Thread by @ArjunKharpal

US took some of its toughest ever actions against China's tech sector with latest curb on chip exports, which could ultimately hobble China's semiconductor industry. But it's not just the rules themselves but the nature of the chip supply chain that make it possible 1/14 🧵

The second and third point are key. The second point is about how the rules could affect businesses that aren't even American-owned. And the third is about cutting key advanced chipmaking machines off from #China 2/14

There is precedent. The U.S. used the so-called foreign direct product rule before on the poster child of the Trump-era U.S.-China tech tensions — Huawei. #Huawei was cut off from the most advanced chips that TSMC was manufacturing and that were designed for its smartphones 3/14

A reminder about TSMC, the Taiwanese based chip manufacturer. It is probably the most important chipmaker in the world, and manufactures #semiconductors for the likes of Apple and others. It accounts for more than 50% of the global foundry market – huge 4/14

But TSMC is based in Taiwan. How did U.S. sanctions mean Huawei was cut off from chips? TSMC uses American-made equipment to manufacture those chips. Therefore it fell under U.S. rules. Huawei's smartphone business was crushed 5/14

This time the U.S. is attempting something much-more wide-spread. By applying a similar rule to China's chip sector, it could starve the Chinese #semiconductor industry of key components, machinery and software required to make the most advanced chips in the world 6/14

There's another key player here - ASML - a Dutch firm that makes a specific piece of kit called an extreme ultraviolet lithography machine. ASML is the only company in the world capable of making it. EUV machines are critical for the most advanced chips made by TSMC 7/14

It's not clear yet whether Washington's latest rules might stop ASML from sending an EUV lithography machine to #China (it hasn't done so yet). But given Netherlands seen as an "allied" country to the U.S., the political signaling of the rules may prevent such an export 8/14

So now Chinese companies in certain industries can't get the most advanced chips required for AI, supercomputing, etc. And Chinese semi manufacturers can't get their hands on the tools required to make the most advanced chips due the wide-ranging U.S. rules. That's a problem 9/14

So where does that leave China? Well many of its companies rely on American technology. When tech giants like #Alibaba and #Baidu have launched chips for servers and AI in the past few years, that has relied on foreign tech. They could be impacted as well as many others 10/14

#China also doesn't have the expertise or the companies to go it alone. In the chip industry, the power is concentrated in the hands of a few players. Taiwan and South Korea make up about 80% of the global foundry market, for example. The U.S. has key chip design players 11/14

That's why the rules could be so damaging for #China. Yes, China will still make chips, but it'll take longer to make advances, to get the scale for the most advanced chips for AI, etc (older ones are not a problem), and pushing toward cutting-edge will be costly 12/14

Two good comments. First from @pranaykotas: "Reinventing the wheel will be far more costly now (for China)."

The second from @abishurprakash: “With the latest action, the chasm between the U.S. and China has now expanded to the point of no return.”
13/14

If you're interested in reading about this, not in tweet format, there's lost more in this piece I wrote. America’s ‘once unthinkable’ chip export restrictions will hobble China’s semiconductor ambitions cnbc.com/2022/10/12/us-…