will lead on microprocessors, memory chips and commodity chips. Both countries over the next decade will claim small victories here and there, but ultimately, as most economists say about trade wars, there aren’t any winners; only losers.
Who loses? Consumers will pay higher prices for Apple iPhones, experience supply shortages for Sony PlayStations and complain over the lack of fancy electronic features in Teslas and BMWs.
Kind of reminds me of the COVID days, but only much, much longer.
Chao is the author of “Selling to China” (2018) and managing director for All In Consulting, assisting companies in their China business strategies. Twitter: @stanleychao6.